Protectionism in Argentina Threatens Foreign Investment
May 14, 2012
Foreign investors looking to invest in the fertile farmland of Argentina will be significantly limited by the Rural Land Law, passed in late 2011 by the Argentine Government. Argentina is concerned over the growing amount of foreign ownership of their natural resources. Nearly 7.0% of Argentina's arable land is owned by foreigners, according to the Agrarian Federation of Argentina. The Argentine Government will now track ownership of its natural resources and limit further expansion of foreign ownership via the new land law.
Rural Land Law
Law 26,737, the Rural Land Law of Argentina, will limit foreign ownership of any rural land in Argentina to 1,000 hectares (2,471 acres). Additionally, the country will cap total foreign investment of rural land at 15% of the total domestic rural land with a 30% cap per nationality. Other restrictions include zero foreign investment of coastal land or land that boarders a large body of water.
The Rural Land Law will immediately impose problems for new and existing investors seeking to place capital in Argentina's arable land by limiting the amount of acreage that can be purchased. Current holdings are grandfathered in under the Rural Land Law.
Complications could also arise within corporate acquisitions that involve land. The new law is not only limited to farmland, but all rural land located anywhere outside of urban areas. The purchase of Fondomonte S.A. by the Saudi dairy giant, Almarai Co. involved 30,000 acres of Argentine farmland, according to CBS. Fortunately, this transaction occurred just days prior to the passing of the Rural Land Law, otherwise the purchase would have been void.
Foreign investors have been attracted to Argentina as it is one of only four major agricultural regions with mollisol soil types that are optimal for growing corn and soybeans. Investors have favored farmland in Argentina over other South American countries due to its favorable soils, infrastructure, and optimal access to ports.
Argentina has been taking drastic actions to protect their natural resources, including the nationalization of key assets. In April, Argentina announced the nationalization of Treasury Petroleum Fields (YPF) from the Spanish based, majority owner, Repsol. YPF will now be owned 51% by the federal government and 49% by the Argentine states. The nationalization of YPF was done to help lower energy costs in Argentina, according to President Cristina Fernandez de Kirchner, and to also reduce foreign oil dependency. In 2010, Argentina became importers of fuel for the first time since the early 1990's, according to the BBC.
The nationalization of YPF and the passing of the Rural Land Law may be the first steps to greater protection of Argentine natural resources. If Argentina is concerned by growing foreign investor interest, eventually an entire nationalization of rural land could occur and the country would be closed to outside investors.
Restrictions in Other Countries
Argentina is not the only country limiting foreign investment in arable land as the concern of foreign ownership of natural resources is growing across the world. Some countries completely ban foreign investment of farmland, including China who is the second largest producer of corn worldwide.
Brazil, located to the northeast of Argentina, historically has been an option for farmland investors due to the large amount of unused arable land and favorable growing weather, but the current disarray of foreign ownership rights have sent investors flocking to other parts of the world. In August of 2010, Brazil suspended sales involving foreign purchasers of land due to a review of their land law that only restricts foreign investors from owning more than 100 "modules" of land which may vary from 100 to 10,000 hectares in size. It is likely that Brazil will alter its law to ban land investments by foreign entities while private sales to individuals will be considered on a case by case basis, according to the Financial Times.
Additionally, there is a landless movement in Brazil where Brazilian citizens are trying to take over foreign farmland holdings because the constitution states every Brazilian citizen has the right to own land. A few of these land takeovers have been successful by the movement and supported by the Brazilian government.
Importance of Property Rights
Where does this leave foreign farmland investors? Identifying investment opportunities in countries with stable property rights will be key. The U.S. is not only home to some of the best farmland in the world, but also property rights and a legal system that will allow investors to sleep well at night. Even the U.S. is home to a diverse set of foreign land ownership restrictions, but will allow for investments per state regulations.
Government support for agriculture is also very strong in the U.S. as the country was founded on agriculture. Subsidized loans and crop insurance ensures profitability for the American farmer. Once owning farmland in the U.S., landowners can rest assured that their land is being taken care of by the most progressive farming operators in the entire world.
There are a small number of countries that are also open to foreign land investment as an avenue to increase domestic development, including Mongolia, Nepal, and Cambodia, according to World Crops Ltd. Uruguay also has friendly foreign land ownership laws and is home to premier soils. Approximately 25% of the arable land in Uruguay is already owned by foreigners. Uruguay is relatively small in size, thus the entry to ownership is more difficult than in larger countries.
Argentina's new land law is a major problem for farmland investors seeking to deploy capital to farmland investments in the fertile regions of Argentina, but luckily other countries will allow these same investors equivalent or superior opportunities. When investing in farmland, taking a value oriented approach is important and will benefit an investor regardless of the country if adequately executed.
The additional risk of owning farmland in a country with foreign ownership restrictions does not necessarily outweigh the potential for increased appreciation. The nationalizing of domestic natural resources will increase globally and thus investors need to identify areas that allow for outside investment in farmland either in the U.S., your own homeland if outside the U.S., or another country with stable property rights.