Constitutional Changes to Farmland Ownership Rights in Georgia

After almost five years of uncertainty, the Georgian Parliament finally approved a number of changes to the Georgian Constitution. In Georgia, the constitution can be altered if 2/3 of sitting parliamentarians approve the changes; no referendum or plebiscite is needed.

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Of considerable concern is the new amendment restricting farmland purchase to Georgians only. Until yesterday, the right of Georgians to sell or mortgage their property to anybody they wished, foreign or Georgian, was enshrined in the Constitution. The numerous moratoria and bureaucratic obstructions of lawful land title transfer of the past 5 years were a direct contravention of the constitutional rights of Georgia’s 600,000 landowners, with thousands of Georgian families and businesses suffering economic damage as a result. Foreign-invested agribusinesses have also suffered difficulty and uncertainty, with many exiting the market in frustration.

Translation of Article 19 point 4 of the Georgian Constitution now reads:

“Agricultural land as a resource of a special significance may only be in the ownership of the state, a municipality, a Georgian citizen or an association of Georgian citizens. Exceptions thereto can be stipulated by an organic law adopted by a majority of two thirds of the total number of the members of the Parliament of Georgia.”

Key issues:

  • Ordinary Acts of Parliament (“organic laws”) generally only require a simple majority to pass in a parliamentary session. The government is deliberately making this intervention in the market more difficult to repeal in future parliaments.
  • The exceptions stipulated are still being considered by Parliament; it is imagined that criteria including technology transfer, employment, and opening up of novel export markets may have some bearing on such exceptions. It is not settled yet as to which body or committee shall rule on individuals or companies applying for such exceptions.
  • Georgia has signed Bilateral Investment Protection Treaties with several dozen countries. A common theme in such treaties is that foreign investors in Georgia shall have market access and property rights no less favourable than a Georgian investor might experience in that counterpart foreign country. Any new organic law on farmland ownership will have to take that into account, lest Georgia be deluged with Breach of Treaty lawsuits and suffer an overflow of negative sentiment into non-agricultural investment sectors.

Most of the domestic and international business organisations in Georgia will continue to lobby the Parliament to make criteria for exceptions very transparent and for agricultural investments (other than pure land bank speculation) to be subject to as little restriction as possible, in the national interest.

By comparison, foreign-invested companies domiciled in Armenia may buy freehold farmland in Armenia without restriction or any approval process. Farmland in Armenia is roughly 2-3 times the price that of equivalent land in Georgia as a result. Armenia’s farmland inventory is fragmented, as is Georgia’s, but interest in capital-intensive, modern agriculture is strong, from diaspora Armenians, as well as Europeans, Gulf Arabs, Iranians and Indians. Many of these foreign investors had spent considerable effort trying to make investments in Georgian agribusiness in the past 5 years, and given up in frustration. With capital investments between USD$30,000-$1 million per hectare involved in the orchard, vineyard and greenhouse sectors, Armenia’s existing satisfactory food security situation is being enhanced by robust food and beverage export development to Russia, Iran, UAE and China, fuelled by foreign investment and technology. World-renowned European and American investors in the wine industry, independent of the existing strong support for this sector amongst the Armenian diaspora, are transferring much-needed viticultural and winemaking expertise to local professionals, and developing lucrative markets in the US and Europe amongst affluent consumers who have never been exposed to Armenia or Armenian products before.

Armenian pragmatism means that Armenia is now attracting much more FDI in agriculture than Georgia is, with the resulting jobs, training and export markets this brings. In 2015, Armenia attracted USD$25 million in agricultural FDI (cp. $14.5 million in Georgia), and USD$21 million in food and beverage manufacture FDI. Agricultural FDI in Armenia in 2017 is likely to exceed USD$100 million, compared to a paltry $10 million in Georgia for 2017. This diverging trend will increase to Georgia’s detriment unless calm heads prevail amongst those responsible for drafting the organic law on farmland ownership in Georgia.

