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By Bamidele Seun Owoola and Nick Harriss
African Agriculture: Unexploited Potential
Historians and anthropologists have long maintained that the development of agriculture made civilization possible, as it allowed for the support of an increased population and labour specialisation, leading in turn to larger societies and eventually the development of cities.
While agriculture has modernised and intensified in most of the world, Africa has remained predominantly at the subsistence level, leaving the continent as the last major land mass with potential to be a major player in global food markets.
The agricultural population in Africa stands at 530 million people, and is expected to exceed 580 million by 2020. The population working primarily in agriculture accounts for 48% of the total African population (and almost 70% in East Africa), plus many more who work in the sector part time. By comparison, roughly 2% of the UK population work in agriculture.
Agriculture and Poverty Alleviation
With more than half of all people living in Africa depending on agriculture for all or part of their livelihood, the encouragement and adoption of methods that would grow agricultural output would result in incomes being boosted, increased economic growth and a general improvement in living conditions. The poverty alleviation benefits of agricultural investment is confirmed by recent evidence from the International Food Policy Research Institute
A widespread body of evidence from many settings around the world shows that agricultural investment is one of the most important and effective strategies for economic growth and poverty reduction in rural areas. GDP growth in agriculture has been shown to be at least twice as effective in reducing poverty as growth originating in other sectors (World Bank, 2007). Productivity growth in Agriculture generates demand for other rural goods and services and creates employment and incomes for the people who provide them. Africa also has the largest share of the world’s uncultivated land with rain-fed crop potential. Unlike many other parts of the world, in Africa there is room for agriculture to expand.
Investment by existing farmers, as well as the public and private sector in agriculture and supporting sectors can increase the availability of food on the market and help keep consumer prices low, making food more accessible to rural and urban consumers.
A Wealth of Undeveloped Agricultural Resources
Unfortunately African agriculture is very far from reaching its potential. In Africa, only about 6 per cent of the total cultivated land is irrigated, compared with 37 per cent in Asia. It is estimated that irrigation alone could increase output by up to 50 per cent in Africa. Likewise, farmers in sub-Saharan Africa use less than 13 kilograms of fertilizer per hectare. This compares with about 73 kilograms in the Middle East and North Africa, and 190 kilograms in East Asia and the Pacific. Small increases in organic or inorganic fertilizer use in sub-Saharan Africa could produce dramatic improvements in yields.
Today, small farms represent 80 per cent of all farms in sub-Saharan Africa. They contribute up to 90 per cent of production in some countries. Yet too many smallholders are ‘poor’; but this could change with investment. Small farms are often more productive per hectare than large farms, and in Africa, they have the potential to be key suppliers to growing urban markets as well as rural markets.
Furthermore demand for food and higher-end food products is growing across the continent from Africa’s increasing middle class, and there is growing foreign interest in the untapped potential of Africa’s fertile land.
Drawbacks within the African Agricultural Sector Include:
Opportunities in Agricultural Products and Investment
Opportunities exist in the processing of agricultural products such as cereals (maize, rice, millet) starchy crops (yam, cassava. sweet potato, plantains), vegetables (carrots, cabbage, aubergine, tomato), fruits (pineapple, paw paw, banana, mango), plantation crops (rubber, sugar cane, cotton, oil palm, cocoa, coffee), livestock (cattle, pigs, poultry, sheep), fisheries (tuna, tilapia, catfish), and rearing of silk worm for the production of raw silk.
Investment opportunities exist in the agro-processing industry to add value, reduce post-harvest losses, promote price stability and expand demand for local agricultural produce. For example, with the processing of cocoa beans into cocoa products and fruits into fruit juices, dairy products and others.
Investment opportunities also exist in the agricultural support sector and technologies that aid in the production and distribution of food. This notably includes the development of irrigable land through irrigation. There are further opportunities in standards, training and certification; capacity building for management and market-oriented enterprises; market intelligence research and in the development of agricultural finance and insurance. Other areas could include alternative fuel producers/distributors, grain storage facilities and water treatment companies.
Generally agricultural investment performance has moved in very different cycles from traditional asset classes like stocks and bonds; as a result, adding farmland to an investor’s portfolio enhances diversification and can result in lower volatility. Over the past 40 years, agricultural land has demonstrated a low correlation with both stock and bond indices. Moreover, a globally diversified portfolio of agricultural investments can further reduce risk, as it spreads its exposure among a variety of crops, government structures and climates. Returns on farmland investments have historically outpaced inflation in a variety of market environments. The NCREIF Farmland Index’s Total Return has consistently provided returns more than double the inflation rate since 1991.
Investing in East Africa
By Peter C. Thoms, CFA
I traveled to East Africa last month to examine the investment prospects of several companies in the region that we consider to be promising. In this article, I will touch on the general investment considerations for East Africa; in subsequent articles I will delve into specific industry and company-level investment prospects.
