April 20, 2016

By Aaron-Micael Beydoun

Colombia is one of seven countries – along with Brazil, Angola, Argentina, Bolivia, Sudan, and the Democratic Republic of Congo – that comprise half of the world’s underused land mass. This is according to the UN’s Food and Agriculture Organization but amongst these countries, Colombia is not only one of the fastest growing but is by far the easiest place to do business. According to the World Bank’s Ease of Doing Business Index, Colombia ranks 54 while Brazil is ranked at a distant second of 116. Even more, the country is on the verge of signing a peace agreement that will virtually end over 50 years of civil conflict with Marxist rebels. The government has identified agriculture as one of the main pillars of the post-conflict economy and is offering incentives to attract large-scale agricultural investment. Matched with improved security, ideal climatic conditions, and millions of hectares of available landbank, Colombia is Latin America’s next agricultural powerhouse.

Large availability of free-hold titled cattle-grazing landbank

Colombia has more than 22 million hectares of arable land but only 5 million hectares are cultivated. In fact, according to the Ministry of Agriculture, there are 7.5 million hectares of land in Colombia with “high agricultural potential” and 3 million hectares of which are suitable for efficient large-scale crop production. When juxtaposed to Colombia’s import spend – 80% of the country’s staple food crops such as corn and soybeans are imported – this presents a tremendous challenge but also an opportunity for asset-managers and institutional investors.

Colombia is a country with vast expanses of arable land but there is chronic underinvestment in agricultural development. According to recent comments by the Agricultural Ministry, the government plans to cultivate 1 million hectares of new farmland through year-end 2018 in an effort to reduce its import bill but more importantly, to organize the agricultural sector as a prelude to an expected peace deal. The program is valued at COP 1.6 trillion pesos (about US$ 5.4 billion at the prevailing exchange rate) and cacao and palm oil have been identified as two key crops that the government is targeting.

Colombia can balance the global cocoa market

There’s a looming global supply shortage of cocoa as production remains chronically precarious in West Africa. In fact, although the International Cocoa Organization (ICCO) revised its math last season and now expects that demand for cocoa will exceed its supply by 96,000 tonnes during the current 2015-16 marketing season. Emerging markets are driving much of the new demand while more developed markets are driven more by values than volumes as consumers are trading up and using darker (higher cacao content) chocolate. Further, more research is being published demonstrating the functional health benefits of cacao consumption and this is adding a new element to the demand matrix. Overall, the situation is highlighting the world’s overreliance on West African supply (>70% of global production) and is leaving the market looking for alternative origins. Cacao is native to Latin America and therefore it should be no surprise that the world is now looking at this part of the world to remedy the situation going forward.

The Colombian government plans to cultivate an additional 60,000 hectares of cacao through year-end 2018 in addition to the roughly 160,000 hectares already planted. In fact, according to the Ministry of Agriculture, there are over 2 million hectares of cattle-grazing land that is suitable for cacao i.e. land that does not require any soil treatment to grow cacao and this is not going unnoticed by institutional investors.  There are several large-scale cacao plantations planned for the country at the moment. In fact, although approximately 95% of the world’s cocoa is produced by smallholder farmers, the ICCO projects that institutional plantations will soon account for 10% of global production as the industry shifts towards more efficient farming and Latin America is being singled out as the ideal location with Colombia at the forefront.

Colombia is the world’s 4^th largest palm oil producer and can be the world’s most sustainable supplier

Oil palm is the highest yielding vegetable oil crop globally and its crude palm oil derivative (“CPO”) is the most widely consumed edible oil. In fact, palm oil typically has the lowest production costs and the highest yields among commercial edible oils. However, production is limited within a geographical band of 10 +/- from the equator and approximately 90% of the world’s production comes from Indonesia and Malaysia. Even more, the industry is marred by serious environmental concerns due to slash and burn deforestation practices which culminated into blankets of haze covering the skies of Kuala Lumpur all the way to Singapore. The haze was so bad that schools were shuttered throughout the region and the Indonesian government even apologized. The RSPO in recent days has even suspended a large Malaysian palm oil company due to environmental malpractice and almost immediately, large multinational buyers began terminating contracts stating that they had to remain committed to sustainability pledges they’ve made to the public and their customers.

Still, palm oil is in everything from chocolate chip cookies to shampoo and demand is compounded by a rising global population. There’s a need for more palm oil but palm oil that is produced sustainably and Colombia can be that source. Already the country is the world’s fourth-largest producer and it is becoming increasingly apparent that even if the world could boycott the vegetable oil, it may not be wise as it is still better than the alternative. No other crop can yield even a third as much oil per acre planted. And along with using less land, the oil palm uses less pesticides and chemical fertilizers than coconut, corn or any other vegetable oil source. Even more, Colombia has a tremendously large untapped land bank that is suitable for environmentally-friendly palm oil. Although there are only a few RSPO-certified palm oil companies in Colombia at the moment, there are dozens more that are working on being certified and Colombia has the potential to become both the world’s foremost reliable supplier of sustainable palm oil.

In summation, Colombia is an investment-grade country with a tested legal framework and a government that is committed to attracting large-scale agricultural investment. But beyond the aforesaid, if the world is to accommodate an additional 2.6 billion people by 2050, we must find both the means and the motivation to cultivate crops more efficiently, more fairly, and more sustainably. Global demand for cocoa and palm oil continues to climb due to a rising population and rising incomes but this is balanced precariously atop a prevailing structure of inefficient subsistence farming, urbanization, and a changing climate. The situation necessitates more transparency and congruency between private institutional investors, producers and policy makers – it’s not just chocolate or palm oil that depends on this, but the world’s food security.

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Aaron-Micael Beydoun is an Associate at Pacific Agri Capital, a Colombia-based private equity asset manager and developer that has participated in the successful development of over 30,000 hectares of cacao and palm oil globally. Aaron is a graduate of Harvard University and is the Director of External Alumni Affairs for Harvard Alumni for Agriculture.

Aaron-Micael Beydoun is a member of the speaking faculty at GAI New York in New York, April 25-28, 2016

The opinions expressed in this editorial are the authors’ own and do not reflect the views of GAI News.