Mon, 15 Nov 2010

From: The Jakarta Post

By Johannes Simbolon, Jakarta
Long regarded by many as one of the least profitable industries, the agricultural industry has been attracting greater attention from the global business community in recent days.

This is good news for countries such as Indonesia, where most of the population still makes a living in the agricultural sector and there are still large tracts of land that can be developed into farmland.

Agricultural commodities were among the first to recover from the impacts of the global financial meltdown. While other commodities, such as oil, coal and the majority of minerals are still struggling to reach pre-crisis levels, most agricultural commodities have seen their prices consistently increase since last year, and some have even hit prices not seen in decades.

The price of rubber has hit its highest level in decades thanks to surging demand for tires in Asian markets such as India, China and Indonesia, where car sales have hit record highs.

Meanwhile, the price of wheat has sharply increased, first triggered by heat waves in Russia and floods in Pakistan. The rise in price of wheat was followed by those of corn, soybean and rice. Since palm oil is a substitute for soy oil, the rise in the latter’s price has in effect pushed the price of palm oil higher.

Analysts generally agree that the prices have increased due to strong fundamentals. They believe that the prices of agricultural commodities will still be strong or even stronger in the coming decades, thanks in the short term to the rising demand from rapidly growing economies such as China and India and, in the long term, to the growth of the world’s population and increased wealth in developing countries.

As Indians and Chinese have become richer thanks to decades-long high economic growth in their countries, they now not only eat rice or wheat, but also more meat. To meet the growing demand for meat, the world needs to raise more poultry and cattle, which in turn requires more corn and soybean for feed.

Agricultural commodities are consumed not only as food nowadays, but are also used to produce fuels. The growing demand for energy has and will add pressure on the production of agricultural commodities. Experts have projected the population of the world to rise from 6 billion to 9 billion over the next 40 years. This means the increasing trend in demands for agricultural commodities is a long-term one and, thus, promises huge profit for businesspeople. For the first time perhaps in decades, agriculture is seen now by many as a business that is as profitable as other industries.

Companies from the Middle East, China and South Korea, India, Europe and the United States have been hunting for farmland around the globe for several years.

According to a report, between 51 million and 63 million hectares of land (about the size of Sumatra and Java combined) in 27 African countries have been acquired or are in the process of being acquired by foreign investors. They have also acquired millions of hectares of land in South America (particularly Brazil) and Cambodia.

The recent announcement by energy giant Royal Dutch Shell about its planned huge investment in the sugarcane business in Brazil has further underlined the rising value of agriculture.

The Dutch-British firm will set up a US$12 billion joint venture with Brazilian biofuel giant Cosan to produce biofuels from sugarcane.

Indonesia is one of the countries targeted by foreign investors. The Forestry Ministry recently announced that a group of South Korean investors have acquired more than 430,000 hectares of degraded forest areas where they plan to grow crops for bioenergy production. Investors from the Middle East and China have also launched study tours here to look for land for acquisition.

A tropical country, Indonesia has abundant sunshine and rain, which are the basic needs of any agricultural business. Most internationally traded commodities grow well in Indonesia. In fact, it is now the world’s largest producer of palm oil, and the world’s leading producer of coffee, rubber and cocoa. Moreover, Indonesia still has vast tracts of lands that remain idle, including 40 million hectares of degraded forest areas that have turned into grasslands after being abandoned by logging concessionaires.

One of the countries that has successfully developed its agricultural industry is Brazil, also a tropical country. Now called an agricultural superpower, Brazil is the world’s largest exporter of beef, poultry, sugarcane and ethanol and a leading producer of soybean, rice and corn. Agriculture is the main force behind the fast economic growth that has brought the nation into the BRIC (Brazil, Russia, India and China) elite club.

Indonesia has the potential to emulate Brazil. What we need to do is learn from Brazil. The nation welcomes foreign investors into its agricultural sector as it realizes that land needs investment and application of technology in order to produce maximum yields. Millions of hectares of farmland in Brazil are now controlled by foreign investors.

It is not easy to implement the Brazilian way here as populist politicians keep calling on the government to distribute degraded forestry areas to small farmers rather than to big investors. We have to keep in mind however that a 10,000-hectare plot of farmland will produce a greater yield, and thus provide more revenue to the government, if it is managed by an investor who has an efficient organization and is financially capable of procuring the best technology rather than 10,000 farmers who eke out a living cultivating their small plots of land.

The challenge for Indonesia is how to strike a balance in which private investors can control huge tracts of land and develop them in partnership with small farmers.

The author is a staff writer at The Jakarta Post.