 

 

 

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Agribusiness Leadership Programme backed by YFN Georgia

It is now 20 years since our founder, Simon Appleby, established his first agribusiness operation in Southeast Asia under the umbrella of YFN Georgia’s East Asian sister company. Looking back over two decades of tremendously hard work, laughter, frustration and satisfaction in emerging markets agribusiness, we recognise that leadership is just as important as technical mastery or market penetration. Our senior personnel have all benefited greatly from mentors in their youth, and from membership of voluntary networks dedicated to developing leadership and technical capability. We wish to ensure that our promising young leaders in the South Caucasus enjoy the same opportunities for growth and good fellowship that we have enjoyed early in our careers. For this reason, we have developed the local chapter of the Nuffield Farm Scholarship Programme.

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The Nuffield Farm Scholarship Programme was developed around 70 years ago, supported by an endowment from British industrialist Lord Nuffield. The programme selected the best and brightest farmers from Britain for a two year period of leadership training, travel, study, and dissemination of knowledge acquired to local industry, to great effect.

The programme spread rapidly through the Commonwealth and Ireland, with Nuffield Scholars drawn from Canada, Australia, New Zealand and South Africa. More recently, France and the Netherlands have become member countries of the programme, with countries such as Brazil, India, China, Mozambique, Indonesia, Japan and the United States as associate member countries.

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A network of 1600 Nuffield Scholars is now in place worldwide, including captains of agro-industry, senior government decision makers and successful owner-operators of family-owned farm businesses. Past scholars have regular networking opportunities at the Annual Farming Conference in November incorporating all of the Nuffield networks from around the world, as well as regular national meetings and conferences. Current Scholars not only enjoy these opportunities, but also the Contemporary Scholars Conference, the Global Focus Programme tours in small groups examining world’s best practice in agriculture for up to 7 weeks, and their own tailored travel programme for the individual research project, from 3-11 months in length. Scholars’ research projects are presented at the Annual Conference to all other scholars, and upon return to their home countries a programme of public speaking and knowledge transfer is arranged for the benefit of local industry.

Nuffield Scholars from Australia and New Zealand share their experiences from their Scholarships.

 

YFN Georgia is currently providing the Secretariat for Nuffield Caucasus, a Georgian-registered NGO tasked with developing a funding network for local scholars from the South Caucasus, and identifying suitable potential Scholars. Nuffield Caucasus shall be approaching industry, government and donors to support Scholars from Georgia initially, and eventually from the whole region.

For potential Scholars and private companies seeking information on the Nuffield Farm Scholarship Programme, click here

For government agencies and foreign donors seeking information on how to support Nuffield Caucasus, click here

Further details can be obtained by contacting YFN Georgia’s Philanthropy Manager, Ms Tamara Mamukelashvili. 

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Educated in Cyprus and California, and with a background in the arts and marketing, Tamara is responsible for three philanthropic ventures developed by YFN Georgia, all involving substantial international interaction.

 

 

Georgia and Bilateral Free Trade Agreements; What’s Next?

 

The Deep and Comprehensive Free Trade Agreement between Georgia and the EU, brought into effect in 2014, was hailed at the time by many as being of great importance to Georgian manufacturers and food/beverage producers. Skeptics commented that 7000 articles under the pre-existing GSP+ agreement with the EU were already duty-free and quota-free for many years, yet very few exporters had ever taken advantage of the concessions. Nonetheless, exporters of alcoholic beverages were keen for the deal to go ahead; while the EU makes up a small proportion of wine and spirits exports, free access to the world’s largest consumer goods market would facilitate steadily rising market share. This very basic treatise will look at alcoholic beverages as representative of Georgia’s primary industry; to a certain extent conclusions drawn here can be applied to other food commodities also.

Note that for all analyses that follow, wines sold are not confined to bottled wines. Cask wines and bulk wine in flexitanks are included in the totals.

Georgia traditionally has been a very Russia-focussed wine production country, as the following charts indicate.

Georgian Wine Exports by Value

Georgian Wine Exports by Volume

Source: UN Comtrade

A quick visual assessment of these charts indicates that Russia is a higher volume/lower price market for Georgian wine than the EU.

Coincidentally, 2014 was a boom year for Georgian alcohol producers; the Russian market that reopened in 2013 was robust and pent-up demand for Georgian wine meant that sales volumes were robust, while prices were acceptable.

