Selling Off Australia: Where Food Security Hits the Hotplate

Source @ UNSW School of Business – 01 March 2011

The recent Queensland floods have wiped out crops and sent food prices spiralling, highlighting the formerly overlooked but pressing concerns about food security. Not before time, some say, because climate is not the only contributor to looming food shortages. To date, the federal government has failed to recognise that if Australia is to succeed in its important global role as a food exporter, it must retain control of its water and land resources, according to Christine Milne, a federal senator in the Greens party, which now holds the balance of power in the Australian parliament.

While the impact of extreme weather has caused immediate food shortages, Australia also needs to focus on its sale of arable land and water to foreign companies and governments. If more widespread food shortages continue, food produced and grown in Australia will be transferred to countries that are buying up Australian land, rather than being sold on world markets, says Milne, who points to the ongoing land grab by China, the United Arab Emirates and Saudi Arabia. “The world changed dramatically when countries realised it didn’t matter how much money they had  – if other nations decided to withhold the export of food, they would have a problem,” she points out. “Nations started buying production land and water elsewhere in the world to feed their own people.”

Fears of a food crisis and violence were re-ignited internationally in August 2010 when the worst drought in 100 years destroyed a third of Russia’s grain crop, prompting the government to ban wheat exports. This move to protect domestic supplies and keep prices low encouraged the Ukraine and Kazakhstan to follow suit. Subsequently, typhoons hit the rice paddy fields in the Philippines and bad weather is wrecking production in China, Indonesia and other key producers. Prices for rice have been escalating. The worry is a hike in the cost of this staple – on the back of spiralling wheat and corn prices – could trigger another food crisis, such as the 2007-08 food shortage, which sparked conflict and riots throughout the developing world. Pakistan is offering to provide security forces for foreigners who buy land, notes Milne. “Countries are recognising they will have to secure that land and water resource for food production for their own people and that we are looking at a future where conflict around food and food production is becoming increasingly real.”

Crop Shocks

Certainly the Food and Agriculture Organisation of the United Nations (FAO) is on the alert over volatile food prices and their threat to food security. The FAO’s Food Price Index hit an all-time high in December 2010, prompting the organisation to warn of the danger of a repetition of the food crisis. The index tracks the wholesale cost of commodities, including wheat, corn, rice, oilseeds, dairy products, sugar and meats. While the FAO does not condone the panic buying and hoarding of food, previously it has warned that the world should “be prepared” for even higher prices in 2011 and indicated that harder times are ahead unless the production of major food crops increases significantly. “With the pressure on world prices of most commodities not abating, the international community must remain vigilant against further supply shocks in 2011 and be prepared,” the FAO said in a statement.

Undoubtedly Australia benefits from higher grain prices, Milne says. At the same time, it needs to fundamentally change the way it thinks about food. She believes Canberra should engage with other nations to formulate a global response to the problem. “The world is facing extreme weather events, peak oil and the emergence of strategic acquisitions by nations for land and water. We should secure or own food and water and maximise our crops so we can assist the rest of the world where possible,” Milne says. While supporting the free trade system, she suggests recent events demonstrate that “circumstances have changed and we need to change with them”. “The government hasn’t thought about ownership of water and land or the consequence of extreme weather events. When people in Australia think about food security, they think about immediate needs – whether it’s available and affordable – rather than how is it grown, who grew it and whether it’s secure in the future.”

Recent reports that Cubbie Station – Australia’s biggest cotton plantation and one of the largest private irrigation projects in the world – is being bought by Saudi Arabian interests unsettled many. This follows the recent purchase of AWB, formerly the Australian Wheat Board, and ABB, previously the Australian Barley Board, by the Canadians. Many Australian-based meat and dairy processors, cattle producers, sugar and biofuel companies are now owned by foreign companies. The Chinese have made no secret of their appetite for Australian resources. For their part, Australian companies are also searching the globe for valuable resources. A recent standout example is BHP with its US$40 billion takeover bid for Potash Corporation of Saskatchewan. Mining giant Rio Tinto is hoping to cash in on the world’s biggest copper mine; Mongolia’s Oyu Tolgoi.

