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C1 Sunday, January 10, 2010

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Left behind

Most profitable CEOs get smallest gains in S&P 500

CORRECTION

Robert “Bob” McDonald, president and chief executive officer of Procter & Gamble Co. (P&G), pauses before speaking at the University of Michigan in Ann Arbor, Michigan, in this November 16, 2009 file photo. The maker of Crest toothpaste and Pantene shampoo in July is boosting promotional spending for the company’s top brands to increase revenue. Brett Mountain/Bloomberg

Corrects percent change for each decade.

Updates figures through Dec. 31.

By Alexis Xydias

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rown-Forman Corp.’s Paul Varga and Johnson & Johnson’s William Weldon are among chief executive officers left behind in the 2009 stock-market rebound even after they created the most value for their companies.

Brown-Forman, the maker of Jack Daniel’s whiskey and Southern Comfort liqueur; J&J, the world’s largest health-products company; and 30 other Standard & Poor’s 500 Index companies rallied less than 10 percent last year even as their managers posted better-than-average sales and efficiently invested capital, data compiled

by Bloomberg show. Companies with the biggest stock gains had among the lowest scores in a ranking known as economic value added.

Money managers ignored profitability to snap up stocks that dropped the most in the credit crisis, leaving opportunities for value investors in 2010, say Raiffeisen Capital Management and Credit Andorra. They’re buying this year’s laggards, betting companies with the highest returns on shareholders’ capital will be rewarded as the Federal Reserve prepares to raise interest rates and the government removes stimulus.

“The best rally in our lifetime has left even more opportunities,” said Vienna-based Herbert Perus, head of global equities at Raiffeisen, whose team helps manage $36 billion and has bought J&J shares. “Well-managed companies with extremely good balance sheets were left behind.”

Fewer than 215 companies in the S&P 500 created value in 2009 as the US economy experienced the worst contraction since the Great Depression, according to data compiled by Bloomberg based on consulting firm Stern Stewart & Co.’s EVA model.

Their so-called return on invested capital exceeded the cost of funding their operations, the economic value added data show.

China’s economy, which is leading the world out of the first global recession since World War II, grew faster than previously estimated, the government said. The US will turn in its best performance since 2004 this year as spending picks up and companies increase investment, said Dean Maki, the most-accurate forecaster in a Bloomberg News survey.

Thirty-two of those companies are projected to increase sales or report a smaller drop than the 5.9 percent median for the S&P 500 this year while posting an equity-market advance that trailed 10 percent through December 24, Bloomberg data show. Shareholders missed out as the benchmark for US stocks rose 25 percent in 2009 and 67 percent during the past nine months, the most in seven decades, after the government lent, spent or guaranteed more than $11 trillion to end the financial crisis.

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2008 Mars the Decade for U.S. Stocks

Bloomberg News

luctuations in EVA are four times more likely to rise and fall with share prices than per-share earnings, according to Joel Stern, the chief executive officer and chairman

The Standard & Poor’s 500 Index fell for only the second decade since the 1920s, the first for which Standard & Poor’s tracked data.

Performance of the S&P 500 Index 1920s

Performance per decade 21.5%

50% 0 -50

This is an undated company photo of William C. Weldon, CEO of Johnson & Johnson Corp. J&J, the world’s largest health-products company and 31 other Standard & Poor’s 500 Index companies, rallied less than 10 percent last year even as their managers posted better-than-average sales and efficiently invested capital, data compiled by Bloomberg show. Johnson & Johnson/via Bloomberg News.

THE TOP 32 The following 32 companies created economic value this year, increased sales or posted a smaller revenue decline than the 5.9 percent median among S&P 500 stocks, and rose less than 10 percent in US trading this year through December 24. Stock symbols are in parentheses after company names.

Abbott Laboratories Aflac Amgen Apollo Group Automatic Data Processing Baxter International BB&T Biogen Idec Brown-Forman C.R. Bard Cephalon DeVry Dun & Bradstreet Exelon Family Dollar Stores First Solar Flir Systems Fluor FPL Group Gamestop Gilead Sciences H&R Block Hershey Jacobs Engineering Group Johnson & Johnson Kraft Foods Procter & Gamble Progress Energy Safeway SAIC Stericycle Wal-Mart Stores

1930s

–41.9%

1940s

34.8%

1950s

256.7%

1960s

53.7%

1970s

17.2%

1980s

227.4%

1990s

315.7%

2000s

–24.5%

Note: The index was first published in 1957, but S&P tracked data going back to Dec. 31, 1927.

of New York-based Stern Stewart. He helped develop the measure in the late 1980s and uses it to advise corporations on strategy.