Georgian Wine Exports to Russia, Value

Georgian Wine Exports to Russia.jpeg

Source: UN Comtrade

In the face of this, the urgency for diversifying into challenging new EU markets was probably dulled by the lure of familiar markets in Russia, despite the higher price capable of being captured in Europe if quality attributes were addressed. A few shrewd operators maintained a counter-cyclical approach, leveraging their Russian sales revenues into aggressive European and Asian marketing campaigns. Those producers are doing rather better now than their solely Russia-centric competitors.

Sales volumes of Georgian wine into the EU have shown satisfactory growth since the DCFTA was implemented, but the the average price per hectalitre has increased by almost 40% in dollar terms. Granted it is only two year’s worth of data points. It is also possible that the mix of products reaching the EU market has changed and that higher-end wines are a larger proportion of imports from Georgia. It will be interesting to observe whether exporters will restrain prices to aggressively capture market share, or continue with relatively high margins but with slower sales growth. It appears that the devaluation of the Euro in 2015 has had some impact upon dollar-denominated trade statistics. Why average price per HL goes up and volume sold goes up, but total $ revenue goes down, is something of a mystery.

Georgian Wine Exports to EU, Value

Georgian Wine Exports to EU, Litres.jpeg

Source: UN Comtrade

There are challenges in the European market; European consumers, especially in the West and South of the continent, have quite well-defined preferences and in many cases have been drinking the same wines from the same appellations for hundreds of years. Changing those preferences will not be easy. The proverbial “wine lake” of Europe means that table wine in Europe is cheaper than mineral water in many cases; Georgia does not effectively compete in this market segment, lacking the subsidies or economies of scale to do so. Data suggests that much of the Georgian wine entering the EU is premium or super-premium.

The next major Free Trade Agreement being pursued is with the People’s Republic of China. Until recently one of the fastest growing centres of wine consumption in the world, China is poised to exceed Russia as a wine consuming country before the end of this decade. However, the two-year Anti Corruption Campaign launched by the Chinese Central Government has constrained sales growth somewhat. In China, a substantial proportion of wine sold is used for gifts, for people from whom one desires a favour, so the anti-graft campaign has dulled the growth of this sector. That said, Georgian wine exporters have been capturing market share in China, from a very low base, at an encouraging rate despite economic slowdown and the anti-graft campaign. Import tariffs on wine imports into China are 14%; exporters from countries with a Free Trade Agreement with China do not have to pay this tariff.

Georgian Wine Exports Asia-Pacific by value

Georgian Wine Exports to Asia-Pacific.jpeg

Source: UN Comtrade

As one can see from the charts, China and Japan account for the majority of volume, and other markets are very much in “test-phase”. Wine sold in quantities of less than a full 20-foot container load have a very high freight price and slow transit time, which limits market uptake.

Until early this century, what little wine that was consumed in China was mostly domestic and of very poor quality. I can vividly remember buying a bottle of “Great Wall” Cabernet in 2000 in Shanghai, which had a can of Coca Cola taped to the neck of the bottle as a free gift. The serving suggestion was to blend the two, which would make the wine almost drinkable; otherwise, it tasted like furniture polish. In only 15 years, wine drinking has become a prestigious activity in China indicating sophistication, and China is poised to have one of the largest areas under vine in the world soon. Vineyard management and winemaking quality is dramatically improved. Wine imports have also boomed, with over a third accounted for by French wine, and New World exporters taking advantage of the fact that many Chinese consumers entering the wine market for the first time have yet to establish fixed habits regarding country of origin of their wines.

It is interesting to observe the average price per hectalitre commanded by exporters to the East Asian markets. France commands the highest premium, and Georgian and Australian wines fit a niche in the next tier, commanding significantly higher prices than Chilean or South African wines.

Wine Export Prices by Market

Source: UN Comtrade

Note that these prices per hectalitre are calculated on an FOB basis, not CIF. When freight and insurance are included, the picture is different and between-country discrepancies in pricing are reduced somewhat.

 

East Asia Wine Imports, Prices by Exporter

Source: UN Comtrade

This may change with time now that rail transport from Georgia across the Caspian to China has become faster and, hopefully, cheaper than sea freight. This could put Georgian wine exports at a competitive advantage to those from South America, Africa, Australasia and western Europe.

