Africa’s challenging path to becoming an agri superpower
Despite the continent’s potential to become a major agribusiness player, the regulatory environment is not yet supportive enough to attract large investments.
There is no doubt that Africa has great potential to become an agricultural superpower.
Sixty-five percent of its workforce is employed in agriculture. The continent is home to nearly two-thirds of the world’s uncultivated arable land and existing farmland is underexploited. Demand is high: African countries run a US$35 billion food deficit, while many countries are looking to Africa for agricultural projects to feed their growing populations.
The biggest private equity investment on record in East Africa – KKR’s US$200 million investment in Afriflora, the Ethiopia and Netherlands-based rose farmer – is in agriculture. Another Ethiopian success story is the Saudi Star farm in the Gambella region, a rice farm aimed at exporting to Saudi Arabia which has received $200 million in financing from its owner since 2009.
However, investments of this size are rare. Delegates at the 2015 Global African Investment Summit in London last December said it was easier for African businesses to raise US$100 million in funds than it was to raise US$10 million, as there is enough investment appetite but not enough large opportunities for traditional private equity players. This trend is visible across private equity markets in Africa, and in the past two years private equity houses raised about double the amount that they actually invested.
The fragmented market means that it is the investors with more specialised agriculture know-how who can facilitate partnerships between larger farms and smallholders. The current landscape favours investments with a 10 to 20 year planning horizon and sized at about $10 million-$50 million.
To turn the continent’s potential into wider success, and attract investments and finance on a larger scale, countries still need regulation and policy improvements that help local farms improve efficiency and co-operate with larger agribusinesses.
Regulatory and policy change is happening, but progress has been painfully slow. A recent PwC report compared Africa’s agricultural potential to Brazil’s forty years ago. It may be some time before the market sees similar progress across Africa.
Particular difficulties facing investors in Africa are lack of infrastructure, limited fertiliser use and poor seed quality in addition to wider developing market problems like corrupt bureaucracy and uneducated local labour.
Low quality of infrastructure, including storage facilities, causes a loss of up to US$4 billion in grains each year. Governments including Ivory Coast, Rwanda and Zambia have made commitments to improve agriculture infrastructure, but these are likely to materialise in the mid to long term, according to a recent KPMG report.
Average fertiliser use in Sub-Saharan Africa is 8 kg a hectare, compared to the international average of 107 a hectare. Limited use of fertiliser is due mainly to the absence of resources and know-how.
Countries like Kenya, Ghana, Zambia and Ivory Coast are having some success in incentivising fertiliser use through faster and cheaper importer registration procedures as an alternative to using subsidies, a World Bank study published this year found.
Improved seeds generally account for about 30 to 50 percent of productivity and profitability increases for farmers, research shows. Seed registration allows farmers access to new seed varieties, and incentivises private sector involvement by protecting plant breeders’ intellectual rights. Kenya and Tanzania are examples of best practice in these areas, being, with South Africa, the only two Sub-Saharan Africa members of the International Union for the Protection of New Varieties of Plants.
However, faced with the crunch in commodity prices, African governments are likely to move agribusiness up on their agenda; regulatory improvements should therefore expected to gain momentum. Investors might want to get their foot in the door early to take advantage.
This article was first published in Agri Investor.