EVA, also known as economic profit, is a more reliable gauge of management performance because it treats the price of intangible assets such as research as an investment, while measuring all returns against the cost of raising money for the business, according to Stern.

The argument that “earnings per share is a driving force on value fails in the face of actual evidence,” he said. “It’s not earnings or dividends that create value, but economic performance.”

Varga posted a return on invested capital of 15 percent during the past year at Brown-Forman, according to data compiled by Bloomberg. That beat the Louisville, Kentucky-based company’s so-called cost of capital by 7.8 percentage points.

Brown-Forman’s shares added 3.8 percent since December 31, 2008 through the week ending December 25.

The liquor maker posted more profit than the average analyst estimate in four of the past five quarters, Bloomberg data show, and boosted its earnings forecast to $2.95 to $3.15 per share for the year ending in April on December 8. Phil Lynch, a spokesman at Brown-Forman, declined to comment.

J&J exceeded its cost of capital by 9.3 percentage points in the past four quarters. The company, based in New Brunswick, New Jersey,

has beaten the analyst profit forecast 14 straight quarters and CEO Weldon said Nov. 3 that he will fire more than 7,000 workers to eliminate layers of management to free up money to invest in more profitable businesses. The shares rose 8.1 percent in 2009. Bill Price, a spokesman, wouldn’t comment.

Procter & Gamble Co., the world’s largest consumer-products company, reported first-quarter profit on October 29 that fell less than analysts estimated and raised its full-year forecast for sales growth. The stock lost 0.9 percent in 2009.

Robert McDonald, who took over as CEO of the maker of Crest toothpaste and Pantene shampoo in July, is boosting promotional spending for the company’s top brands to increase revenue.

Company spokespeople weren’t immediately reachable for comment.

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nvestors favored companies with the weakest finances during the nine-month rally in the S&P 500, said Nick Skiming at Ashburton Ltd. That’s partly because those shares suffered the most during the credit crisis as traders priced in the possibility of a depression following the collapse of Lehman Brothers Holdings Inc. in September 2008, he said.

“The poorer balance-sheet stocks rallied because they were oversold,” said Skiming, who helps oversee about $2 billion from Jersey, the Channel Islands, and owns shares of Kraft Foods

Inc. and Procter & Gamble. Northfield, Illinoisbased Kraft is also among the 32 companies that passed the EVA test. “Risk of default was extremely high. Going forward, the rally will broaden out and the blue chips will start to rally.”

The S&P 500 plunged 57 percent through March 9 from a record high of 1,565.15 in October 2007, wiping out $11 trillion in value. More than $1.7 trillion in bank losses and writedowns stemming from the collapse of the subprime mortgage market caused the collapse of Lehman Brothers and Bear Stearns Cos., both from New York, and forced the US government to bail out American International Group Inc.

Bear Stearns was bought by JPMorgan with the Federal Reserve’s help in 2008, while Lehman failed to find a buyer and filed for the biggest bankruptcy in US history. New York-based AIG, once the world’s largest insurer, was rescued in 2008 with a bailout that increased to $182.3 billion.

The 25 companies in the S&P 500 who did worst according to EVA this year posted a median rally of 95 percent in 2009, compared with the 51-percent median gain for the 25 that did the best. The trend will probably reverse, said David Macia, US fund manager at Credit Andorra’s Credi Invest unit in Andorra La Vella, Andorra.

“The market will be much more selective and will bet for companies that give more certainty,” said Macia, whose firm oversees $5.7 billion. “It won’t be such an indiscriminate rally. Companies will now need to prove their ability and show they can boost revenue.”

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hanges in EVA are a better indicator of how well CEOs are investing money and the prospects for their stocks, according to Stern and Michael McConnell, director of research for Credit Suisse Group AG’s HOLT division, which tracks a similar measure of economic profit.

“What’s important is performance relative to expectations,” McConnell said. “You can look at the change and momentum in economic profit.