Interestingly, on average wines imported into Mainland China from France, Australia and Georgia are priced roughly the same on average on a CIF basis. This does not take into the account the price distribution of different products in the product mix, but it is still an interesting finding.

If we consider that Australia and Georgia have some similarities in this market (similar average price point), then it is worthwhile looking at Australia’s experiences in capturing emerging market share.  The following infographic from Wine Industry Insight Magazine’s Lewis Perdue should be interesting.

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Australia is a zero-subsidy jurisdiction. Georgia maintains floor prices for grape produced by smallholders, but there is no substantial subsidy for commercial-scale vignerons. Australian exporters have been able to capture significantly better prices on average than most of their competitors, through rigourous quality management, national and regional branding, and aggressive export marketing.

Concurrently, the Free Trade Agreement with China has significantly reduced the cost of Australian wine to Chinese distributors (the tariff of 14% of the Cost-Insurance-Freight value is now abolished for Australian wine) which allows flexibility for discounting to capture market share, or capturing better margins, or a mix of these strategies. It is still too early to see the effect on the Free Trade Agreement with China, effective December 2015.

Australian Wine Exports to China

Australian Wine Exports to China volume.jpeg

Source: UN Comtrade

A weakening Australian dollar over the past two years has substantially improved Australia’s trade competitiveness, so even though the drop in price per HL appears steep, in AUD terms it is much less pronounced and counteracted by a greater volume of sales.

Australia also implemented Free Trade Agreements with Japan (January 2015) and South Korea (December 2014) , and the effects on sales and average price can be seen here.

Australian Wine Exports to South Korea.jpeg

Australian Wine Exports to South Korea by volume .jpeg

Source: UN Comtrade

A 25% increase in sales turnover in one year after an FTA comes into force in USD terms is quite a good result.

In Japan’s case, the response to a FTA is a more mixed result

Australia Wine Exports to Japan by value

Australia Wine Exports to Japan by volume

 

 

 

 

 

 

 

Source: UN Comtrade

An substantial increase in wine sales in litres to Japan was noted in the first year of the FTA, with a tripling in bulk wine sales. Average price per hectalitre in USD terms has dropped in that period as a result of the change in product mix, compensated by the concurrent weakening of the AUD and improved terms of trade. Japan’s economy is still rather shaky so dramatic growth in wine prices is unlikely in the near future.

Granted these datasets only involve a few years and prices are averaged over many product classes. The next 2-3 years will yield very interesting data on the cost-benefit of FTA’s for wine exporting countries.

Hiro Tejima, Wine Australia’s Head of Market for Asia Pacific, comments on the short-term effects of these two FTA’s and how they see the future.

 

Non-traditional markets for Georgia have been core markets for Australia for some decades. The $6 billion a year wine import trade in the Asia Pacific region still has plenty of growth potential, and for wine producers in countries other than France, the opportunity exists to capture market share amongst first-time wine drinkers who are not yet firmly wedded to European wines.

Asia-Pacific Wine Imports

Source: UN Comtrade

Steady growth within the ASEAN (Association of South-East Asian Nations) FTA in wine imports is encouraging. Singapore is a Free Port, with no import duty on wines, but other neighbouring countries with high tariffs are showing good growth potential. Australia’s establishment of an FTA with New Zealand and ASEAN in October 2015 should provide impetus for further growth in wine exports. Currently ASEAN countries import between 15% (Singapore) to 50% (Malaysia) of their wine from Australia.

Asean ex-Singapore Wine Imports

Source: UN Comtrade 

Only 20 years ago, Australian wine was unknown in Asia. Now it is ubiquitous. Export market promotion has evolved over time, with levies imposed upon wineries and grapegrowers to fund export market development, vineyard R&D, and biosecurity programmes with government co-operation.

Brand Australia” is now well known, and consumers understand the diversity of product available under that umbrella, from supermarket “critter wines” like Yellowtail at $5 to $3000/bottle Penfolds Grange. Regional/appellation identities like Barossa Valley, Margaret River, and Rutherglen are understood by consumers within the larger national wine identity.

