With over 450,000 visitors and 2,000 exhibitors from 53 countries, Agritechnica 2017 was a great success. The world’s largest agricultural machinery fair organized by DLG: German Agricultural Society not only gave the opportunity for the world’s farmers to familiarize themselves with the newest agricultural technologies, but also enabled the organization of unique break out sessions focusing on business opportunities in the agricultural sectors of Zambia, Ethiopia, Ukraine, Russia, Iran, China, Thailand and Myanmar. It may seem reasonable to conclude that there is nothing in common within such a diverse group of countries, though the conference showed that this cannot be further from the truth! It turns out that the conversation always focuses on consolidation of agriculture for the purpose of increasing effectiveness through mechanization and better water management.
Different countries, similar challenges
While over 75% of Iranian farmers are farming less than 5 ha each, Russian farmers manage farms of thousands of hectares each which the local government sees as the guarantee for the country’s food security. The Government of Thailand aims to increase the average size of the farm through policies aimed at the development of agricultural co-operatives. Whereas in China, while as many as 47.8% of population is involved in agriculture, the government sees the 1,789 state-owned farms as the key to country’s national security.
Water scarcity: the biggest problem
Discussions at Agritechnica clearly indicate that water security is the key topic for the future of agriculture and consequently the stability and security of whole nations. Iran, which is already facing water shortages, does not want to rely on food imports for strategic reasons. This is why the country is investing heavily in the development of planting seedlings for the majority of locally grown crops, which include corn, sugar beet, cotton and rapeseed. This technique not only increases effectiveness of water use, but also offers the opportunity for yield increases.
As the example of the Golestan Osareh Food Industries shows, there is indeed plenty of space for yield increases with wheat yields of 3.5t/ha and rapeseed yields of 2.5t/ha. The former crop is grown at 2.000ha and the latter at 1.000ha. However, the tomatoes grown on 1.200ha, which constitute the majority of business’ earnings, are being exported: 85% of farm’s tomatoes production is being exported. It is interesting to note that Iran has 5bln USD trade surplus in food trade mainly due to export of its famous pistachios.
Africa is also not immune to the problem of water availability. Water scarcity has affected the export of agricultural machinery to the continent, which in 2016 decreased by 23% in comparison with the previous year. This dramatic decrease was caused by El Niño which essentially emptied rivers and water dams. The weather situation is back to normal already and producers of agricultural machinery notice the rebound in the levels of exports.
Zambian water abundance
There is, however, one country in Africa which is not concerned about water availability: Zambia. David Gordon – a Zambian farmer present at the conference who owns 7.000ha of land, of which 2.600ha is farmed – noticed that on average, yearly precipitation is as high as 850mm. Abundant rain fall combined with fertile soil had led to fantastic yields: between 8-9t/ha of wheat and 11,4t/ha of corn!
Therefore, it is not surprising that Zambia is the only country in the whole of Africa with surplus production over consumption in corn, soybeans and wheat. While as much as 45% of the total water potential in the South African region is located in Zambia, only 8% of this potential is currently being used. Even though the water and food security situation of Zambia is a fantastic one, the country is playing a long game by investing $180 million in irrigation for 5.500ha. It is critical to note that financing, as well as construction of the project is being done by the Chinese. We covered these developments in our article on Chinese investment in Africa.
The importance of agricultural machinery
Even when one has an abundant yield, this yield must be harvested, stored, and delivered to the market. One of the greatest challenges of African agriculture and that of developing countries more broadly is the availability of agricultural machinery. In Ethiopia, for each hectare of land only 0.34 horsepower of machinery is available, compared to 7HP/ha in Japan. A crucial statistic illustrates the underdeveloped nature of the Ethiopian agricultural sector, and the resulting opportunity for investment: there are 1,000 harvesters in the country of 100 million people. This explains losses of 25-30% during the harvest, not to mention the losses further up the value chain.