Companies that improve their performance will do better in the equity market.”

A HOLT index of 60 US stocks with the best economic profit prospects has gained 195 percent since April 1996, compared with about 112 percent for the S&P 500 including reinvested dividends.

Joseph Keating of RBC Bank said he’s buying companies with “reliable” revenue growth, including J&J and Purchase, New York-based PepsiCo Inc., the world’s largest snack maker. PepsiCo beat its cost of capital by 13 percentage points last year. Keating said investors are likely to shift away from companies with the worst prospects.

“We clearly way overshot the downside because of people discounting the worst-case scenario,” said Keating, chief investment officer of Raleigh, North Carolina-based RBC Bank, which oversees $3 billion. “Now it’s more fundamentals.

We’re going to invest in companies that we can begin to discount into the present value of the stocks some stream of future earnings.” n

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C2 Sunday, January 10, 2010

Bolivia’s hidden power source South America’s secondpoorest country holds the world’s largest untapped reserves of the lithium needed for electric car batteries.

Investors are lining up.

By Michael Smith & Matthew Craze

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Bloomberg Markets

he wind whips across a 3,900-square-mile expanse of salt on a desert plateau in Bolivia’s Andes Mountains.

Plastic washtubs filled with an emerald-colored liquid rich in lithium dot the Uyuni Salt Flat, all the way to the volcanoes on the horizon.

Waist-high slabs of salt are piled around a pond that’s shimmering in the sun. Francisco Quisbert, an Indian peasant leader known as Comrade Lithium, sits inside a crumbling adobe building on the edge of the desert. He’s explaining how Bolivia, South America’s second-poorest country, will supply the world with lithium, which

will be used in batteries that power electric cars.

“We have this dream,” Quisbert, 65, says.

“Lithium could bring us prosperity.”

The world’s largest untapped lithium reserve—containing enough of the lightest metal to make batteries for more than 4.8 billion electric cars—sits just below Quisbert’s feet, according to the US Geological Survey.

The automobile industry plans to introduce dozens of electric models with lithium batteries in the next three years. Bolivian President Evo Morales says his country can become one of the world’s biggest suppliers of lithium, making the nation of 10 million people a major player in the drive to cut the use of fossil fuels.

Even with its massive reserves, Bolivia has never built a lithium mine.

“Lithium is the hope not only for Bolivia but for all the people on the planet,” says Morales,

who, according to polls, was probably elected to a second term in elections.

If Morales gets his way, he will upset a market now controlled by two publicly traded companies: Princeton, New Jersey-based Rockwood Holdings Inc., which is 29 percent owned by Henry Kravis’s KKR & Co., and Santiago-based Sociedad Quimica y Minera de Chile SA, or Soquimich.

These two companies produce about 70 percent of the world’s low-cost lithium from a salt flat in Chile, just across the Andes from Bolivia.

Investors are wooing President Morales to be partners in building a Bolivian mine. French billionaire Vincent Bollore, South Korea’s LG Corp. and Japan’s Mitsubishi Corp. and Sumitomo Corp. offered to join with Morales in the project.

They’re already helping the government at no cost to design the mine.

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Vehicle tracks trail off to the horizon in the Uyuni Salt Flat in Uyuni, Bolivia.

Claudio Perez/Bloomberg Markets via Bloomberg

October 2009, according to a report by Credit Suisse Group AG. Ventures backed by A123 Systems Inc., Dow Chemical Co. and Johnson Controls Inc. are planning to ramp up production of lithium car batteries or cells.

About 75 percent of commercial lithium is still used for other things: It helps make glass and ceramics heat resistant, it’s a lubricant and it’s used in a drug to treat depression.

No other metal is better at holding a charge and dissipating heat with as little weight, making lithium the best ingredient known to make batteries for electric cars. Such batteries use a derivative called lithium carbonate to hold electricity they get when plugged into an outlet to be charged.

“Lithium is a very important commodity for the battery,” Ghosn says. “Obviously, we’re going to need to import a lot of it. Countries that have reserves of lithium are going to benefit.”

Companies such as Apple Inc., HewlettPackard Co. and Nokia started using rechargeable lithium ion batteries a decade ago, and today they are in millions of iPods, computers and mobile phones.