Depending on whose definition of East Africa you use, the region, in the broadest sense, may include Burundi, Comoros, Eritrea, Ethiopia, Kenya, Rwanda, the Seychelles, Somalia, South Sudan, Tanzania and Uganda. For investment purposes, we at Africa Capital Group LLC think of East Africa as the five countries that make up the inter-governmental organization called the East African Community (EAC). The EAC members are: Burundi, Kenya, Rwanda, Tanzania and Uganda, and it is in these countries that we see the region’s most promising investment opportunities.
The EAC countries have a combined population of about 141 million people and aggregate GDP of approximately USD $100 billion. While there are still strong rivalries between these countries, they have generally recognized that it is in their collective economic interest to pursue improved trade relations, cross-border infrastructure projects and closer political cooperation. Talks concerning the development of a common currency and centralization of the region’s capital markets functions are ongoing, but, for now, we believe such advancements remain years away.
East Africa is one of the world’s fastest growing regions. Its GDP grew roughly 6.0% in 2013 and is forecast (by the U.N.) to grow by about 6.3% in 2014. While agriculture is still the single most important sector for the region, consumer services such as telecommunications and financial services are rapidly taking share of GDP. Thus, the electricity grid and transport infrastructure are also increasingly vital parts of the region’s growth equation as countries invest to provide for their rapidly growing and increasingly urbanized populations. Traffic snarls on the roads and bottlenecks at the ports and on the rail system make movement of goods slow and expensive. In fact, in our view it is this infrastructure development (grid, port, road, rail and pipeline) that holds the key to unlocking significantly higher economic output and living standards for the region.
Kenya has the most developed capital markets in East Africa, followed by Tanzania and Uganda. Rwanda has the smallest exchange, whereas Burundi does not have its own stock market. All of these markets are small and illiquid by developed market standards, but collectively they contain intriguing opportunities from a variety of industries, including telecom services, banking, insurance, energy, advertising, food and beverage and infrastructure.
While the region has attracted substantial interest from foreign companies of late, we believe East Africa’s home-grown firms hold the most investment potential because of their intimate knowledge of the local business environment. In particular, we believe dominant and well-managed local companies like Safaricom, Equity Bank, ARM Cement, KenolKobil, Bank of Kigali, CRBD Bank and Scangroup all offer interesting long-term growth prospects for investors. In future articles we will examine such companies in greater detail.
by Nick Harriss, Founder and Chairman
Over the years many misguided pronouncements have touted the improved economic prospects of Africa, home to a large proportion of the world’s billion poorest people.
Many business leaders in the West remain sceptical about Africa. Past perceptions of matters such as:
still linger on many potential investors’ minds.
However, the progress that has been made in reforming governments,achieving greater political stability, improved macroeconomic environment, and an energized business environment are becoming too significant to ignore. For example, several countries halted their deadly conflicts, reduced inflation, cut budget deficits, lowered trade barriers, cut taxes, privatized companies, and liberalized many sectors, such as banking.
Another perception about investing in Africa is that its financial sectors are inefficient, but unknown to many Africa’s banking sector has both grown rapidly and demonstrated an impressive record of innovation in the last decade. A significant contributor to this growth has been financial reforms. For example in Nigeria, banking reform promoted a swift consolidation (from 89 to 25 banks between 2004 and 2006) that unlocked the sector’s potential—bigger banks with better capabilities has driven down their costs, allowing them to penetrate a larger portion of the unbanked population and to ride on the back of rapid economic growth.
The banking sector is just an example of where out-dated perceptions do not match with the Continent’s new realities. Africa is now home to some of the world’s fastest-growing economies and offers the highest risk-adjusted returns on foreign direct investment among emerging economies.
Telecom, mobile banking, retail, and consumer goods are only some of the sectors that are showing great promise. While mining and oil remain big businesses, infrastructure investment and the consumer market are also major growth areas.It is estimated that consumer goods and services, natural resources, agriculture, and infrastructure could together generate as much as $2.6 trillion in annual revenue by 2020, or $1 trillion more than today, measured in 2010 dollars
Africa’s growth acceleration has beenwidespread, with GDP rising more rapidly in 27 of its 30 largest economies—both in countries with significant resource exports and those without. Rising revenues from oil, minerals, and other natural resources accounted for just 24 percent of growth from 2000 through 2008.
The Continent now has more than 1,400 publicly listed companies. It boasts more than 100 companies with annual revenues of greater than $1 billion. Telecom firms have signed up more than 316 million new mobile-phone subscribers in Africa since 2000—more than the total U.S. population, while Africa’s future economic growth likely will be supported by several long-term trends, notably the world’s increasing demand for many of thecommodities the Continent is blessed with.
Many years have passed since investors updated their view of Africa’s promise. The time is ripe for investors to rethink sub-Saharan opportunities and simultaneously to help the region achieve its promise by contributing much-needed capital, business skills, and global connections, whilebenefiting from the high returns on these investments.