Despite those daunting numbers Abrhame Endrias Butta, contractor from Ethiopia, notices that according to the USDA, Ethiopia is already the world’s 9th largest producer of barley and within the top 20 of the world’s largest wheat and corn producers. Abrhame continues: “Those are the numbers when our tractor is an ox! Can you imagine the potential of our agricultural production once the oxen are replied by mechanical horsepower?”
The progress in Russia and Ukraine
Agricultural entrepreneurs are aiming to increase productivity not only in Africa, but also in Ukraine. Petro Melnyk from Agricom Group shared the story of his group, whose assets have grown from 14.700ha to 40.000ha in three years’ time, while during the same period their employees grew by only 225, from 300 to 525. All of that was possible thanks to the introduction of modern technologies like telematics in particular, which drastically reduced theft from the farm: be it fuel, or pesticides.
The Russians however are thinking whether they have gone too far with consolidating their farms and driving economies of scale, which are becoming more of a burden than an asset. Consider a dairy farm with 81.880 cows, producing 850t of milk per day, with a farm of 235.115ha supporting the dairy operation. These economies of scale seem off. Prodimex Holding with 600.000ha of arable land, 18 sugar beet processing facilities and annual production of 8mln tons of sugar faces similar dilemma.
Klaus John representing Prodimex Holding commented that pricing of critical business inputs is critical for the success of company’s operation saying: “We have extremely cheap fuel and trucks. Yet per ton of sugar beets transported to the processing facility we have to pay twice as much, as our colleagues in Germany do with much more expensive fuel and trucks.” Klaus further commented that with the price of land around 600EUR/ha and annual rent of 18EUR/ha, the cost of farming land is very reasonable. However, the high costs of machinery, which can range from 800 to 1,200EUR/ha, is the greatest challenge for farm operators. Especially with a highly variable yield of wheat between 1.5-4t/ha, dependent on rainfall.
Agriculture in Asia
The Chinese are also working towards making the next revolution in agriculture happen. Today, China is producing more rice than Japan and the US combined, but that is not enough. One of the key goal of the Chinese Strategy 2025 is the mechanization of agriculture, which will bring greater efficiencies on the cost side, greater yields, and will free up a significant part of the population for non-agricultural labor, further driving economic growth.
The Government of Thailand is also working towards drastically increasing efficiency in agriculture. Their strategy is to encourage farmers to set up agricultural holdings of 50ha through co-operatives. The goal for the next five years is to consolidate 3.5 million ha, which will lead to cost reductions of 20% with simultaneous increases in efficiency of up to 20%.
Thet Htun, a farmer from Myanmar, the world’s largest sesame seed producer and world’s fifth largest producer of peanuts, recounted to the audience the proccess of preparing 400ha of land for agricultural production. Over half of the land is ready for production already, but as Thet pointed out, his biggest challenge is the fact that he cannot compete with the agriculture of the West: “I need agricultural machinery and the Western producers want to supply those to me. Sadly, after currency translation, I simply cannot afford it.”
While it would be impossible to cover all of the innovations presented at the conference, it is critical to conclude with a note about the continuous efforts of CNH Group to promote gas-powered tractors. New Holland, one of the major brands of the CNH Group, revealed a new edition of the T6 Methane Power tractor in Germany. While still in its initial stages, the energy revolution will profoundly affect agriculture and New Holland’s continuous efforts in this respect are the greatest testimony to this future. The Center for Industrial Development develops unique insight on the developments in both sectors. We encourage you to read our insights from the St. Petersburg Gas Forum and the Polish LNG Conference Part I and Part II, where we talked at length about future developments.
The promise of a sector
In conclusion, driven by strong fundamentals and negative correlation with the other asset classes, agriculture offers unique investment opportunities to a wide range of investors. We are delighted to be able to report on the latest trends in the sector in countries including Zambia, Ethiopia, Ukraine, Russia, Iran, China, Thailand and Myanmar.
In addition to sharing our insights, CID works with investors and producers to take advantage of the vast opportunities that this sector can offer. Contact us today to discuss how you can benefit and participate in the development of agriculture around the world.
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.