“There could be a rush to grab up supplies of lithium,” says Alex Molinaroli, president of Johnson Controls Power Solutions, part of the world’s biggest car battery maker. “You’ll see different folks positioning themselves to secure rights to lithium in the future.”

Still, electric cars are a gamble. No one knows how many consumers will buy them, and they’re a long way from performing like gasoline-powered vehicles. GM’s Volt, planned for production in 2010, can go only 40 miles before its battery is drained. Then, a gasoline-powered generator kicks in. An owner can recharge the battery by plugging it into an electrical outlet at home.

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Francisco Quisbert, an Indian peasant leader known as “Comrade Lithium,” poses at the Uyuni Salt Flat in Uyuni, Bolivia. Quisbert is credited with convincing the Bolivian government to build a lithium mine in the salt flat, the world’s largest. Claudio Perez/Bloomberg Markets via Bloomberg

So far, Morales has rebuffed outside investment, saying he wants to keep lithium in government hands to provide local Indians with jobs.

Morales says he may change his mind if Bolivia can’t raise the $800 million it would cost for construction of a mine and processing plants.

“If the Bolivian state had the money, it would invest it,” he says. “If the state doesn’t have cash, then we’re going to look for investment.”

Quisbert, the orphaned son of a llama herder, helped persuade Morales in 2007 to pledge $6 million to start work on what could be the largest lithium mine in the world by 2014, says Saul Villegas, who oversees lithium reserves at stateowned mining company Corporacion Minera de Bolivia. Bolivia has 35 percent of the world’s lithium resources, according to the USGS.

“Bolivia could become like Saudi Arabia,” says Gabriel Torres, an economist for Moody’s Investors Service Inc. in New York. “It has a huge amount of the world’s reserves.”

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armakers are betting that electric vehicles built to run on lithium batteries will help the industry recover from its worst crisis in three decades. US President Barack Obama’s administration is providing $11 billion

in loans and grants to car and battery makers to reduce the country’s dependence on foreign oil.

The world’s auto companies plan 42 new electric models by 2012, according to an October study by PricewaterhouseCoopers LLP. Instead of running on gasoline, these vehicles will be powered by lithium batteries that are charged with electricity made in plants fueled by coal, natural gas, nuclear power, solar power and wind.

General Motors Co. says electric cars are critical for the once-mighty carmaker to restore its technical edge after it filed for bankruptcy in 2009. Electric models, such as the Volt, will help GM meet US standards requiring automakers to increase the average mileage of their fleets as much as 40 percent by 2020.

“The Volt remains our top priority as far as advanced technology goes,” GM vice chairman Bob Lutz says. The company expects the Volt to get the equivalent of 230 miles per gallon of gasoline.

By 2020, one in 10 cars manufactured—or more than 6 million vehicles—may be powered by lithium batteries, says Carlos Ghosn, chief executive officer of Nissan Motor Co. Car battery sales could jump to $103 billion a year in the next two decades, up from $100 million a year as of

olivia’s desolate salt flats are at the center of a global rush for lithium. Villegas, the state mining company executive, says a processing plant will start making lithium carbonate in 2010.

By 2014, the mine will produce 30,000 metric tons of lithium carbonate, more than Rockwood’s mine in Chile, which is the world’s second largest.

Bolivian scientists say there are about 95 million tons of lithium under the Uyuni Salt Flat, more than 12 times Chile’s reserves.

Car and battery companies want a piece of the action. Bollore and his friend, French President Nicolas Sarkozy, have met with Morales to discuss lithium. Bollore, who controls a multibillion-dollar banking, media and shipping empire, owns a lithium battery plant in France and plans to build electric cars.

In February 2009, Morales, during a state visit to France, test-drove Bollore’s Bluecar. Bollore then told Morales they would fund a $5-million study for a mine and help finance construction of a lithium-processing plant.

“It’s you who controls the raw materials for the 21st and 22nd centuries,” Bollore told Morales, according to a videotape of the meeting.

“You are like Saudi Arabia.”

Bolivia is up against big odds, says Eduardo Morales, manager of Rockwood’s mine in Chile’s Atacama Salt Flat. Bolivia’s salt flat has few paved roads, and most communities don’t have electricity. The country is landlocked; the nearest port is across the Andes, hundreds of miles away in Chile. And Bolivia has no experience mining lithium.

