A Case of Homeland Security | Land Portal

Alejandro Litovsky and Paulina Villalpando look at how the risks of investing in farmland create opportunities for sustainability

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How agricultural land is owned, what is grown on it, and by whom, will probably determine much of the next century’s profits, politics and, possibly, revolutions. As the agricultural paradigm of industrial productivity faces growing social, economic, and governance pressures, investors seeking to manage the resulting risks will require an unconventional approach to risk management: inserting ecological limits and human security into the agricultural equation.

Photo: iStock

Food commodity prices are on a steady rise. Much of the planet’s arable land is being cultivated, and large proportions of it are being used to grow biofuels and crops to feed livestock. The extraordinary amounts of water needed for irrigation further compete with increasing human water consumption and with the needs of hydropower plants. As the world’s population continues to grow, ‘land’ is quickly becoming the nexus that holds all the trade-offs together. Add recurring droughts, and one begins to understand why the United States military calls climate change a “threat amplifier”.

Land security

Investors are flocking to land-based assets as a more secure alternative to the volatile stock and bond markets; and for countries like Saudi Arabia and China, food and commodity supplies are becoming a matter of national security. Both trends are resulting in large-scale acquisitions of land in regions where the soil is still fertile and water still available. In sub-Saharan Africa alone, in just ten years, over 200 million hectares have been leased to investors for agricultural development by governments that often ignore the interests of communities living on the land, leading to forced evictions and social instability.

The results are direct reputational and political risks for investors that undermine the long-term viability of investments. Conventional risk management approaches will struggle. What is needed is for companies and investors to align agricultural productivity, human rights, and ecological limits as an integrated investment strategy.

Just as large car-makers have turned to electric cars, large agribusiness firms will turn to organic farming. Just as new companies are being created on the basis of providing services through distributed networks, like car-sharing schemes in large cities, so too, agribusiness must better integrate the role of smallholder farmers into a radical rethink of its business models. Incentives for pursuing these innovations are more likely to arise from fully understanding the security and risk challenges involved in the current model, than from appeals to global sustainability. The sort of security framework that is emerging combines three inter-related types of risk:

Productivity

In the United States, to cite one example, an exponential growth in pests that have effectively adapted to pesticides such as glyphosate is leaving US farmers either unable to shoulder the costs of additional chemicals or having to experiment with untested chemical cocktails that are likely to increase the toxicity of water supplies and the soil. Investment analysts have signaled that the growing resistance of pests to chemical pesticides is a cause for concern for investors in agrochemical companies.

Ecological limits are forcing farmers to acknowledge the importance that a healthy environment has on long-term agricultural productivity. Organic methods that shy away from the heavy use of chemicals and genetic modification to, for example, strengthen biodiversity of crops and crop rotation as a strategy to challenge pests, have proven to be effective.

Recently, after 30 years of scientific research, the Rodale Institute in the United States has found that organic farming, although providing lower yields in the first years, in the long term outperforms conventional chemical farming in terms of crop yields, sustainability and profit. It is the longest-running scientific comparison between organic and conventional agriculture.

A part of this paradigm shift implies conceiving the fertility of the soil and the diversity of supporting ecosystems as ‘natural assets’ that must be taken into account in the agricultural economic equation. In sub-Saharan Africa, where farmers are either too poor to afford chemical options or the distribution models are not sufficiently developed, natural ways of fixing nitrogen into the soil are driving agricultural innovation which can offer considerable insight to the research capabilities of more developed nations. One example is ‘fertilizer tree systems’: by planting certain types of nitrogen-fixing trees alongside crops, farmers have managed to boost crop fertility, while increasing the biological diversity needed to face climate changes, such as more frequent droughts.

In light of the long-tem risks involved for agricultural productivity, when transitioning from ‘Green Revolution’ to ‘Green Economy’, it will probably make economic sense for companies and investors to assume the short-term costs of switching to environmentally friendly agriculture.


Cartoon by Damien Glez

Human Security

The generally low levels of government accountability in sub-Saharan Africa mean that large-scale land investment deals made between governments and investors, even if by well-meaning investors, are likely to increase the vulnerability of poor communities. The risks to human security are significant, whether because communities are forcibly evicted from the public lands they have cultivated, usually without formal rights, for various generations, or because new water canals, meant to improve large-scale irrigation, jeopardize water availability for small-scale subsistence farming. The growing social instability and vulnerability created by this booming industry is growing in visibility, and a few high-profile cases have shown just how material these reputational and political risks are for investors and companies.

