Deutsche Bank – Responsibility
Frankfurter Allgemeine Zeitung ǀ June 22, 2012

"Agriculture does not have to be dirty"

Agricultural investments are often criticized harshly. Many projects are accused of participating in forcing up prices, speculative trading and expulsions. But there is another way.

By Christian von Hiller

FRANKFURT, August 1st. Investments in farmland do not get good press in Germany, especially if they are taking place in Africa or in other Third World regions. “Doing business with hunger” is one of the typical headlines, “Blood diamonds of modern era”, “Land robbery in Africa” or even “The plague of the locusts”. The accusation is that investments in agriculture allegedly constitute speculative trading in farmland at the expense of the local people and the environment. Detlef Schön, the head of the Agriculture Team at the investment company Aquila Capital, Hamburg, says: “There is good reason why the issue is implicated. Speculative trading in agricultural products with a short-term objective is definitely questionable from the ethical standpoint.”

How does that correspond? Schön collects money from German investors for meat farms, dairy operations and other agricultural projects in New Zealand, Australia and even Brazil, and he criticizes investments in agriculture that are supposed to yield returns on investment that are as high as possible? Schön draws a sharp dividing line in this regard. On the one hand, he says there are speculative transactions that benefit from forcing up prices and from food scarcity; on the other, there are investments in agriculture that increase the supply of food in the long term and have a tendency to push prices down.

There is absolutely no doubt that investing in agricultural production is necessary. By 2050, the population of the world will have grown from approx. 7 billion to 9 billion people. That means that more food will have to be produced, despite continuing erosion of cultivable land, stressed water resources and drastic climate changes throughout the world. A Food and Agricultural Organisation of the United Nations (FAO) study estimated that requirements will increase from 643 million tons of wheat in 2010 to 903 million tons in 2050. During that 40-year period, the requirements will increase from 414 to 522 million tons in the case of rice and from 1038 to 1584 million tons for other types of grain.

There is no question that the world’s agricultural sector will have to conserve resources, make more efficient use of soils and increase production. That cannot be achieved with the traditional type of agriculture in many developing countries, which is based on self-sufficiency. Investments in agriculture are indispensable, especially by private investors - but which investments are right, and which ones are harmful?

“Earning money also includes increasing production sustainably, while at the same time conserving resources and adhering to social standards, because in the long term we can only succeed if we continue to be welcome in the target region,” says Schön. Blanket criticism of agricultural investments may promote the opposite of what it aims to achieve. “The consequence of undifferentiated demonization of agricultural investments may ultimately be that the method of battling growing hunger in the world by increasing the production of food will come to a standstill,” worries Schön.

Some financial investors are not letting themselves be deterred by that. Some of them come from Germany and have their companies listed on the stock exchange. For example, KTG Agrar AG cultivates roughly 35,000 hectares (about 87,000 acres) of farmland in Germany and Lithuania. The shares are listed in the Entry Standard of the Frankfurt Stock Exchange. Furthermore, KTG has issued two bonds. In addition, Agrarius AG, which has purchased about 3,500 hectares (8,700 acres) in Romania to date and leased that farmland for the most part, is also listed in the Entry Standard of the Frankfurt Stock Exchange. There are plans to purchase additional farmland. While the share price of Agrarius has been relatively stable in the past months, the share price of Acazis AG dropped steeply in the past twelve months - from 1.46 Euros to less than 90 cents. The company is traded on the Frankfurt Stock Exchange in the over-the-counter market, which is not highly regulated (First Quotation Board). Acazis, which is managed by three former German bankers, wants to cultivate oil plants in Ethiopia and also operate an oil mill.

The Federal Ministry for Economic Co-operation and Development (BMZ) and the KfW development bank are trying to promote justifiable agricultural investments in Africa together with Deutsche Bank. To this end, they founded the Africa Agricultural Trade and Investment Fund, Aatif for short. The fund volume currently amounts to 85 million Euros. The KfW and Deutsche Bank supplied 20 million Euros each; the remaining 45 million came from the BMZ. The intention is to include private investors as well in the future, but up to now there have only been professional investors and no private ones. The Aatif fund is supposed to end up with a total of 135 million euros, but it will not be permitted to take out a loan for its investments. Besides money, Deutsche Bank is also making its expertise available, for example in currency risk hedging.

“The fund concept is a hybrid combining development co-operation and investment, and that does not work without sustainability,” says Michael Schneider, who is responsible for the Aatif fund at Deutsche Bank, describing the three most important attributes of the fund. “Development co-operation on its own is not enough to build up an efficient agricultural sector in Africa,” says Schneider. “That is why it is necessary to tap into new sources of capital.”

Aatif invests directly in agricultural projects, but also in processing foods, and it provides financing to co-operatives, smaller and medium-sized business operations. In order to strengthen the local financial sector, the investors from the north also want to finance those business operations indirectly by passing their loans along via banks on location.

In Schneider’s opinion, that does not have anything to do with supporting land robbery or exploiting nature. On the contrary, he considers Aatif to be a modern further development of traditional methods. With Aatif, the German federal government is assuming the primary risk: The federal government bears the default risk up to those 45 million Euros. If the worst comes to worst, KfW and Deutsche Bank are liable for half with their 40 million Euros each. That makes the fund acceptable for private investors who then assume the tertiary risk.

