South America limits access to its resources for foreigners

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South America limits access to its resources for foreigners?

The country of Uruguay, sandwiched between South America’s largest economies Argentina and Brazil, is taking steps to protect its farmland from unregulated foreign investment which to date has been Argentina and Brazil.

It’s a familiar story. Powerful countries with money to spend and mouths to feed look outside their own borders for agricultural land. But this time, it’s not only Europe or North America making inroads into other regions. Increasingly, when land changes hands, the buyer is often China using a front to hide ownership.

China has been buying arable land all over the world at an enormous scale,from Australia to Africa. “The model China is developing is to buy up the whole harvest in regions. “The scale of the operation is completely unprecedented.”

China is by no means the only wealthy country in the market for farmland. In Africa, especially, there are major investors from other Asian countries, from North America and Europe, and even now from Brazil. Several oil-rich Middle Eastern countries are also buying farmland around the world.

But China’s growing population has created major concerns about its future food security. At the national scale, food security means having reliable access to enough food for all citizens, and this is a challenge that will grow right along with China’s expanding population.

Economic factors within China are also prompting the government to look outside the country for agricultural land. China already has very little farmland per capita, and there is increasing pressure on the existing land as the government steps up urbanization efforts to cope with the growing population. The increasing affluence of China’s population means appetites are growing for meat, so China is importing grain for livestock feed. Other major agricultural imports are for industrial purposes, such as crops used in biofuel production.

Walking a Tightrope

In Africa, Chinese companies have bought millions of acres of land for farming and mining. In the Ukraine, China recently signed a 50-year lease that will give it control of 7.4 million acres of farmland. And in South America, three agriculturally rich countries are scrambling to keep their farmland under domestic control.

Uruguay will follow its neighbors, Argentina and Brazil, in passing a law to restrict foreign ownership of rural land. In the past three years, both Argentina and Brazil have passed new laws or reinstated older ones aimed at controlling the flow of foreign investment capital into agribusinesses. These laws restrict the amount of farmland that can be owned by foreigners in general, regardless of whether they’re individual investors, corporations or even foreign governments.

But the Uruguayan government had a tightrope to walk when it planned its own law. Uruguay prides itself on its openness to foreigners. American investors like Grasslands run by Doug Bell, is a wealth preservation fund that invests in Uruguayan farmland, call Uruguay’s people and policies “friendly.” And the multi-national resort community at Punta del Este is proof that Uruguay is a melting pot. Because Uruguay’s economy depends so heavily on foreign capital, the government didn’t want to go as far as Brazil and Argentina in restricting foreign property investments – but it did want to make sure foreign governments weren’t buying up vast tracts of farmland within their borders.

“This is demonstrably some of the best farmland in the world,” Bell said. He has found that farmland in Uruguay costs half as much as it does in the United States, and there are fewer headaches. Uruguay has a mild climate and ample annual rainfall, and the seaports along the mouth of the Plate River make it easy to ship grain, beef, pulpwood and soybeans all over the world.

“We’re helping to feed the planet,” Bell said, “and I like being a part of that.”

Bell sees the proposed law as a good thing for his fund’s ability to buy additional land. “I think it will ensure fair pricing,” he said.

The new law has been under discussion for about two years. It’s being refined by a Parliamentary committee, and Juan Federico Fischer, managing partner in the Montevideo law firm Fischer and Schickendantz, said the law is expected to come to a vote in the next few months. All signs point toward its easy passage. It will prohibit the purchase of rural land by corporations that count foreign governments among their shareholders.

“When China buys land, it doesn’t come as the country of China,” Fischer said. Instead, the buyer could be hidden behind a series of companies that obfuscate where the money is coming from and who really controls the land. Chen said this is a legitimate concern. Many Chinese companies are backed by the state to some degree, but he pointed out that it’s not a unique situation. “Even China’s state-owned industries are not that different from how other countries organize their economies,” he said. For example, he said, many American companies have ties to the United States government. “The idea that U.S. corporations are not backed heavily by the state and the U.S. military, history shows that to be false.”

The Uruguayan government is especially nervous because it doesn’t have a system for tracing the ownership of companies operating within its borders, a problem lawmakers hope to correct, according to Wilkinson. Meanwhile, the majority of all land sales in Uruguay are to corporations, a new phenomenon that is causing concern at the national level. Wilkinson said there’s a perception that Chinese and Middle Eastern companies “are in fact controlled by the state.”

A Neighborhood Problem?

So far, Uruguay’s fears about the Chinese government snapping up prime Uruguayan cattle ranches are unfounded. The largest foreign landowners in Uruguay are not from China, the Middle East or North America. They’re right next door in Brazil and Argentina.

“Uruguay is a very small country squeezed between Brazil and Argentina,” Wilkinson said. “Both Brazil and Argentina are expanding their frontier into Uruguay.” Brazilian-owned rice farms are becoming common in Uruguay, and Argentine operations are growing an increasing amount of soybeans on Uruguayan soil.