Increasingly, foreign companies  – and governments  – are targeting quality farmland and many land purchases are taking place unreported by the media because the transactions are too small, claims Milne. That’s because the sale of agricultural land to offshore buyers – hastened by the collapse of managed investment schemes – is exempt under the rules of the Foreign Investment Review Board (FIRB), unless a deal exceeds A$231 million. Milne argues that FIRB should look more carefully at the acquisition by foreign interests of Australia’s farms, including their water rights and downstream production assets. “We should have a register so we can know what has been sold. Right now there is nowhere you can find out what volume of water licenses have been sold, how much land has been sold and to whom. We should know what is going on in terms of who owns our land and where that food will go in the end,” she says.

Typically FIRB responds to such criticism by saying its role is to implement the Foreign Acquisitions and Takeovers Act and that any amendments must go through parliament. Milne is calling for human rights considerations, environment standards, occupational health and safety law and trade laws to be taken into account. “Farmers are being driven off the land because it’s cheaper for a food processor to import frozen vegetables from China [where agricultural production costs less and environmental standards are inconsistent] rather than buy them from a veggie grower here,” says Milne.

Recipe for Disaster?

Ian Dunlop, an advisor on governance and sustainability, is also watching the race between governments and private interests to acquire arable land and water around the world. These present big investment opportunities for hedge funds, he notes. A former chair of the Australian Coal Association and chief executive of the Australian Institute of Company Directors with wide experience in the international energy industry, Dunlop believes conventional market forces will be inadequate to handle the problem of food security without the world getting into trouble. “Relying on market forces is guaranteed to build a major conflict over the availability of food around the world in the next few decades,” he says.”Relying on conventional market forces will result in the wealthy winning, prices going through the roof and will create the framework for a major conflict.”

Dealing with food security requires a more enlightened view, which may mean introducing an allocation mechanism for scarce resources, as happened with the first oil shock in 1973, according to Dunlop. He believes there’s a global emergency driven by the physical impact of climate change and resource shortages due to increasing populations and consumption, together with technological limits, impacting more acutely than anticipated. The problem is so big the global market must create new rules now, “because most of the changes required will take at least a decade to have any effect”, he says.

The issue of food security demands big picture thinking, but Kevin Fox, a professor of economics at the Australian School of Business, is not worried about offshore interests acquiring Australian land and resources. “If Australians want access to world-class health and education services, and to be wealthy enough to have the luxury of preserving the environment, then [the country] must be part of the world economy,” he argues. Australia needs capital investment. And Fox sees the ability to attract offshore capital as a sign of confidence in the Australian economy, and an indication that there are high returns for investment in Australia. Escalating international wheat prices translate to Australian wheat producers “raking it in”, he suggests.

In Fox’s view, the world will not run out of food unlike the views espoused by the Club of Rome global think tank in the early 1970s and political economist Thomas Malthus in 1798, who predicted that the world would be forced return to subsistence-level conditions once population growth outpaced agricultural production.  “Their arguments were discredited when, among other things, new technologies proved them wrong,” Fox says. “Alarmists on global food security underestimate the power of the price mechanism to change grower and consumer behaviour, the natural resources available, the development of capacity to generate energy and advances in hybrids, new seeds, fertilisers and technologies.”

On the food security front, there’s a range of things that market forces will not look after and they include the environment where excessive emissions of carbon dioxide and other toxic gases are concerned, says Nicholas Gruen, chief executive at public policy group, Lateral Economics. But, as long as the basic environmental concerns connected with food security are attended to, then there are no worries over the issue of food production itself. “We produce food at the least cost, so markets will sort it out. Australia is a massive exporter of food, which means worrying about food security doesn’t make sense,” he says. “Our arable land is cheap; people won’t pay much money for it. If the Chinese are growing produce on it and we care about feeding the world, what’s the problem with them taking it back to China? If there is land that can be used for growing, isn’t that where the investment should go?”

The world needs to be more rational in dealing with food security issues, Gruen concludes. For example export bans do the opposite of protecting local growers, he says. “They cause domestic prices to fall and the producers can get hit. They then can’t produce enough so they reduce investment in their farms.”

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