“They will need outside investors,” says Morales, a Chilean national unrelated to Bolivia’s president.

Rockwood and Soquimich can sell lithium for about three times what it costs to produce because, until now, production hasn’t been able to keep up with demand, says Brian Jaskula, a lithium specialist at the USGS in Reston, Virginia.

On Chile’s Atacama Salt Flat in the driest desert on Earth, Rockwood and Soquimich produce lithium from evaporating pools that stretch for miles across a sea of formations made of salt.

They create those ponds by pumping out lithiumrich water, and then wait 18 months for most of it to evaporate.

Then, they process the remaining liquid into powdered lithium carbonate. It costs about $1 to produce a pound, Rockwood’s Morales says.

Rockwood and Soquimich sell the powder for about $3 a pound.

“This is a good business, and here’s the money, right here,” says Eduardo Morales, standing at a 300-meter-wide pool filled with lithiumbearing water that looks and feels like olive oil at Rockwood’s mine in Chile.

Rockwood and Soquimich have big sway over prices because they have few competitors.

“That’s what this market is,” Jaskula says. “It’s dominated by one or two big players.”

Kravis’s KKR created Rockwood in 2000 with the acquisition of UK-based Laporte Plc’s specialty chemical business, and four years later acquired the lithium mine by purchasing Chemetall Plc. Under CEO Seifi Ghasemi, Rockwood boosted annual revenue fourfold, to $3.4 billion in 2008.

KKR took Rockwood public in 2005 and reduced its 100-percent stake to 29 percent. KKR cofounder Kravis declined to comment.

In 2009, lithium carbonate prices jumped to $6,500 a metric ton, almost tripling 2006 values, because of surging demand for batteries, Jaskula says.

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wedish pharmaceutical researcher Johan August Arfvedson discovered lithium in 1817. It wasn’t until 1923 that German steelmaker Metallgesellschaft AG began producing lithium on an industrial scale. Bolivia’s government and USGS geologists discovered lithium beneath the Uyuni Salt Flat in 1976.

Quisbert inspired Bolivia to move to the center stage of the market. The orphan took off on his own at the age of 12 to dig minerals by hand from the salt flats of South America’s Andes Mountains.

By the time he was in his 20s, in the 1960s, Quisbert was organizing farmers to pressure for jobs and better living conditions.

Quisbert says he became convinced that Uyuni’s lithium, if mined by the government, would generate jobs and revenue that could bring prosperity to the impoverished Indian families who live in mud huts amid the desolation of the salt flat.

Quisbert envisions lithium bringing power to a place where electricity is a luxury. He grew up around Uyuni, which is one of Bolivia’s poorest regions. It’s inhabited by subsistence farmers and llama herders who tend small farms with no electricity. Towns around the salt flat have frequent power outages.

“Roads and electricity come with a lithium mine,” says Quisbert, whose face is tanned and wrinkled from a life in the intense sun of Uyuni.

“We still live with candles, with oil lamps.”

In the 1980s, Quisbert lobbied the government, unsuccessfully, to construct a mine. In 1991, he organized street protests to successfully block plans by Philadelphia-based FMC Corp. and Soquimich to build a lithium mine in Uyuni.

FMC gave up and opened a mine across the border in Argentina.

In 2005, Quisbert’s friend, Morales, was elected as the first Indian president of Bolivia.

Morales had grown up poor, like Quisbert, in Bolivia’s Andes, working on farms since the age of 6.

The two men first met in the 1980s, when Morales led Bolivia’s biggest coca farmers union.

As Quisbert pushed for a government-run

lithium mine, Morales organized protests that helped to force two presidents from office because they had allowed oil companies to exploit Bolivia’s natural gas reserves.

Both men believed that foreigners had looted Bolivia’s riches, starting with Spanish conquistadors five centuries before, leaving its Indian majority in poverty.

Today, Bolivians have an annual per-capita income of $1,716, according to the International Monetary Fund. Bolivia is the second-poorest nation in South America, after Guyana.

“He was fighting for coca; I was fighting for lithium,” Quisbert says.

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n November 2007, Quisbert walked into the presidential palace in La Paz, past guards dressed in red uniforms. It was 5 a.m., when the president routinely starts his workday, and Quisbert sat down in the palace’s Room of Mirrors to propose that the government mine lithium.

