Promoting Investment in Agriculture for Increased Production and Productivity. Saifullah Syed

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      Executive summary

      As food prices increase and many face greater food insecurity, there is global concern about financing agricultural growth in the developing world. Accelerated agricultural growth is not only needed to meet growing global demand for food and energy, but is also seen as the main pathway out of hunger and poverty for many impoverished people and countries.

      Global estimates of the amount of investment needed to achieve acceptable levels of agricultural growth in the developing world vary enormously, but all these estimates far exceed the current trends in investment in agriculture by governments and donors. This report addresses the key questions that need to be addressed if this investment gap is to be filled:

      ■ Who is going to make the required investments?

      ■ Where are the needed resources going to come from?

      ■ What are the policy options to ensure that resources flow to appropriate segments of the agrofood value chain?

      ■ What are the policy options for guiding these investments to enhance pro-poor outcomes?

      SOME NOTABLE FEATURES OF INVESTMENT IN AGRICULTURE

      Investment in agriculture must be viewed in the wider economic context in which agricultural development occurs. In designing policies and programmes for promoting investment in agriculture it should be recognized that agricultural development depends on the simultaneous growth of agricultural production and the value chains to which it is linked. These value chains include a wide range of small- and large-scale activities that involve supplying farm inputs, processing, storing, distributing, wholesaling, retailing and exporting farm products. All these activities can be referred to collectively as ‘agro-industry’. When considering agricultural investment, it should also be recognized that there are different types of investors operating in agriculture and its value chains. These investors have different objectives and roles. In addition, there is a variety of sources of financing for investment and all the sources are not equally accessible to all investors.

      It must also be acknowledged that investment capital comes in many forms: financial capital, productive capital, fixed capital, working capital, as well as human capital, social capital and natural capital. Different forms of capital cannot simply be added together to determine the total amount of capital available or needed. They overlap and complement each other, and some forms of capital cannot be substituted for others. Moreover, different types of investors exercise varying degrees of control and ownership over these different types of capital, and at different stages along value chains. Investments made by different investors can on occasion complement each other, whereas in other situations different investments cannot simply be substituted for others. For example, farm capital formation, which is essential for increasing agricultural production, depends on farmers’ own investment of labour and financial resources and cannot be substituted by other investors and sources of financing investment. Likewise, there are certain areas where only the public sector can or will invest. Conflicting goals can arise between different types of investors leading to tradeoffs that require public intervention to find the right balance between the economic, social and financial costs and benefits.

      FARMERS ARE THE BIGGEST INVESTORS IN AGRICULTURE

      For any investment to have positive impact on production and productivity, it must contribute to capital formation at the farm level. In this respect, the investments made by the farmers themselves are indispensable. Public investment in agriculture and private investment in agro-industries complement farm-level investment, but cannot substitute for the investments that need to be made by the farmers themselves.

      The most comprehensive and readily available data for empirical measurement of investment in agriculture are the FAO estimate of on-farm capital stock. FAO has prepared estimates of on-farm capital stock for 206 countries from 1975 to 2005 based on inventories of agricultural assets contained in the FAOSTAT database. According to this dataset, farmers are the largest source of investment in agriculture for agricultural capital stock (ACS). On-farm investment in agricultural capital stock by farmers is nearly three times as large as other sources of investment combined, including public investment, foreign direct investment and official development assistance.

      According to the FAO publication, The State of Food and Agriculture 2012 – Investing in Agriculture for a Better Future (FAO, 2012a), in the 47 countries that are on track to achieve the Millennium Development Goals (MDGs) hunger-reduction target, agricultural capital stock per agricultural worker (a proxy for private domestic agricultural investment) has grown by 0.7% per year since 1992. Whereas, this ratio has declined slightly in the 25 countries where progress has been insufficient and strongly in the 15 countries where rates of undernourishment have stagnated or regressed.

      PUBLIC INVESTMENT

      Available data indicate that public investment, although small relative to farmers’ investment, is the second most significant contributor to farm-level capital formation, both directly through the provision of rural public goods and its effect on private investment. Hunger is more prevalent in countries where public agricultural expenditure per agricultural worker is lower, suggesting that both public and private investment in agriculture is important in the fight against poverty and hunger.

      THE CORPORATE PRIVATE SECTOR AND FOREIGN DIRECT INVESTMENT

      There are no comprehensive data on corporate private sector and foreign direct investment (FDI) in agriculture. However, the limited and country-specific data collected through case studies and sources such as UNCTAD, demonstrate that bulk of the corporate investment goes into agro-industries and the higher end of the value chain. Private sector investments along value chains are opening up new market opportunities for some farmers, but it is also becoming apparent that many small farmers are being left behind. There are signs of an increasing chasm opening up between small farms that are commercializable and non-commercializable subsistence farmers. This polarization could lead to a situation where policies and investments geared towards strengthening commercial agricultural production and value chains are not consistent with policies and investments geared to reducing poverty and food insecurity.

      INVESTMENT REQUIRES THE RIGHT CAPACITIES AND THE RIGHT ENVIRONMENT

      All agricultural investors, regardless of their size or the country, require the capacity to make investments and an environment that enables them to do so.

      For farmers, their capacity to invest is determined by their main sources of investment finance: their own savings and their fixed capital, which is used as collateral for credit. Capital formation is certainly higher for farming households with positive savings. In the countries where the levels of poverty and hunger are high, the average farmer does not have any savings. In India and Bangladesh, more than 80% of the farming households demonstrate negative savings and take out loans just to cover their consumption. In recent years, remittances from migrating family members have contributed to increasing investment in agriculture. However, policies to provide credit to small and marginal farmers, who do not have adequate collateral, have not had the desired success.