African Agriculture – A Compelling Investment Case
In most parts of Africa, agriculture offers an attractive investment opportunity. Yet, according to a report in The Financial Times published on 16 September 2012, the challenges involved in investing in African farmland are often underestimated by investors who, expecting to make a quick profit, seem to have no qualms about buying up large tracts of land in Africa.
According to the FT, citing an analysis by the International Institute for Environment and Development, one-third of global investments in agribusiness by private equity funds are located on the African continent. This preponderance can in part be explained by the huge amount of farmland available on the continent. Figures from Zürich-based advisory firm EBG Capital show that the sub-Saharan region of Africa alone offers 590 million hectares of cropland available for development. By comparison, the land available in the rest of the world is about 380 million hectares.
Although impressive in scale, the amount of farmland offered is not the only attraction of Africa’s agricultural sector. Low land prices and other overheads involved in agriculture also appeal. In Mozambique, for example, the cost of farmland is a ninth of that in Russia while monthly wages are about a seventh. Africa, and the sub-Saharan region especially, is also rich in water resources – 20 per cent more plentiful per inhabitant than in eastern Europe, considered a strong agricultural region, and almost three times more more plentiful than in Asia.
!m(/uploads/story/434/thumbs/pic1_inline.png)As the FT notes, based on such factors it’s no surprise that, according to Land Matrix Partnership, as many as 62 percent of all large-scale land purchases since 2000 have been made in Africa. There are however various challenges associated with successfully investing in Africa’s agribusiness sector, including political instability, security of tenure, inadequate transport systems and some additional expenses.
In this regard, agribusiness entrepreneur Mark Terken, who advises the World Bank’s Principles for Responsible Agricultural Investing, told the FT: “You might be able to buy a hectare of land for $300 in countries like Mozambique but each hectare may cost you $1,000 to clear it for planting, add another $200 to $2,000 to develop ‘bulk water’, and finally add $2,000-$3,000 for the irrigation equipment itself.” Mr Terken added that private equity funds touting African farmland investments might find it difficult to achieve the 15 per cent annualised returns being promised by some, particularly in the short term.
The problem experienced by most investors is that farmland investment in Africa is much more complex than generally expected. Although most African countries offer various tax breaks to foreign investors putting capital into their agricultural sector, many private equity funds struggle to make a profit commensurate with their initial expectations. Chief operating officer of private equity agribusiness EmVest, Bobby Console-Verma, agrees that African agriculture is not for investors seeking to make a quick profit. According to Console-Verma, whilst returns of 15 per cent annualised are possible for diversified companies like EmVest investors need to have realistic expectations and be patient.
For investors looking for shorter-term, more straightforward ways to gain exposure to African farmland, the lending market may be worth investigating. The FT gives the example of Capital Bernd Schanzenbächer whose managing partner arranged a 12-month loan for a producer of Macadamia nuts in Mozambique with the funding coming from a Swiss investor unsure of making a longer commitment.
Head of agribusiness at Standard Bank in Johannesburg, Mohit Arora, says that in the past two years
more than a hundred deals have been made in African agriculture. A good example is Olam International. Beginning as a cashew exporter from Nigeria, the company now has sales of €10.7 billion (£8.5 billion), a portion of which still comes from its initial African investment, demonstrating that for this 22-year veteran at least the continent remains a profitable destination for agricultural investments. And, whilst a return on investment needn’t take decades, investors should consider the region’s challenges and timing issues when making an agricultural investment in Africa.
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