In every engagement focused on agricultural investment in Africa that the experts at CID participate in, our clients acknowledge that the potential for investments on the continent is huge, yet difficult to tap into. While it is true that investing successfully in agriculture in Africa – or energy and mining for that matter – is far from easy, it is perfectly possible. Initiatives such as the Feed Africa Strategy of the African Development Bank should be one’s starting point for trying to make sense of the agricultural space on the continent. Translating the information from those resources into feasible and bankable business cases was the topic of the discussion of the Welcome 2 Africa Summit in Frankfurt, Germany last year, which CID participated in. The purpose of this article is to share the insights learned at the event.
The Competitiveness of African Agriculture
While financial return combined with managed risk is the focus of any investor, agricultural investments should also consider can also be considered for their social impact, since their job-creating nature plays a key role in poverty alleviation. Sanjay Sethi from the Phoenix Group – one of the largest growers of rice in Africa – presented a view that African farmers are already capable of entering rice production, yet the holistic ecosystem for growing rice dos not exist on the continent. Even though, the farmers are ready to grow rice, once they do, the price of rice is not competitive with that of Asian rice since the proper support ecosystem exists in Asia. The macroeconomic competitiveness of African produce was thus one of the first of five identified structural challenges present in the agricultural sector on the continent.
The Five Challenges
The second identified challenge stifling development of the African agriculture sector is the chronic devaluation of local currencies. The best way to mitigate this challenge is to invest in the production of export crops, such as coffee, cocoa, or cashews. This is because exports can be sold for “hard currency,” often foreign currency, which carries less risk of devaluation. The third challenge is the ability to quickly tap into market opportunities. The investors present in Frankfurt noticed that in comparison with South America, for example, business in Africa is conducted very slowly. “By the time you can pull your business off the ground, the business opportunity is long gone,” said one investor. Fourthly, in Sub-Saharan Africa and many other parts of the continent, accessing credit using one’s arable land as collateral is almost impossible. This is because land titles for most of the farmed land are nonexistent, so the banks cannot lend money to farmers, who in turn cannot develop their farms, which on a macro level limits the entire sector. Fifthly, reliable access to electricity is often-times a dream, which significantly increases the investment and working capital requirements for a business that will have to install back-up generation capacity. This cost ultimately reflects itself in the price of the agricultural goods, which are rendered unncompetitive relative to products produced in markets with consistent electricity supply.
Africa’s Competitive Advantage?
While these identified problems can partly explain the current state of the sector, they may not be a good enough reason to explain Africa’s growing levels of food imports, which are bordering on over $30 billion. Hans Bogaard from the Dutch Development Bank FMO was particularly outraged by this figure, considering that many of the imported products like sugar, palm oil, and rice can be grown on African soil and even exported from Africa. Bogaard expressed understanding on why this is not happening using the example of palm oil.
To begin with, potential investors in the African palm oil industry often shy away from large scale investments in production due to the reputational risks such investments carry, such as de-forestation or forced re-settlement of native populations. The root of the problem of Africa’s underdeveloped palm oil industry, however, is that Asian producers of palm oil are currently asking themselves how can they grow their plantations from 25,000 acres to 37,500 acres, so that they can increase their competitiveness even further. While at the same time, palm oil projects discussed in Africa are in the range of 250 acres and are being financed as development projects, and not as efficiency seeking business ventures. “Consider someone who is able to set-up such a plantation in Africa. How on earth can he, or she, compete with the Asian growers,” Bogaard asked rhetorically.
Reforming Agricultural Value Chains
Each challenge presents an opportunity, however, and this was brilliantly showcased by Richelle Speights from Franchise Africa, which is focused on matching commercial investors with fundable projects across the continent. Propcom Mai-Karfi, which aims to create well-functioning and transparent markets for commodities produced by farmers in Nigeria, is an example of the businesses Franchise Africa works with. Speights described her company’s experience in Nigeria, where the greatest problem is that every agricultural value chain leads from the field to the harbor, which can be explain by investors’ preference to grow export crops to mitigate the risk posed by local currencies. She proposed that African countries should process much more of their agricultural produce locally to capture more value and create local jobs. From this perspective, the value proposition of Franchise Africa is not only to prevent tax-payers’ money from wasting, but also to develop local manufacturing bases.
There are two facts about the Dutch people. The first one is that they are very direct. Secondly, they are very important in the African agricultural space. One of those Dutchmen shared his insights learned over many years working on the continent, which boils down to his simple observation: aid programs are not aimed at creating sustainable agriculture, but rather sustainable poverty. This is because every participant in the agricultural value chain is assured a certain profit margin, while the farmer is left with the most risk on his balance sheet. Whether the farmer earns money or not is – according to our honest speaker – entirely a matter of chance and not design. The prescription for dealing with this challenge is to increase the bargaining power of farmers through the creation of farmer co-operatives, which can further process what farmers produce, therefore capturing even more value. A successful example of such a system can be found in India, with its establishment of FPOs: Farmer Producers Organizations.
Financing the “Missing Middle”
The majority of the conversations that CID engaged in at Frankfurt concerned financing, or in the context of African agriculture, the lack thereof. The key phrase in understanding this issue is “missing middle,” which is a fluid concept referring to the missing capital at the growth stage of the business, in between developmental finance and purely commercial funding. As previously mentioned, Franchise Africa is one of the groups working to address this middle financing gap.
