Traditional Market Cycles and Agribusiness
The idea of resource nationalism is one that has resurfaced during the 21st century as governments in developing countries sought to take advantage of the commodities boom several years ago to develop their national economies. However, resource nationalism and the economic implications of riding a commodities boom wave have yielded different outcomes throughout the world. In an article titled “Understanding Resource Nationalism“, economist Jeffrey Wilson seeks to create a new theoretical framework on the basis of the economic bargaining models by adding a variable that considers how political institutions affect resource nationalism.
Traditional Market Cycles and Agribusiness
The first concepts to be examined are those of the economic bargaining models, which this assessment intends to deepen and expand upon as it relates to the articulation of resource nationalism. The first economic bargaining model is the market cycle model, in which state governments with large natural resource reserves enjoy a better negotiating position vis-à-vis private resource-exploiting companies in sectors such as mining and fossil fuels when international market prices are on the rise. This means that, when the price of a commodity, such as oil, is high, national governments may demand higher tax and royalties payments from companies that exploit these resources because they have much to lose in case of expropriation, nationalization or forced sale. On the other hand, private companies enjoy an advantage over governments when negotiating during periods of low international market prices. This dynamic is due to the fact that, in the absence of favorable investment and operating conditions, private companies can easily abandon projects without incurring large economic losses. Likewise, in this scenario, private companies are aware that governments themselves do not have much incentive to exploit a resource whose international price does not justify the creation of a public company.
Similarly, there is the obsolescing bargaining model, according to which governments gain an advantage in terms of bargaining as private companies become increasingly invested in fixed extractive infrastructure within the government’s territory. While private companies have not yet settled into a specific project on the ground and investing in fixed assets, such as offshore platforms and drilling machinery, the companies maintain a comparative advantage because they can abandon projects that seem economically unfavorable to them. Instead, once private companies have invested in exploration studies and have settled their operations, the government has an advantage in negotiating because it could expropriate or threaten nationalization, causing substantial losses to these private capital investments. Normally, the obsolescing bargaining model is more applicable in less developed and some developing economies, whose government tends to be more authoritarian or populist as well as highly dependent on the income generated from natural resources. Meanwhile, the market cycle model is more applicable in free market economies and more developed countries. However, neither model completely factors in the political institutions of the respective countries or their declared policy objectives. Ultimately, the economic bargaining models enable governments to take actions as it relates to resource nationalism. However, the countries’ political institutions condition their actions and behavior.
In this regard, traditional investments in international oil and mineral companies brings about inherent risks and market cycles. Meanwhile, the agricultural asset class offered by Farmfolio, as conceptualized by our CEO, Dax Cooke, represents way for investors to diversify their portfolio through a unique sector that is immune to traditional market cycles.