In neighboring Argentina, the so-called ley de tierras, or land law, was passed in 2011. “Basically what the law does is put a cap on the ownership by foreign persons on land in rural areas,” said Laurence P. Wiener of the law firm Wiener, Soto and Caparros in Buenos Aires. No more than 15 percent of the total ownership of any specific state or municipality can be in foreign hands, and no single entity can hold more than 1,000 hectares (about 2,500 acres). The law also restricts how many people from the same country of origin can buy land in a specific area, preventing enclaves of investors from buying up all the available land in any one region.

Brazil’s law passed in 1971 but hasn’t been enforced in recent years. The government dusted it off and revitalized it in 2010, said Alessandro Jacob of Alves Jacob Law Firm in Rio de Janeiro. Like Argentina, Brazil restricts the amount of rural land a foreign entity can purchase and limits the amount of land that foreigners from any one country can buy in a given state or municipality. Jacob said Brazil’s law was meant to address concerns about national security, a sentiment echoed by experts in all three countries.

Wiener, the lawyer in Argentina, thinks this perspective is a mistake. “The law reflects a tremendous confusion between sovereignty and private ownership,” he said. “But all nation-states have tools to expropriate land that is required for the public good.”

This may be true if the landowners are individuals or even corporations, but Wilkinson said this is a major reason why foreign governments owning property is a problem. In such cases, “if you want to expropriate land you have a diplomatic crisis,” he said. “It becomes a delicate matter.”

The newly enforced restrictions have already had unintended consequences in Brazil. Opponents of the law claim that it has already blocked crucial foreign investors, causing a major slow-down in the growth of several industries. Wilkinson said it’s true that agribusinesses producing crops for ethanol fuel and the pulp and paper industry have slowed down, but he hesitated to attribute the slow-down to the legal changes alone. He said the global financial crisis of 2008, drought and fuel prices have had a bigger impact on Brazil’s ethanol fuel industry than the restriction foreign buyers. “Pulp and paper investments seem to have been the sector most directly affected” by the new restrictions, he added.

Another unforeseen complication in Brazil has been reduced access to financing. Many international banks loan money in the form of mortgages on a company’s property. But if non-Brazilian banks can no longer own Brazilian land, they are unwilling to accept it as collateral. Wilkinson said work-arounds are possible, but they will take time to figure out and will almost certainly increase the transaction costs. “When they created the law, nobody thought about that implication,” he said. “There’s a lot of pressure now to look again at this position.”

Helping American Investors

Both Brazil and Argentina were reacting to major purchases by foreign individuals and corporations when they made their laws, but so far Uruguay’s law is merely a precaution. Chinese corporations have not invested in Uruguayan farmland in a major way. China is not interested in Uruguay as they tend to be interested in larger scale operations like those available in Brazil. Uruguay’s average farm is only 400 hectares, which is small potatoes for a country the size of China.

American investment in Uruguay has grown significantly in the past few years.

The country’s agricultural products have a good reputation, especially the beef. Eighty percent of it is grass-fed and free from antibiotics, and a radio frequency identification system tracks cows throughout their lives. This allows for a high degree of transparency about where specific shipments of meat come from, including the ranches where each cow was raised. This paints an idyllic picture of happy cows under a blue sky, a far cry from the factory farms and animal cruelty concerns in many other countries that export beef. All of this appeals to health-conscious consumers in the United States who want to eat ethically but don’t necessarily want to go vegan to do it.

The international interest in Uruguayan agriculture has driven the price of land up an average of 20 percent a year since 2002. In 2002, you could buy excellent land for $1,500 per hectare. Now this excellent land costs $12,000 per hectare. (Uruguayan assets like real estate, cars and most export crops have been priced in United States dollars for decades because of the Uruguayan dollar’s history of devaluation.)

Uruguayan farmers are not complaining about the price gains. Those who want to sell can cash in on the appreciation of their land. Those who want to keep farming benefit from the increased cost of food worldwide. And many landowners choose to rent their holdings to farmers like Da Silva, who grows grain on acreage that he leases while his father continues to run the family cattle farm.

As for American investors, Fischer tells his clients that the new law is “the best news for a private investor. It will keep huge players like governments from coming out and driving prices up.”

It’s hard to say how this international chess game will affect the average consumer. So many economic factors influenced the price of that grass-fed steak you ate at your local restaurant last week. But with the United Nations anticipating a worldwide population of up to 10.6 billion by the year 2050, these national-scale tussles over food production are not going away.

Part of an Article by Virginia McGuire

Contact the Gateway to South America team to learn about the best investment opportunities in the region. The company is a benchmark for foreign investors wishing to invest in Argentina, Brazil, Chile, Paraguay, Peru and Uruguay, providing expert advice on property acquisition and investment tours.

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