The lessons that Georgia can learn from this:

  1. Effort invested in negotiating Free Trade Agreements potentially have a bigger effect upon exports, and bigger flow-on effect to grape growers, than subsidies can.
  2. Free-Trade Agreements can affect demand for different product types of different price points in different ways.
  3. Free-Trade Agreements in the short term may, but not always, result in higher FOB prices for exported goods, but volumes sold tend to trend upwards when tariffs are reduced.
  4. Export marketing requires an industry-led approach with government co-operation. National branding is an essential component.

To what extent these conclusions can also be apportioned to other agricultural exports can be argued. East Asia is a major importer of nuts of all types, including hazelnuts, and nut consumption is a pretty good proxy for economic development. Georgia is well positioned to be a major exporter of hazelnuts, walnuts, pecans, almonds and pistachios if it can get its act together, and a diversity of target markets with no import tariffs would make this investment class more attractive to professional investors. Nut orchards are expensive to develop and have terrible cashflow dynamics for the first five years, so it requires patient capital and a professional approach; such investments are more likely to occur if market access is more favourable.

Fresh produce exports are in a state of flux, as both the EU ($12 billion a year) and Turkey ($2.5 billion a year) have lost access to the Russian market, leaving large surpluses of produce heavily discounted in the region. After some adjustment to new market realities, some niche products like Kiwifruit, blueberries, honeyberries and blackberries will no doubt increase market penetration in Europe when GlobalGAP standards are implemented in supply chains and distribution in Europe is sorted out.

The EU DCFTA is an excellent development that may yield incremental gains for Georgian wine exporters, from a low baseline, in a very attractive consumer goods market. However, it should not be seen as an end unto itself, but the first of many Free Trade Agreements negotiated with non-traditional markets. Having gone through the process of DCFTA negotiations, increasing safety standards and dealing with non-compliance to satisfy the EU, Georgia is now institutionally equipped to push through deals not only with China, but with ASEAN, South Korea, Japan, Australia, New Zealand, India and NAFTA.

 

New Logistics Options for Georgian Wine and Nuts

This month, a train from Lianyunyang port in East China’s Jiangsu province arrived in Tbilisi. Performed as a test shipment, the exercise was designed to test how a shipment of non-perishable goods (in this case electronics) could travel through China’s domestic rail network to its border with Kazakhstan at Korgas, through the Kazakhstan rail network to Aktau, cross the Caspian on a ferry to Azerbaijan’s capital Baku, and then travel to Tbilisi.

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The duration of travel for this journey was 15 days, which compares with the current 10-15 days that container freight on trucks taking the same route. It is 25 days shorter than the same route by sea.

From Civil.ge

According to the state-owned Georgian Railway one more container train is scheduled to deliver cargo via Georgia through this Trans-Caspian International Transport Route. The Georgian Railway also said, without specifying figures, that it expects “several thousand” of containers to be shipped via this route in 2016. Georgia hopes that completion of the Baku-Tbilisi-Kars railway in 2016, that will link Azerbaijan with Turkey via Georgia, will increase efficiency of the route.

It is worth noting that this route runs in parallel with China’s planned high-speed rail network routed between Turkey and China via Iran.

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As can be seen, the planned high-speed link bypasses Georgia and the Caspian altogether, with no need for moving carriages onto ferries for a slow trip over the Caspian Sea. It also avoids passing through either Azerbaijani or Armenian territory, which may or may not be linked to regional security issues. Using standard high-speed rail technology, cruising at 200-250 km/hour, a trip from Julfa in northern Iran to China’s Eastern or Southern coastal cities( a journey of 8000 km), could be accomplished in 2-3 days. Likewise, freight from Julfa to New Delhi (around 4000 km) could be accomplished in 1-2 days.

A high-speed spur line from Julfa, through Azerbaijan to Tbilisi and onwards to Poti and Anaklia would make sense, but it is not yet known if that is planned.

The high cost of freight and ponderous speed of transit has been an impediment to Georgian exports of agricultural produce to East Asia and South Asia. Wine and hazelnuts are products that Georgia has certain competitive advantages in producing, and hopefully faster, cheaper freight with better temperature control will improve competitiveness of Georgian exports in those markets

 

 

World Trade Organization strikes ‘historic’ farming subsidy deal.

