Richard Ferguson writes: Monopolies are bad, competition is good.
Speeches about agriculture normally start off with the mantra: “By the year 2050, there will be 9 billion people in the world.”
Agriculture companies are supposed to see this as positive. However, when it was first formulated as a forecast by the United Nations, sometime in the 1990s, it was also a sign that you ought to buy General Motors stock because everyone would want a car.
The problem with these maxims is that they lapse into investment clichés. Once we accept this as conventional wisdom, we start to make the wrong investment decisions.
Let’s not talk about 9 billion people on the planet by 2050, how the Chinese are eating more protein and how soft commodity prices will likely stay high for a long time.
If Brazil is a positive lesson for Ukrainian agriculture, then Argentina is a warning.”
– Richard Ferguson.
For sure, all these mantras drive the agricultural investment decision-making process and they are interesting themes to discuss but, in reality, they are of less importance than other factors common to all investment decisions – not just in agriculture.
But let’s return to the idea of what makes a successful investment destination and why Ukraine faces many challenges in this regard.
Consider previous “hot” investment destinations. My current favorite is the view of Brazil as an agricultural superpower and the much-vaunted Mato Grosso as some kind of agricultural nirvana with few peers around the world.
What people omit is the fact that the Mato Grosso is almost 2,000 kilometers from a port, the soil structures are actually quite acidic, water isn’t quite as plentiful as you might believe and the logistics are dire.
If Brazil is a positive lesson for Ukrainian agriculture, then Argentina is a warning.
Despite a lengthy history of industrial farming that stretches right back to the 19th century, good soils and excellent growing conditions, Argentina went from being the 8th richest nation in 1910 to the 62nd richest nation in 2010.
Worryingly, Argentina’s eclipse as a major agricultural power and recently established status as an investment no-go area took effect in an era when our views of emerging markets were being altered for the better and one in which commodity prices boomed.
So, why was it that, between December 2001 and October 2006, a couple of years before the whole world collapsed did Brazil attract foreign direct investment of some $55 billion compared to Argentina’s $15 billion?
The fact is that Argentina, in common with Ukraine, has a range of assets which are exemplary – soils, climate, precipitation, geography and so on. But these come at the expense of the intangible factors which genuinely drive progress and investment.
Argentina, in common with Ukraine, has a range of assets which are exemplary – soils, climate, precipitation, geography and so on. But these come at the expense of the intangible factors which genuinely drive progress and investment.”
– Richard Ferguson.
Let’s consider the ownership of assets. How is it that 20 years after the failure of state planning, some places still see foreign ownership of assets as a bad thing?
Let’s look at this through a business, which reflects my cultural heritage – whisky.
Today some 40 percent of the Scottish industry is in foreign hands.
If you count the English as foreigners, that figure would probably rise to more than 80 percent.
However, the product is still made in Scotland and always will be. Its vast export earnings still pile into the U.K.’s central treasury via taxes.
In fact, one reason why the Scotch whisky industry is in foreign hands it is for the simple reason that half the managers of the Scotch whisky industry in the 1980s were simply not up to the task. Ukrainian farming groups should be allowed to think along these lines.
Let’s turn to another investment essential: the enforceability of contracts and the rule of law.
Let me extend this into another place: Colonial Hong Kong, a place that shouldn’t have worked. However, what did work was the fact that rule of law and an independent judiciary capable of enforcing contracts allowed the place to flourish and made Hong Kong one of the wealthiest places in the world.
Try to imagine what would happen to agricultural investment in Ukraine if it had Hong Kong’s legal code. It is a lesson Ukraine could do well to learn if it is not to repeat the Argentine calamity.
And what about competition?
Let me put it bluntly: monopolies are bad and competition is good. It isn’t just companies that require competition. Nations do as well. A nation that allows its companies to compete against one another will build an enduring business environment replete with opportunities.
Government interference in the sector hinders investment.”
– Richard Ferguson.
However, state-sanctioned monopolies – as in Ukraine’s possible creation of a state grain-trading monopoly, will simply drive investment to alternative destinations.
The Argentine government’s persistently meddlesome behavior in the agriculture sector has had a devastating impact on farmers over the last 50 years. In an era when the sector should have flourished, it became instead an investment backwater. Does Ukraine really want to be in a similar position in the future?
What it proved was that government interference in the sector hinders investment.
In 20 years, there will be some farming companies that are international in scope and diversity.
They will manage millions of hectares with some of the most sophisticated capital and, above all, they will be household names. Whether they are Ukrainian remains to be seen.
Richard Ferguson is the global head of agriculture for Renaissance Capital, which offers financial, investment and management expertise in high-opportunity emerging markets around the world.