Morales, who calls Quisbert Comrade Lithium, agreed within minutes, saying the project would provide jobs.

“The president was very enthusiastic,” says Quisbert, who in turn calls Morales Comrade Coca.

The president chose two of Quisbert’s friends and advisers to lead the lithium program. One was Villegas, a tattooed, 34-year-old union leader who’d worked for years with Quisbert, to oversee lithium mining.

Belgian physicist Guillaume Roelants, who had spent 28 years mining southwest Bolivia and teaching Indians how to farm and mine, was charged with planning the project.

On the Uyuni Salt Flat, engineers fill metal and plastic containers with brine to test how quickly it will evaporate. Workers are building a small plant to test how to process lithium carbonate.

Roelants, the mine planner, is working with car and battery makers who could become investors to solve the challenges of building a lithium mine from scratch.

He set up a committee that includes French mining company Eramet SA; state-owned Japan Oil, Gas & Metals Corp.; South Korea’s LG Chem and state-owned mining company Korea Resources Corp.; Brazil’s Ministry of Science and Technology; and Bollore. University researchers in Brazil and South Korea, working with the committee, are studying how to process the lithium.

Thierry Marraud, Bollore’s chief financial officer, has technicians testing brine samples.

Researchers at Paris-based Eramet are seeking ways to separate magnesium impurities from the brine.

“We are going to try to evaluate the total potential, which is huge,” Roelants says.

Bolivia is looking, for the first time in its history, to take over bragging rights from Chile.

Quisbert is convinced Bolivia can succeed. He sits in his office in a dusty desert town, backed by a portrait of President Morales and the checkered flag of Bolivia’s Indians.

For decades since geologists discovered the Bolivian reserve, political opposition and a lack of funds have gotten in the way of developing it.

Quisbert says that will change.

“We want a different Bolivia,” he says. “We want development in our country.”

Battery and car companies around the world are hungry to tap into Bolivia’s massive reserves of lithium. The country is betting that lithium can turn it into a global force in the auto industry.

The odds are stacked against it because of its poverty, politics and lack of know-how. If Bolivia chooses to partner with investors from around the world, it may yet become the Saudi Arabia of lithium. n

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Obang Moe, aged 13, stands on a plantation owned by Karuturi Global Ltd., in Elliah, Ethiopia, in this October 28, 2009, file photo. Jason Mclure/Bloomberg

Below poverty line Ethiopian farms lure investor funds as workers paid less than World Bank limit

By Jason McLure

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Bloomberg News

ntil last year, people in the Ethiopian settlement of Elliah earned a living by farming their land and fishing. Now, they are employees.

Dozens of women and children pack dirt into bags for palm seedlings along the banks of the Baro River, seedlings whose oil will be exported to India and China. They work for Bangalore-based Karuturi Global Ltd., which is leasing 300,000 hectares of local land, an area larger than Luxembourg.

The jobs pay less than the World Bank’s $1.25-per-day poverty threshold, even as the project has the potential to enrich international investors with annual earnings that the company expects to exceed $100 million by 2013.

“My business is the third wave of outsourcing,” Sai Ramakrishna Karuturi, the 44-year-old managing director of Karuturi Global, said at the company’s dusty office in the western town

of Gambella. “Everyone is investing in China for manufacturing; everyone is investing in India for services. Everybody needs to invest in Africa for food.”

Companies and governments are buying or leasing African land after cereals prices almost tripled in the three years ended April 2008. Ghana, Madagascar, Mali and Ethiopia alone have approved 1.4 million hectares of land allocations to foreign investors since 2004, according to the International Institute for Environment and Development in London.

Emergent Asset Management Ltd.’s African Agricultural Land Fund opened last year. On November 23, Moscow-based Pharos Financial Advisors Ltd. and Dubai-based Miro Asset Management Ltd. announced the creation of a $350-million private equity fund to invest in agriculture in developing countries.

“African agricultural land is cheap relative to similar land elsewhere; it is probably the last frontier,” said Paul Christie, marketing director at Emergent Asset Management in London. The hedge fund manager has farm holdings in South

Africa, Mozambique and Zimbabwe.

“I am amazed it has taken this long for people to realize the opportunities of investing in African agriculture,” Christie said.

