The Handbook of Global Agricultural Markets

The Business and Finance of Land, Water, and Soft Commodities

L. Nijs

• Publisher: Palgrave Macmillan
• Year: 2014
• ISBN:
  9781137302342
• Topic: Business
• Subtopic: Financial Risk Management
• Index: Business

This book is a one-stop reference for practitioners and academics in finance, business and economics, providing a holistic reference to the international agriculture business. It takes a multidisciplinary approach, looking at the issues, opportunities and investable themes in the global agricultural space, combining research and practical tools.

1

Introduction

The agricultural sector is characterized by several dynamics that distinguish it from other economical activities. They could be summarized as follows:

1.High sensitivity to natural conditions

This includes discrepancies among climatic conditions (e.g., rain, temperature) from one season to another that impact the level of agricultural production, especially in perpetual farming areas, as well as in all areas in general. This results in an inconsistent relationship between production inputs (e.g., seeds, fertilizers, plaguing, weeding, hoeing) and the final product, and consequently in production fluctuations that require government interference to restore balance for the benefit of producers, consumers, or both. Man’s ability to control the agricultural environment is still limited and varies from one country to another according to the development achieved in biotechnology, which is determined in turn by the location of invention. This explains the slow transfer of these innovations to countries with differences in environmental conditions.

2.The seasonal and biological nature of agriculture

Each group of agricultural crops has its suitable season and can’t be planted in other seasons. With advancements in some agricultural activities, such as in the case of greenhouses in plant production from one side, and poultry production in the animal production sector on the other, it has become possible to achieve year round production. The production cycle (the period between starting the production process and getting the final product) is long compared to the production cycle in other activities. In spite of humans’ achievements in biotechnology and especially in genetic engineering and hybridization which lead to effective results in innovating new breeds and types with high productivity compared to traditional breeds, shortening the production cycle in agriculture is still difficult to achieve.

Realistic limitations on shortening the production cycle make the task of increased production across time difficult. Growth sources predominantly rely on two sources: (1) horizontal expansion: increased production elements, land, water, work equipment, and production requirements, and (2) vertical expansion: increased productivity of production elements and appropriate application of biotechnology innovations (vertical farming, verticrops; see infra).

3.The local nature of agricultural production

Since agricultural activity is usually attached to climate, soil, and people’s traditions and norms (people who work in agriculture), agricultural activity and its advancement requirements are less dependent on external factors, for example the inability to grow palm trees and citrus in northern Iraq, or to have certain areas specialize in growing potatoes.

That leaves an uncertain output relative to other industries. Recent food crisis and growing concerns about global climate change have placed agriculture on top of the international agenda. In 2013 a convergence has been recognized between the dual goals of eradicating hunger and making agriculture sustainable. Achieving these goals will require a significant increase in agricultural investment, but more importantly it will require improving the quality of this investment.

The international financial crisis, which is affecting governments and donors around the world, means that now, more than ever, public resources alone cannot meet the investment needs for agriculture. Governments and donors play a crucial role in catalyzing, channeling, and governing agricultural investment, but private investors – primarily farmers themselves – must be central to any investment strategy for agriculture.

Investors in agriculture can be categorized as public or private and foreign or domestic. The majority of private domestic investors are farmers, and they are by far the largest source of investment in agriculture in low- and middle-income countries and in relative terms also in the developed world. Domestic public investors, primarily national governments, are the next largest source of investment in agriculture, followed distantly by foreign public investors such as development partners and by foreign private investors, such as corporations. These investors – public and private, domestic and foreign – invest in different things and for different reasons. Their investments are often complementary, sometimes overlapping, and are generally not substitutable for each other. Particularly in low- and middle-income countries, the biggest investor is the farmer himself. This has important implications for policy: while public investment remains essential, the focus of investment policy has to shift to facilitating more and better private investment.

Farmers invest to feed their families, to increase and diversify their incomes, and to build their wealth. For farmers, investing in agriculture means giving up something now (such as money, effort or time) in order to accumulate assets or capital that will allow them to increase their productivity and incomes in the future. Farmers and other private investors will invest in agriculture only if the expected returns compensate for the perceived risk and exceed returns from alternative types of investment. The rationale for public investment in agriculture by governments and development partners rests on three interrelated benefits for society that can come from enhancing agricultural productivity: (1) economic growth and poverty reduction, (2) food and nutrition security, and (3) environmental sustainability. For governments and donors, investing in agriculture means allocating scarce public resources to activities that raise productivity in that sector. Agricultural research and market infrastructure are among the most important types of public investment in agriculture. History shows that even though farmers are the largest investors in agriculture, in the absence of good governance, appropriate incentives, and essential public goods, they do not invest enough. Agricultural production is usually seasonal or cyclical in nature and is vulnerable to natural phenomena such as drought, pests, and disease. Producers are often geographically dispersed, and most agricultural products are bulky and perishable. All these factors make agricultural investment risky and highly dependent on the existence of good rural infrastructure, robust input supply and output processing industries, and transparent market institutions and price signals. Appropriate public investment can reduce the risk and increase the profitability of private investment and thus enhance incentives for farmers to invest.