For many decades, a critical impediment to developing countries’ agricultural development has been unfair competition from the EU and US, dumping products in local and regional markets supported by taxpayer-funded subsidies. Thankfully, this may change soon;

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“Countries in the World Trade Organization (WTO) have agreed to abolish subsidies on farming exports.

Developed countries agreed to stop the subsidies immediately and developing nations must follow by the end of 2018.

The WTO, which represents 162 countries, called it “the most significant outcome on agriculture” since the body’s foundation in 1995.

But longstanding talks on other trade barriers were left unresolved at the end of the summit in Kenya.

Removing agriculture export subsidies is intended to help farmers in poorer countries to compete more fairly.

“The decision you have taken today on export competition is truly extraordinary,” WTO chief Roberto Azevedo said at the closing session in Kenyan capital, Nairobi.

The summit of ministers, which finished on Saturday after five days of talks, was the first to be held in Africa. “.

Of relevance to Georgia are imports of milk powder used to make liquid milk, yoghurt and cheese in Georgia.

 

Agricultural Internships Abroad

Today our agronomist Albert leaves for China, where he will serve a three month internship in Central China’s Hunan Province, improving his skills in cereal cropping and vegetable production.

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This is Albert’s fourth foreign internship, having worked in vegetable greenhouses in Massachusets, USA twice and in a floriculture enterprise in South Australia for an extended period.

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We notice employees returning from internships bring back fresh new ideas, have improved problems solving skills and can more effectively research solutions independently without supervision. I could not recommend this for Georgian agribusinesses too strongly; a 3-12 month sabbatical for promising young professionals can yield very substantial results.

Growth Rate in Georgia’s Agricultural Economy and the Effect of Government Spending

Zviad Khorguashvili of the thinktank GRASS has produced a concise and rather elegant analysis of the growth rate in Georgia’s agriculture sector, and raised two excellent questions that are posed altogether too infrequently.

Has the massive expenditure of taxpayers’ money on Georgian agriculture since October 2012 resulted in greater growth than if the State had restrained its spending?  

If Georgia has a small proportion of its GDP contributed by agriculture, is that necessarily a bad thing?

The article can be read in its entirety here , but the charts are quite illuminating.

Real Growth Rate of Agriculture

Source: Geostat

The Russian Embargo on Georgian wine and other food products imposed in 2006 had a serious effect that continued to be felt until 2013. The large increase in growth in 2013 arguably can be attributed mostly to increased market access to the lucrative Russian market. Growth was still positive in 2014 but the drought seriously curtailed output amongst those farmers not using irrigation.

GDP Per Capita vs % of GDP generated by Agriculture

Source: World Bank

This World Bank data is common knowledge amongst development economists. The most productive and competitive agricultural producers in the world, such as Australia, New Zealand, Canada, USA and the EU (to a point) all concurrently have quite a small proportion of agriculture in their economies, while GDP per capita and living standards are nonetheless quite high. For some reason elements within the Georgian political spectrum find agriculture occupying a small proportion of the Georgian economy a badge of shame, which is irrational.

One should be careful what one wishes for; if the aim is to have agriculture at 50% of GDP, all one needs is to incite a vicious ethnic conflict, destruction of most infrastructure and the collapse of the formal economy, as witnessed in Somalia or Central African Republic, and one’s target will be achieved in short order.

Zviad’s call for a rigourous cost-benefit analysis is a sound one; of course taxpayers should know whether the funds they spend on particular programmes are effective. However, I would apply the proviso that cost-benefit analyses based on only two years of data (2013 and 2014) can provide a skewed outcome, given the massive impact of market access and drought on the figures, which is largely independent of government spending.

It would also be very interesting to study the correlation between growth in the agricultural economy, and previous Foreign Direct Investment in the sector (as a leading indicator, as it can take up to 5 years after breaking ground for many commercial agricultural projects to generate any cashflow). Given the tepid FDI in the sector since the ban on farmland purchase came into play in June 2013, it may not be until 2018 that the effect is fully apparent, if indeed such an effect exists. Our previous study on the effects of agricultural FDI on competitiveness suggests that such an effect exists and we did identify that the effects are not instantaneously observed due to the lag mentioned above.