Agriculture : a new frontier for private equity funds ?

According to an article by Reese Ewing from Reuters, private equity funds remain optimistic that Brazil's farm sector offers investment opportunities despite the deteriorating world credit market.

This illustrates a growing appetite from private equity funds for investing in agriculture related businesses in emerging countries by taking stakes in large farms, food processing or warehousing companies.

What stands behind this new interest in agriculture ?

Obviously the spectacular boom in the international price of agriculture commodities over the last three years is a key factor behind this surge of interest for "green assets".

For many analysts, including officials from the OECD and the FAO, food prices are going to stay high in the coming decade driven by a combination of surging demand from countries such as China and India which are consuming more meat and dairy products, a sustained demand for biofuels backed by generous subsidies in developed countries (US, EU), and a relative scarcity of supply in the short term (wheat inventories have plumetted to thirty years lows).

Indeed, according to some reports, arable land cannot be further extended without causing irreversible damages to the environment, either through large scale deforestation, as in Brazil, or through expensive irrigation projects. In addition, farm land is severly constrained by sweeping urbanization in emerging countries such as China that already holds one of the lowest ratios of arable land to total land.

In addition, another serious problem is the stagnation - or even the decline - in agriculture productivity in developing countries that has been witnessed in recent years as a result of under-investment in the sector over the last two decades. In India for example, where a spectacular growth in productivity was achieved over the last fourty years thanks to a scientific revolution and heavy investment in the sixties and seventies - with some support from the US - experts now fear the country may face a "green revolution fatigue".

Are private equity funds cynically speculating on hunger ?

On the contrary I believe, private equity funds might be a part of the solution rather than a part of the problem. Through their implication in the management of the companies they invest in and through the modern technologies they bring, they could significantly improve the productivity of agriculture in developing countries, eventually benefiting both consumers and producers.

Echoing this belief, the president of Senegal, Abdulaye Wade, recently chocked his western counterparts at an FAO conference held in May to tackle the global food crisis by saying that the FAO was itself largely to blame for the price rises. He later announced a deal with India to benefit from the latter's experience in achieving food security through intensive technology transfers.

In a similar way, the World Bank recognized in its 2008 annual report that investing in agriculture projects was key to achieve Millenium Objectives of substantially reducing poverty in the world, as most of the poors live in rural areas. Robert Zellick, the Bank's new chief executive proposed that alongside donors from developed countries, sovereign wealth funds in emerging countries also invest a small share of their assets on such projects.