One of the key insights from the conference was that there is no shortage of capital in African agriculture. The reality is that there is an abundance of short-term financing available while there is little long-term capital on the market. Combine that with the fact that the structural and capital intensive investments needed in agriculture are truly long-term in nature, and one arrives at the simple conclusion that it is long-term, patient capital, which is most needed on the continent. Paul Groenev from GreenTec Capital Partners further commented that the knowledge transfer that follows funding may in fact be more important than the funding itself. According to Groenev, this knowledge transfer is key leverage for reducing the risks of certain investments so that more investors are willing to step on board and provide growth capital.
Hedging the Risks of Currencies
While agriculture is inherently focused on discussions that occur on local levels, the Welcome 2 Africa Summit showcased the fundamental impact that global currency markets have on the sector. Julian Dixon from INTL FCStone presented a case of an agricultural processor from Nigeria whose profit margin was decreased from 30pp [percentage points] to 10pp driven by a 10pp move in currency exchange rates. Dixon said that it is safe to assume that African currencies will depreciate, not appreciate, for the foreseeable future. This widely accepted fact means that multiple investments into African agriculture may be put off by foreign investors.
There are, however, ingenious examples of lowering currency risk across Africa. One such example is the West African Currency Union established by Benin in 1994, which pegs its currency to the Euro, effectively creating a perfect hedge for investors. A similar situation is present in Zambia, where businesses are commonly using USD alongside the local currency, kwacha, which is abbreviated ZMK.
The Importance of Local Perspective
Even though having disposable capital is a fundamental requirement to be an investor in agriculture, it is hardly a sufficient condition to be a successful investor in agriculture. It was recommended that before investing one’s money into anything, each investor should start with a demand analysis of whatever the product is. Once you are sure that there is a demand for whatever you want to produce, only then should you take the next steps in the investment process. Furthermore, it is critical to be “on the ground,” especially in agriculture. Our honest Dutch speaker succinctly said that if you are based in New York, or Amsterdam, and you visit Africa three times a year for a week, “you cannot consider yourself to be doing farming in Africa at all!”
The event concluded with presentations of businesses that have taken all of the challenges presented in this article head on. The first presentation from Ipade Adayeye of Kasavex introduced the business, which aims to create an integrated value chain of starch produced from cassava. A plantation of 5,000 acres is currently being established while the capital is being raised for the construction of a starch processing facility and a biogas plant. The project is planning on fueling its biogas plant with plant waste, therefore solving the issue of unpredictable power supply. Each acre is expected to produce 10 tons of raw material which will contain 26% starch. Adayeye also commented that investors should not box themselves into thinking about establishing green field agricultural operations, as there is a huge opportunity for driving productivity improvements in established farming operations.
The final panel of the day introduced Yunus Social Business. Bastian Muller, representing the company, explained that the it is indeed connected with the Nobel Laureate Professor Muhammad Yunus and it operates as an individual investment entity. One of the representative investments of the fund is the Hope Development Initiative in Uganda. Further, Nicolas Lohr from E-Farm pitched his company’s exciting plan to tap into the niche of exporting high-quality used agricultural machinery from the EU or the U.S. to Africa. Finally, Ollie Smeenk from Kukua presented their technology which enables African farmers to access meteorological data in a convenient and financially accessible way. This data enables them to plan field work in advance and ultimately increase farm income. It is worth mentioning that Kukua is currently one of those “hot” start-ups on the African agricultural scene.
More Lessons Learned
Participation in this conference entertained various unexpected discussions. One such conversation enabled us to learn about a very interesting business model targeting African countries that produce export crops, such as cocoa. Each African producer of this commodity regulates the market through the establishment of state boards, which are the only legal purchaser of the crop. Such agencies require a lot of capital – most often USD denominated – to be able to pay for farmer’s produce. Some participants at the conference were involved in providing exactly such seasonal financing to African states.
Furthermore, representatives of the Frankfurt School of Finance and Management presented the micro-loans consulting assignments they were involved in. They focused on their Agricultural Loan Evaluation System, or ALES. This conference was also the second event that we have attended that mentioned the incredible work of the Tony Elumelu Foundation in the area of entrepreneurship in Africa. Finally, given that the conference took place in Germany, we were interested to hear more about concrete developments in the New Marshall Plan for Africa, which was announced at the beginning of 2017 and, from our perspective, has the potential to disrupt the status quo of business relationships between Africa and the West. Unfortunately, even though some of the participants had heard of the plan, none knew more about its specifics.
Capitalizing on Opportunities
In summary, it is fair to say that investing in African agriculture is not easy, and successful investing is even more difficult. Nevertheless, if one knows what to be aware of and how to manage known and unknown risk, the potential of African agriculture is endless for those investors that spend time to find opportunities. Finally, the key to the identification and understanding of potential challenges, as well as to finding solutions, is having strong relationships on the ground. The Center for Industrial Development has the capabilities needed to be the partner that helps you succeed in African agriculture, and we are here for you to utilize our insights and network. Please contact us here to inquire about our consulting services and take the first step towards successful agricultural investment in Africa.
Mateusz Ciasnocha is constantly on a mission to “unleash dormant potential.” He specializes in agriculture, energy, and Africa, and is also passionate about innovation and entrepreneurship. A Hult International Business School graduate, Mateusz currently studies at ESCP Europe Business School and the University of Oxford, where he is receiving a Masters in Energy Management and Philosophy Certificate, respectively. Mateusz is currently in India participating in the prestigious IDEX Fellowship, which enables him to work with Vrutti to support 130,000 smallholder farmers.