Investing in food security and agriculture: the changing landscape

Inclusive Economy19 Sep 2016Rimma Dankova

To implement the 2030 Agenda for Sustainable Development, developing countries will have to increasingly rely on domestic finance for investment in agriculture. As public funding for agriculture decreases, the role of private investment and, in particular, smallholder farmers, needs to be scaled up to achieve sustainable food security. To stimulate this process, governments focus more on fostering an enabling environment for responsible private investment. Greater attention must be placed on the quality of agricultural investment preparation and implementation, as well as on policies and instruments to lower risk and strengthen the confidence of investors in the long term.

Achieving food security and eradicating rural poverty is the overall goal of the 2030 Agenda for Sustainable Development. Naturally, food and agriculture are key elements of the 17 Sustainable Development Goals (SDGs).

Considering that global food production in 2050 will need to increase by 60%, investing in food and agriculture is essential to achieve food security in all its dimensions, namely: increasing the availability of food on the market, helping to keep prices affordable for consumers and rewarding for producers, and making food more accessible to rural and urban consumers. Investment in food and agriculture is also required to achieve sustainable food security and poverty eradication, while at same time addressing climate issues, conserving natural resources and facilitating the transition to sustainable production systems.

Stepping up domestic financing

Investment in agriculture can be categorized as public or private, foreign or domestic. The private sector is responsible for most of the investment in agriculture (including through foreign direct investment), and this is expected to continue in the future. At present, investment is mainly from domestic sources, while the relative importance of official development assistance is likely to decrease.

Developing countries will need to step up efforts to finance their own development by increasing domestic resource mobilization, improving tax administration, and using public revenue from the use of natural resources through adequate fiscal rules, strong public financial management systems, and by improving expenditure efficiency. Greater attention on domestic resource mobilization means that governments will have to improve the policy conditions for development and growth, making their countries more attractive for private-sector investment and financing. With the diminishing contribution of public funding, private investment in agriculture will need to be scaled up in order to achieve a transition to sustainable food security.

Farmers as the largest investors

According to an analysis by FAO in 2012 in the State of Food and Agriculture: Investing in agriculture for a better future1, farmers themselves, including family farmers, are by far the largest private investors in primary agriculture. In its 2014 report, The State of Agriculture: Innovation in family farming2, FAO indicates that more than 90% of the 570 million farms worldwide are family farms. These family farms, most of which are under two hectares, occupy 70–80% of the world’s farm land and produce more than 80% of the world’s food in terms of value. Their share of land is small at the global level (only 12%), but significant in low- and lower-middle-income countries: 42 and 31%, respectively. If farms up to five hectares are included, the respective shares increase to 73 and 57%.

Therefore, investment by smallholders plays an important role in boosting agricultural production and contributing to food security and better nutrition, while reducing rural poverty. However, severe constraints on the ability of farmers to invest – including poor access to technology, markets and financial services; insecure property rights and vulnerability to risk; and market distortions stemming from inadequate policies and laws – need to be addressed.

The changing role of the public sector

As most investment comes from the private sector, including from smallholder farmers, the role of governments is shifting towards fostering an enabling environment for responsible private investment by corporate investors and reducing the constraints faced by smallholder farmers. Government investment in essential public goods and services (such as institution building, advisory services, productivity-enhancing research, rural transport, health, education and social protection) is a fundamental part of the enabling environment. To stimulate agricultural investment, governments need to secure property or tenure rights, develop rural infrastructure and public services, and ensure that their institutions are functioning. Increasingly, partnerships are emerging between the public sector, private sector and communities to promote agriculture and rural development, poverty reduction, food security and nutrition.

Achieving development goals will depend on the availability of long-term finance to support productivity-enhancing investment. In turn, accessing long-term finance will require a greater focus on the quality of agricultural investment preparation and implementation, as well as policies and instruments that can lower risk and strengthen the confidence of investors. Financing a transformative agricultural development agenda requires resources to be used more effectively and strategically to catalyse additional financing. International development partners can add value by supporting countries, financial development institutions and private sector actors with technical expertise and by applying quality standards to investment design and execution, sharing cross-country experiences and strengthening country-focused development partnerships.