One of the first projects that Aatif is supporting is a rice farm in Ghana. Another project involves the cultivation of wheat, soybeans and corn in Zambia but the programme does not just encompass food. Loans to cotton farmers in the north of Ghana and in Mozambique are currently under review.

The projects in Ghana and Zambia are primarily aimed at covering the needs of the local population. Schneider is not bothered by the fact that future Aatif projects will also cultivate products for export, even though many development organisations demand the establishment of an agricultural sector that is geared to the requirements of the local population. “Some of our projects are intended to reduce dependency on imports, like the rice project in Ghana; in other regions it is a sensible idea to promote exports in order to increase household incomes,” says Schneider. “The right mix is the crucial aspect.”

It is also important  not to limit oneself to isolated projects, but to look at the entire value added chain. For example, establishing a plant for processing tomatoes into tomato paste and ketchup could also alleviate dependency on imports because it is a popular product but is usually imported. Ultimately, many countries in Africa suffer from foreign exchange shortages and for that reason are dependent on building up an export economy. Schneider cites another argument: “Establishing modern business operations increases farmers’ incomes and thus the affluence of the regions, which are frequently remote and underdeveloped.”

To ensure that useful and necessary investments in agriculture do not trigger land robbery, destruction of nature and expulsion, the BMZ, KfW and Deutsche Bank investment fund has introduced clear sustainability criteria and set up three bodies that will review the individual products in that respect. Thus, all investments have to fulfil the Aatif criteria based on the IFC Performance Standards of the World Bank. Their objective is to help prevent expulsions, slavery and child labour, and destruction of nature or cultural heritage.

“We scrutinize all projects ourselves at Deutsche Bank,” says Schneider. He says that - parallel and irrespective of that - the International Labour Organisation (ILO) in Geneva, and ultimately the investment committee of the investment fund, scrutinizes every single project. “That body takes the development policy related goals of Aatif into consideration and assesses the cost effectiveness of the project,” says Schneider. “We are only allowed to invest once that expert group is convinced.”

In many African countries, there is a lack of suitable legislation to prevent undesirable land seizures, for example by Chinese, Indian or Arabian investors. “In Germany there are substantial legal obstacles preventing land seizure,” says Franz Böhke, personally liable partner of the investment management firm of Böhke & Compagnie Consultants in Braunschweig. About one year ago, he founded Realkapital KgaA, which invests in agricultural cropland in Germany and then leases it to farmers. In Germany, the Law of Real Estate Transactions [Grundstücksverkehrsgesetz] stipulates the establishment of a real estate transaction committee in every administrative district or county. “In doubtful cases, the latter can prohibit the sale of agricultural crop land if the purchaser is not a farmer.”

Thinking about investing a portion of private assets in the agricultural sector is definitely a sensible idea. In comparison with real estate properties, leased agricultural cropland does not cause a lot of work. However, in Germany the return on investment is very low. “The rental yield is about 2 percent before taxes, with a maximum of 3 percent, and depreciation is not possible either,” says Böhke. That is not exactly an argument that makes an imminent wave of speculation in Germany likely.

But Aquila expert Schön is also convinced that agricultural crop land is getting more and more scarce internationally. “Farmland,” says Schön, “will become a strategic resource for many countries.”

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Characteristics of good agricultural investments

Financial investors that do not have a clue about agriculture are almost even worse than land robbers, according to a witticism that is bandied about in agricultural circles. Many financial investors offer participations in wheat cultivation in the Ukraine or castor oil plant plantations that can produce castor oil. Many investors do not manage the agricultural operation themselves: they lease the agricultural cropland to farmers, who sometimes work for the investors according to a contract, but often operate completely independently. Admittedly, every agricultural project can only be assessed individually but there are some universally valid rules that investors who are interested in this type of investment should take to heart:

A farm is not a canning factory: An agricultural business operation cannot be enlarged to any desired degree like a factory. That is why large-scale agricultural projects entail special risks.

Overalls instead of a suit: In agriculture, experience is everything. Investors should decide in favour of operators that have already managed agricultural business operations.

The location is crucial: Smart farmers select the products they cultivate according to soil, climate and water conditions. In their business operation, they only cultivate products for which the location has proven to be suitable.

In agriculture, the return on investment is not everything: Some business operations can derive large profits from a location for only a temporary period but all too often what is left behind is depleted soil or over-extended natural resources. People who want to invest in the long-term, and who attach importance to long-term success and lasting conservation of nature will avoid that kind of project.

Make comparisons: Those who want to participate in agricultural projects should take a look at what is standard in the sector in which they want to get involved. One reference point is provided by the question of whether the agricultural investment is the first in the specific region and why, or the question of what the international standard for this specific crop rotation or products is can be helpful in making the decision.

International standards: The World Bank has prepared special guidelines for agricultural business operations, the IFC Performance Standards. They address aspects such as working conditions, environmental pollution and health in the work place; conditions pertaining to land purchasing; biodiversity; dealing with the cultural heritage on location; and treatment of the native population. They stipulate a “Social and Environmental Assessment and Management System” (SEMS). Not every business operation has introduced this guideline, but it should be in a position to adhere to it.

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