Capturing Africa’s agricultural potential
By Neil Crowder | Published: 11 January, 2010
African agriculture has become an appealing theme for international investors: large swathes of sub-Saharan Africa offer fertile land, abundant water resources and proximity to transportation links or regional markets. Against this backdrop, it is remarkable that, while less than one quarter of the land suitable for crop production in sub-Saharan Africa is under cultivation, many African countries are unable to meet local food requirements. We believe a sustainable business model for farming in Africa must not only take advantage of the continent’s impressive agricultural potential, but also implement strategies that will make Africans successful farmers in the years ahead.
There are many reasons why Africa has yet to fulfill its agricultural potential. Production farming is a capital intensive, cyclical business. Where local infrastructure is lacking, capital needs increase, impacting returns on investment. Foreign investors typically required a higher return on capital to justify taking potential political, currency and business risks. Such factors have limited foreign investment to date.
Governments are increasingly receptive to international operators who wish to cultivate land, and they are increasing related infrastructure spending. Nevertheless, building a viable business model remains a significant challenge.
While transactions involving large-scale acquisitions by overseas operators have taken place, these are often sponsored by foreign governments and appear to be exploitative rather than cooperative. At the other end of the spectrum, models based solely on harnessing small-scale indigenous farming output may be viable but are unlikely to increase production at a national level. Models that combine a commercial farming approach, underpinned by significant capital investment, with local small-scale farming have the potential to develop the African agricultural opportunity in a sustainable and profitable way.
In our view, several factors are critical in creating a sustainable African agricultural business. First, there is a need for scale. Larger farming operations can lower the costs of production. Moving up the value chain into businesses related to production, including storage, milling and transportation, can reduce the volatility of returns. Larger operations can attract experienced operators who are able to introduce valuable farming techniques. Our research suggests that top farming talent is capable of producing crop yields four times greater than the African average, with substantially lower volatility.
Second, it is our view that large-scale agricultural investment must be made in conjunction with efforts to improve returns for small farmers. Efforts should be made to improve regional access to storage and transportation. Education and skill transfer can have economic as well as social benefits within the local community, while smaller farmers can take advantage of improved local and regional infrastructure, including access to storage and transportation. This community-based approach to developing agricultural potential can improve long-term investment prospects by expanding the local market and increasing the community’s ability to attract investment.
Finally, we believe that investors in African agriculture must contribute to solving Africa’s food crisis. Despite the available resources, most countries in sub-Saharan Africa are dependent upon food imports to meet the basic requirements of their populations. At the same time, population growth within Africa is three times the global average. Food prices in central African markets are often significantly higher than global prices due to poor infrastructure. We do not believe a sustainable investment climate for agriculture can be created without addressing these needs and serving the local markets.
Recent investment returns in African agriculture have been unattractive. We believe this is a result of poorly developed business models, combined with a negative economic environment and the recent weakness in commodity prices. However, African and global demographic trends are positive. Our analysis of several current opportunities suggests that a well-structured operating plan combined with proper execution can generate a return on investment which is internationally competitive. Additionally, we have been encouraged by our recent experience with governments who realise the potential positive impact of large scale commercial farming and are creating an investor-friendly environment.
At Chayton Capital, we are investing in sustainable agricultural ventures in Africa. We define sustainable investment as community-based, technologically advanced and environmentally friendly. We believe that the long-term success of agricultural investment depends on prioritising Africa’s food requirements and we see an opportunity to create agricultural companies that meet the return requirements necessary to attract foreign capital and to ensure that the many opportunities are developed in a sustainable way, contributing to the future prosperity and well-being of the people of Africa.
Neil Crowder is managing partner at Chayton Capital (www.chaytoncapital.com)