Twelve of the world’s 25 leading agricultural production firms are from developing countries.
UNCTAD’s just-released “World Investment Report 2009: Transnational Corporations, Agricultural Production and Development” reveals some fascinating shifts in the global agricultural sector. Most striking: twelve of the world’s 25 leading agricultural production (plantation) firms are from developing countries. Sime Darby of Malaysia is largest, with $10.9 billion in total assets and $4.7 billion in foreign assets in 2007. As striking, it is much larger than Nos. 2 and 3 — the Dole Food Company and Fresh Del Monte Produce of the United States, with $4.6 billion and $2.1 billion in total assets, and $2.6 billion and $1.8 billion in foreign assets, respectively. India’s Karuturi Global, a rose producer, with $54 million in total and $37 million in foreign assets, ranks No. 23. Five of the other Top 25 agricultural production firms are Malaysia, and five are from Indonesia, Thailand, Sri Lanka, Papua New Guinea and South Africa.
Developing country firms are also becoming significant M&A players in agricultural production. In 2008, they acquired $1.6 billion worth of plantation assets, representing 40 per cent of the total global M&A value in this vertical. Developing countries are now also leading targets for global agricultural production M&As.
This year’s report offers a fascinating glimpse into the world of agriculture, food and beverage, and food retail multinationals, while examining their impact on agriculture internationally. But, most valuable of all, the report presents readers with a global context within which to situate India’s own ongoing national debate on agricultural reform and retail liberalisation, as also to assess the development of its agri-business sector.
FDI in agricultural production (as distinct from upstream or downstream agriculture-related industries) accounted for just 1-2 per cent of total world FDI flows and FDI stock in 2007, due to restrictive FDI policies in this sector. However, recent liberalisation has prompted annual FDI inflows to triple from $1 billion in 1990 to $3 billion in 2007. FDI inflows in the more liberal food and beverages sector have burgeoned from $7.2 billion in 1990 to $40.5 billion in 2007.
Despite their dominance in global agricultural production, developing country firms play a much smaller role at the top of the four other agriculture-related verticals considered by the report. The world’s 25 top agricultural suppliers and privately-owned agri-food businesses are all from developed economies. Only two Singapore firms, Wilmar International and Fraser & Neave, rank among the global top 25 food and beverage firms and, that too, only near the bottom. Only three developing economy firms, two from Hong Kong and one from Kuwait, feature among the top 25 food retail chains.
Further, the leading firms in these verticals are gigantic. Walmart, the world’s largest food retail TNC, has $163.5 billion in total assets and $63 billion in foreign assets. It is followed by Nestle, the world’s largest food & beverages TNC, with $102 billion in total assets and $65 billion in foreign assets. BASF and Bayer of Germany, the largest agricultural suppliers, each have some $70 billion in total assets. Cargill and Mars of the United States lead the privately-owned agri-food vertical, with $44 million and $27 million in global agri-good sales.
Key role for TNCs
Despite negligible global levels of FDI in agriculture, multinational companies do play a key role in agricultural development, the report finds, particularly in countries which actively seek foreign investment in agriculture. China is now the world’s leading agricultural FDI destination, with annual flows of $700 million and $6 billion in inward FDI stock, far ahead of the United States whose inward agricultural FDI stock is just $2.5 billion. In Cambodia, Laos and Malaysia, agriculture draws 10-15 per cent of total national FDI inflows. Multinationals account for 100 per cent of Mozambique’s and Zambia’s cotton production, 75 per cent of Brazil’s poultry production, and 90 per cent of Vietnam’s fresh milk production.
Contract farming is the dominant mode of engagement, since most countries prohibit land acquisition by foreigners. According to the report, agricultural production firms, food and beverage companies, and supermarket chains ‘contract farm’ crops, livestock, and bio-fuels in 110 developing and transition economies. Cereals, sugarcane, fruit, oilseeds, and poultry/ meat are the primary focus of investment in Asia, Africa and Latin America, and dairying in Central and Eastern Europe.
The report sifts through the international experience with TNC participation in agriculture to determine what value and risks it brings to host country farmers. The strongest observed impacts are much increased incomes, access to credit and investment, and links to global markets and supply chains. Available data also suggests that TNCs have contributed to domestic food security by boosting agricultural production, while increasingly selling the largest share of their produce locally. Potential dangers are farmers’ over-reliance on a couple of monopoly buyers and commercially-viable crops, minimising their bargaining power and economic resilience. Irresponsible commercial farming can also seriously damage the environment.
The record on employment-generation and technology transfer is varied. While farms that plant labour-intensive crops, like tea and flowers, create thousands of jobs, those that are heavily mechanised do not. Similarly, while TNCs now lead the development and commercialisation of novel seed, crop protection, and other technologies, only one per cent of their R&D budgets goes towards staple crops that are important to developing countries, and intellectual property rules hamper the diffusion of existing innovations. However, they have contributed to farm modernisation and farmer capacity-building.
The report suggests that developing countries might benefit from encouraging more private investment into their agricultural sectors to enhance productivity, reduce hunger, and boost farmer income and welfare. However, TNC involvement should be approached strategically, so as to minimise downsides. Protective measures might include an integrated strategic policy and regulatory framework for TNC activities in agricultural production, model contracts that farmers might use when negotiating with TNCs, local output-sharing requirement, and the development of international standards of transparency and fair play applicable in cases of land acquisition.
More significant question
Although the report concentrates on the potential impact of inward foreign participation in agriculture, its rich detail provokes another, more significant question for Indian policy-makers. That is, why is India not an outward FDI player in agriculture, in keeping with BRIC and emerging market counterparts?
China, with $1.2 billion in outward agricultural FDI stock in 2007, is now the world’s third largest international agricultural investor after the United States and Canada, and South Korea, Brazil, Chile, and Colombia also figure amongst the global top 20. Ironically, India — one of the largest global agricultural producers with a strong latent international advantage — is absent from this list. Largely responsible is a national agricultural policy that has focused solely on trade as the instrument for agricultural growth, overlooking the potential developmental impact that might issue from encouraging globalised Indian players in agriculture. The economic contribution made by globalised Indian IT, telecom, and pharmaceuticals firms is unequivocal.
Fortunately, India has made a start in the right direction. Mahindra & Mahindra is now a global Top 5 tractor producer, and Indian R&D firms’ contributions to seed and crop research are internationally acknowledged. But India still has a long way to go, beginning with the first and most vital step of all — a mindshift in policy. — Courtesy: U.N. Information Centre, New Delhi
(Premila Nazareth Satyanand writes on foreign direct investment issues for the Economist Intelligence Unit, UNCTAD and the World Bank.)