Monsoon Capital of Bethesda, Maryland, and Boston-based Sandstone Capital are among the shareholders of Karuturi Global, Karuturi said. The company is also the world’s largest producer of roses, with flower farms in India, Kenya and Ethiopia.

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ne advantage to starting a plantation 50 kilometers from the border with war-torn Southern Sudan and a four-day drive to the nearest port: The land is free. Under the agreement with Ethiopia’s government, Karuturi pays no rent for the land for the first six years. After that, it will pay 15 birr ($1.18) per hectare per year for the next 84 years.

Land of similar quality in Malaysia and Indonesia would cost about $350 per hectare per year, and tracts of that size aren’t available in Karuturi Global’s native India, Karuturi said.

Omeud Obank, a security guard, center, poses while at a plantation owned by Karuturi Global Ltd., in Elliah, Ethiopia, in this October 28, 2009, file photo. Foreign companies and governments, prompted by the 2007-2008 surge in food prices, are making record investments in African land. Jason Mclure/Bloomberg

Labor costs of less than $50 a month per worker and duty-free treaties with China and India also attracted Karuturi Global, he said. The $100-million projected annual profit will come from the export of food crops, including corn, rice and palm oil, he said. The company also is plowing land on a 10,900-hectare spread near the central Ethiopian town of Bako.

The project will give the government revenue from corporate income taxes and from future leases, as well as from job creation, said Omod Obang Olom, president of Ethiopia’s Gambella region and an ally of Prime Minister Meles Zenawi’s ruling party.

“This strategy will build up capitalism,” he said in an interview in Gambella. “The message I want to convey is there is room for any investor. We have very fertile land, there is good labor here, we can support them.” The government plans to allot 3 million hectares, or about 4 percent of its arable land, to foreign investors over the next three years.

Workers in Elliah say they weren’t consulted on the deal to lease land around the village, and that not much of the money is trickling down.

At a Karuturi site 20 kilometers from Elliah, more than a dozen tractors clear newly burned savannah for a corn crop to be planted in June.

Omeud Obank, 50, guards the site 24 hours a day, six days a week. The job helps support his family of 10 on a salary of 600 birr per month, more than the 450 birr he earned monthly as a soldier in the Ethiopian army.

Obank said it isn’t enough to adequately feed and clothe his family.

“These Indians do not have any humanity,” he said, speaking of his employers. “Just because we are poor it doesn’t make us less human.”

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bang Moe, a 13-year-old who earns 10 birr per day working part-time in a nursery with 105,000 palm seedlings, calls her work “a tough job.” While the cash income supplements her family’s income from their corn plot, she said that many days they still only have enough food for one meal.

The fact that the project is based on a wage level below the World Bank’s poverty limit is “quite remarkable,” said Lorenzo Cotula, a researcher with the London-based IIED.

Large-scale export-oriented plantations may keep farmers from accessing productive resources in countries such as Ethiopia, where 13.7 million people depend on foreign food aid, according to a June report by Olivier De Schutter, the United Nations special rapporteur on the right to food. It called for ensuring that revenue from land contracts be “sufficient to procure food in volumes equivalent to those which are produced for exports.”

Karuturi said his company pays its workers at least Ethiopia’s minimum wage of 8 birr, and abides

by Ethiopia’s labor and environmental laws.

“We have to be very, very cognizant of the fact that we are dealing with people who are easily exploitable,” he said, adding that the company will create up to 20,000 jobs and has plans to build a hospital, a cinema, a school and a day-care center in the settlement. “We’re going to have a very healthy township that we will build. We are creating jobs where there were none.”

The project may help cover part of the $44 billion a year that the UN Food and Agriculture Organization says must be invested in agriculture in poor nations to halve the number of the world’s hungry people by 2015.

“We keep saying the big problem is, you need investment in African agriculture; well here are a load of guys who for whatever reason want to invest,” David Hallam, deputy director of the FAO’s trade and markets division, said in an interview in Rome. “So the question is, is it possible to sort of steer it toward forms of investment that are going to be beneficial?”

Buntin Buli, a 21-year-old supervisor at the nursery who earns 600 birr a month, said he hopes Karuturi will use some of its earnings to improve working conditions and provide housing and food.

“Otherwise we would have been better off working on our own lands,” he said. “This is a society that has been very primitive. We want development.” n