The Quest for Commodities: Chinese Investment in Farmland

Farmland and water are increasingly sought-after resources for a growing number of foreign investors. The private sector is looking to capitalise on rising agricultural commodity prices and global demand, as well as speculating on rising land prices. Governments are investing abroad to secure their country’s food and energy needs in the context of volatile world market prices, scarce or depleted natural resources at home and the global hunt for water resources.

The World Bank found that in 2009 investors were reported to have acquired 45 million hectares of land, 32 million of it in Africa alone. In 2012, the Land Matrix project revised those figures, and now estimates that over the past 10 years investors have acquired 83.2 million hectares of land, mostly in Africa. The phenomenon has come to be referred to as the global ‘land grab’.

China is often singled out as one of the big ‘land grabbers’, although it strongly refutes these claims. Chinese Foreign Ministry spokesman Hong Lei told the Xinhua state news agency in December 2011: “Instead of grabbing land in Africa, China has been providing as much technical assistance as it can to help develop agriculture there and enhance the continent’s capability of using its natural resources and addressing issues such as climate change and food security… There is indeed neo-colonialism in Africa, but absolutely not from China.”

We set out to verify whether reports about Chinese investments were accurate or not.[i] Unsurprisingly, our findings present a more complex picture of China’s overseas ambitions.  Importantly, the country has a strong domestic agricultural base and a sound food security policy that enables it to be largely food self-sufficient. However, there are a few agricultural products that China does not produce in sufficient quantities. For these, China depends on commodity traders. To reduce this dependence, China is investing abroad, including by acquiring farmland and water, purchasing directly from producers and through joint venture operations.

In terms of land and water investments, we found media reports on 86 large Chinese projects covering 9 million hectares of farmland in developing countries. We were able to confirm the existence of 55 projects covering 4.9 million hectares. Most projects have not yet started production, but at a minimum, contracts or memorandums of understanding have been signed. This article summarises the main findings from our report Farmland and Water: China Invests Abroad.

China’s trade dependence

China needs massive quantities of agricultural commodities to supply its industries, which cannot be met by domestic production alone. In 2010, the country accounted for nine per cent of world agricultural imports; the main commodities are soybeans, cotton, palm oil, dairy products, hides, skins and wool.[ii]

To secure these commodities, the state depends on US and European transnational agribusinesses, such as Archer Daniel Midlands, Bunge, Louis Dreyfuss and Cargill, who dominate the trade in soybeans and other agricultural commodities.

China is concerned about the costs associated with purchasing from traders and the high volatility of agricultural prices. In an interview with The China Daily, the president of a state-owned Chinese agricultural company, Chongqing Grain Group, said “most Chinese companies import soybeans through the four largest grain dealers… However, if importers can purchase from the producers, 18 to 24 per cent of the profit could be saved.” As a result, China has shifted to foreign direct investment. Acquiring farmland is one part of the strategy, but it is much broader, and includes joint ventures with local governments or local companies and contracts with local farmers.

The shift to foreign investment

A turning point was reached in 2001, when the country formally adopted its ‘Go Global’ strategy, the first major drive by the government to encourage investors to go abroad. In many ways it was China’s ‘coming out’ and showed its desire to turn local enterprises into international players.

Since the launch of the strategy, overseas investment has increased dramatically. In 2001, annual flows of overseas direct investment totalled $6 billion, and in 2010 $68 billion (placing it fifth among other economies in terms of annual foreign direct investment outflows, but only representing five per cent of total global outflows).

In 2007, stocks of Chinese foreign direct investment (FDI) in agriculture were roughly $1.2 billion, making it the third largest source, behind the United States and Canada.[iii] In 2010, China’s Ministry of Commerce reported that stocks had grown to US$2.6 billion.

Asian and Latin American markets

Asia is the top target for land-based investments. We found 29 projects covering 2.5 million hectares of land. But local resistance has sometimes forced China to find more socially and politically acceptable business models. So, it has also invested through contract farming and joint ventures, as well as aid and development cooperation, particularly with the Mekong River Basin countries, to help improve agricultural productivity. In Central Asia, there are three confirmed projects covering just over a million hectares.

We found five land-based projects covering 770,000 hectares in Latin America. Because of strict foreign ownership laws for land, Chinese investors have been buying directly from producers, particularly soybeans. In Brazil, for example, a mix of four private and state-owned Chinese enterprises is negotiating a $7 billion agreement in the state of Goiás to produce six million tons of soybeans a year for export to China.

In addition, Chinese investors are expected to invest $2 billion in a soybean crushing plant and storage facility and $100 million to improve port facilities in Sao Francisco do Sul.[iv]

African markets

In Africa, we found 18 land-based projects covering 380,000 hectares of land, some of which are part of China’s aid and cooperation programme. Aid projects date back to the 1950s but have become increasingly profit-driven. Today, an important motivation for China’s aid projects is helping to establish new markets for Chinese companies—not unlike the strategy used by many industrialised countries. For example, the Chinese state-owned enterprise China-Africa Cotton Development Limited has a joint venture in Malawi to produce, process and export cotton back to China. The project combines aid and commercial ventures and involves construction of a processing plant and purchasing cotton from local farmers.

Too big to succeed

Investment projects that involve tens of thousands of hectares of farmland are of real concern because of the growing evidence of seriously negative effects on local communities and the high rate of failure. In 2011, a World Bank report found that investors were generally targeting countries with weak land governance, resulting in transfers often neglecting land rights. They pointed to a culture of secrecy in which communities (and even government officials) are not consulted or informed about land deals until after they had been signed. They also found that investment projects failed to generate employment. There are a growing number of reports about large projects failing. And the World Bank recently conducted a survey of 179 agricultural investment projects, which found that 50 percent failed in financial terms because the concept was “fatally flawed”.[v]

Since then, a number of other intergovernmental organisations, academics, and NGOs have conducted research and made similar findings. While these do not specifically point the finger at China, any government or investor acquiring land abroad should proceed responsibly, ensuring compliance with domestic laws and international treaties and standards. A number of tools can be used to help design responsible, sustainable investment projects and assess their performance.

Conclusion

China is actively pursuing investment opportunities abroad and is now the world’s third largest source of foreign investment stocks in agriculture. The agricultural sector has become a priority for Chinese overseas investments, and this is expected to increase in significance.

The shift to overseas investment is partly about reducing dependence on global commodity markets. As a result, China is implementing a complex investment strategy that includes acquiring farmland and water resources, purchasing directly from producers, and investing in joint ventures.

As with all initiatives involving land- and water-resources transfers to foreign investors, there is cause for concern about China’s projects in developing countries. However, particularly in the poorest countries, investment in agriculture is desperately needed, and China can play a positive role. It is essential that foreign investment operates within a sound economic, legal and public policy framework and that the host country’s investment policies will ensure that projects contribute to improving livelihoods, strengthening food security, creating jobs and using natural resources in a sustainable manner.

Authors: Carin Smaller is Advisor on Agriculture and Investment, International Institute for Sustainable Development (IISD), Geneva; Qiu Wei is a Chinese economist specialising in international trade and investment and a former intern at IISD working on climate change and trade issues; Liu Yalan is a Chinese lawyer specialising in international investment arbitration and a consultant with IISD’s investment programme.