Is restitution driving farm prices to untenable levels?

05-12-2005

There is considerable anecdotal evidence that farm prices have risen faster in areas where restitution demand has been the highest. Limpopo province is one such area where, according to Government data, more than 50% of farmland is up for sale in willing seller, willing buyer restitution deals. Farm prices in this province have also soared and are amongst the highest in the country.

Rode & Associates CEO Erwin Rode says this tendency is the result of the inevitable extra demand for farmland that occurs in regions where large-scale restitution is taking place. Many of the farmers that are bought out want to reinvest and they have the money in hand to pay, and so their demand is an added pressure driving up farm prices in the face of shrinking commercial farmland inventory. This in turn makes expropriation at market values more expensive, thereby putting pressure on the government’s restitution-and-redistribution budget, which will prolong the process even further.

Thus, the question is increasingly being asked whether farm prices are being driven above economically sustainable levels. There are also concerns about the government’s announcement that the principle of willing buyer, willing seller is to be revisited.

Rode deems these concerns among farm owners and potential investors to be largely unfounded. On the one hand, redistribution demand is likely to continue for several decades as Government is unlikely to reach its goal of redistributing 30% of commercial farmland by 2014, and in any case, the process is likely to continue for a long time after that.

On the other hand, concerns that expropriation of unwilling owners’ land will cause farm prices to plummet, are probably due to a misunderstanding of the implications of Government’s new policy to expropriate where owners are not willing to sell, says Rode.

“Government may expropriate land to speed up redistribution, but in terms of the Constitution, it will be unlawful for Government to pay less than market value. That is to say, Government can force farmland owners to sell, but it will have to pay market value. Therefore, there is no danger that expropriation will undermine agricultural-land values. Rather, it will continue to put upward pressure on values through growing demand and shrinking supply for decades to come.”

This opinion is supported by Dr Edward Lahiff of the Programme for Land and Agrarian Studies (PLAAS) at the University of the Western Cape, which focuses, inter alia, on land redistribution and restitution programmes.

Commenting on the government’s announcement at the recent Land Summit of its intention to switch to the selective use of expropriation, Lahiff stresses “it does not imply the abandonment of ‘the market’, or the payment of market-related prices.” According to Lahiff, it simply means that market forces would cease to be the only determinant of land reform and would become just one of a range of available options.

“Given the lack of suitably qualified black commercial farmers and the training-and-support shortfall, which cannot be rectified overnight, it is reasonable to assume that the transferred land will experience a sharp decline in productivity, which will tend to push up prices of some produce and thereby increase the economic viability of the remaining commercial farmland.

“Furthermore, it is likely that Government will not stop the process of redistribution after 2014 – even if it reaches its 30% goal – as land redistribution is in the short term a politically inexpensive way to give the masses of jobless and underemployed citizens a means to eke out a living as peasants,” says Rode.

If one now factors in the increasingly positive signs that European and US subsidies for farmers are likely to be phased out in the medium to long term, the investment prospects for local farmland are looking quite positive, in spite of the current high prices.

“The wild-cards are genetic engineering, which will increase the productivity of farm land, and a changing climate, which will have a varying effect on productivity,” concludes Rode.