In general, investment involves giving up something today in order to accumulate assets that generate increased income or other benefits in the future. Farmers invest in their farms by acquiring farm equipment and machinery, purchasing animals or raising them to productive age, planting permanent crops, improving their land, constructing farm buildings, and the like. Governments may invest in, inter alia, building and maintaining rural roads and large-scale irrigation infrastructure, assets that generate returns in terms of increased productivity over a long period of time. Governments also invest in other less tangible assets such as the legal and market institutions that form part of the enabling environment for private investment. Determining whether an expenditure, public or private, constitutes an investment can thus be difficult both conceptually and empirically, and in some cases it is not clear cut. Investment is generally defined as activities that result in the accumulation of capital that yields a stream of returns over time. In agriculture, a distinction is usually made between investment and spending on inputs, based rather arbitrarily on the length of time required to generate a return. Thus, planting trees is typically considered an investment because it takes more than a year to generate a return, but applying fertilizer to a maize crop is not considered an investment because it generates a return during the current crop cycle. More important from a conceptual point of view, trees are a capital asset that yields a stream of returns over many years. Even in this seemingly simple case, the distinction may not be clear. If fertilizer use helps maintain and build soil fertility in the long-run, it may also be considered an investment. Similarly, in public expenditures, a distinction is generally made between investment and current expenditures, but again this is not always clear cut, not least because current expenditures are required to maintain the value of capital assets such as roads and other physical infrastructure.

Many of the investments made by governments are called “public goods” because they generate benefits for society that cannot be captured by a private investor. Once a public good has been created, people cannot be excluded from taking advantage of it, and use-by one person does not diminish the ability of others to use it. In technical terms, they are “nonexclusive” and “nonrival.” Private investors have little or no incentive to provide public goods because they cannot charge enough to recover the cost of the investment. Examples of important public goods for agriculture include many types of R&D and rural roads and other infrastructure. Other types of public investment, such as building institutions and human capacity, provide less tangible but perhaps even more important public goods for agriculture. What constitutes a public good will depend to some extent on country characteristics and local context, and mixed public/private goods are common in agriculture.

Public investment helps to create an appropriate enabling environment that influences farmers’ incentives to invest. It also directly creates other forms of capital that support the development of a thriving agriculture sector. Some types of government investment are specific to agriculture and aimed specifically at enhancing primary production in the crop, livestock, aquaculture, and forest sectors as well as in upstream and downstream activities. These can be referred to as investments in agriculture. Government investment in other sectors can also have a positive impact on agricultural productivity and farm incomes. For example, investments in transport and communications infrastructure, energy, general education, health and nutrition, ecosystem services, market institutions, and broader legal and social institutions all support agriculture and can be considered as investments for agriculture.

From a helicopter view, there are four distinct investment streams to be recognized: (1) domestic private, (2) domestic public, (3) foreign private, and (4) foreign public.¹ Although there are data available for the public capital streams, there is no comprehensive set available for the private investments in agriculture on a global level.

The shape, size, and focus of the investment flows are going to be very different depending on the location of the area in which one intends to invest. In most OECD (Organisation for Economic Co-operation and Development) countries, industrial farming is the dominant form of farming. This refers to the industrialized production of livestock, poultry, fish, and crops. This form of farming is supported by innovation in machinery and methodologies, genetic technology, and techniques for the achievement of economies of scale and assumes global and free trade.

Although the trend is that the agricultural sector has generated more investor attention in recent years, it has been very asymmetric, in that there is a focus on certain assets rather than on the industry in general, but also on the location of investible interest. The trends in agricultural capital stock, agricultural capital stock per worker, and the composition of agricultural capital stock all suggest that investment is seriously lagging in low- and lower-middle-income countries, particularly in Sub-Saharan Africa and South Asia.

Arable land refers to land where crops can be cultivated. This usually refers to the totality of land that is not only already cul...

Table of contents

• Cover
• Title
• 1 Introduction
• 2 The Investible Agricultural Space
• 3 Climate Change and Agriculture
• 4 Agricultural Risk Management and (Crop) Insurance
• 5 Biofuels and Agriculture
• 6 Biofuels and the Sustainability Conundrum
• 7 Financing the Agricultural Firm
• 8 Farmland I: An Investible Asset Class?
• 9 Farmland II: Capita Selecta
• 10 Farmland III: Land-Expectation Value and Timberland Valuation
• 11 Advanced Technologies and Agriculture: Genomics, Nanotechnology, and Beyond
• 12 Challenges in Agricultural Production and Natural-Resources Management
• 13 Sustainability of Agricultural Productivity Growth
• 14 Commodities I: Derivative Markets
• 15 Commodities II: Trading Agricultural Commodities
• 16 Commodities III: Speculation on (Agricultural) Commodity Derivatives and Financialization of Commodity-Price Formation
• 17 The Global Water Challenge
• 18 Future Agricultural Dynamics
• Notes
• Index