Taking human security into account will become a norm for farmland investments, even if that means going beyond legal compliance. Ethiopia, for example, recently offered to lease 3 million hectares to foreign investors for agricultural production at a time when 2.8 million Ethiopians are suffering from hunger in one of the worst famines in history. These investment deals may boost food or commodity exports, but human security concerns and land-related conflicts will make their way to the top of the business and investment agenda.

Blaming unaccountable governments is not likely to be enough to get investors ‘off the hook’. They will have to take proactive measures to ensure the transparency of investment deals and bridge the gap between private and informal land tenure by communities. History shows that, as with other areas where governments have been slow to respond or just sloppy – for example, in relation to labour standards or Apple’s recent standoff over the environmental footprint of its supply chain in China – the private sector will be held to account. It is reasonable to think that a proactive approach to risk management must include ways of involving and benefiting local communities, not just through an their informed and prior consent to these deals, but also with options that build their capacity and livelihood to participate in development.

Ecological limits

The situation in Mali illustrates the challenges that lie ahead. A recent study aggregated all the new land deals entered into by the government of Mali, and found that, if they all fully developed, there won’t be enough water in the Niger River to irrigate them. The availability of water and water rights that come with land rights will be the main point of contention. Currently, two large investments are said to require more than half of the critical reserve of water for the dry season, and have exclusivity of service in emergency situation. Some of the new contracts take water rights for granted. A large irrigation canal is being built by Libyan investors to cater for the needs of industrial-scale agriculture. This canal is said to affect the water supply for more than 90,000 hectares of land used by small-holder farms for subsistence (of one or two hectares per person), as well as cut routes of passage for livestock. Given the impending water scarcity, analysts foresee a serious problem arising both in terms of water availability for agriculture, as well as water-related conflicts. Climate change and recurrent droughts, which are increasingly difficult to predict, are likely to aggravate the situation.

Land contracts that grant preferential access to water resources, or fail to consider water rights, should concern investors – as should the overall institutional capacity put in place by government agencies to manage the aggregated demands of agricultural developments on limited water resources.

Further unintended consequences from surpassing these ecological limits pose additional risks for investors. For example, since 2004, Saudi Arabia has leased more than 376,000 hectares from the Sudanese government to grow rice, a water-intensive crop. Weak water regulation has forced the Sudanese government to halt its wheat production because of water scarcity, which in turn has reduced grain supplies and increased its price on the local market. Another example is Tanzania, where water demand from land investments has had a detrimental effect on electricity supply, which in turn has affected the country’s entire economy since more than half of Tanzania’s electricity is generated by hydropower.

It is reasonable to assume that these trade-offs and externalities, which will increasingly translate into costs to be written-off the balance sheet, are re-defining how to assess the long-term productivity and risk of land and agricultural investments.

Where next?

While progress depends on host governments getting good governance and land planning right, the costs of inaction will undoubtedly land on the balance sheets of companies and investors. Avoiding these risks requires some foresight. Two areas of opportunity to move this agenda forward are:

Transparency

Pressures for greater transparency are increasing. Within civil society, a research partnership between the International Land Coalition and a number of development agencies aims to become the world’s largest database on large-scale land investments. Increasing transparency by investors can create virtuous circles with governments and communities, but transparency will not be an easy subject, especially due to competitive pressures within the investment sector. Initial steps are being taken however through thePrinciples for Responsible Investment’s (PRI) Farmland Working Group, where six pension funds are pooling their combined US$1.3 trillion in assets to explore how to drive more responsible investments. Operationalizing a commitment to transparency is among their main interests. Considerable opportunities exist for cooperation, but precisely how investors operationalize transparency is an area where the first mover will have the advantage.

Agribusiness beyond compliance

Obtaining prior and informed consent from local communities for large-scale investments is becoming a central demand of civil society to both governments and investors. Framing this in terms of compliance is important, but more important from a business perspective will be to create more inclusive value chains and offer local communities ways to be involved in development. As the global media becomes increasingly interested in this agenda, investors are likely to continue to be exposed when promises are not kept, as was recently the case with biofuel investments in Tanzania. Ensuring there is a long-term view of a community’s development is likely to feature centrally on this agenda.

With global financial markets in turmoil, investors regard land-assets as a more stable opportunity. Many will think it is unfair for a broader human rights and sustainability agenda to be coupled with investment focus, but, incorporating productivity risks, human security and ecological limits into the equation is essential to fully understand what lies ahead. Managing these risks proactively offers not only an extraordinary opportunity to move the sustainability agenda forward, but also one that looks at productivity in a new way. Time is of the essence, and everyone has a stake in trying to make the land agenda work for the long-term.

● Alejandro Litovsky is Founder and Director of the Earth Security Initiative; Paulina Villalpando is an Associate at the Earth Security Initiative.

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