Role of commercial investment in agriculture in Africa
-An Investor perspective-
Huge Growth Potential for Investment in Agriculture – Unrealised
The potential for growth in Sustainable Agriculture in Africa is well understood, but has not been realised. Currently agriculture-related industry (in primary processing) accounts for nearly half of all economic activity in sub-Saharan Africa. At the same time, the continent spends $25bn each year importing food (Source: World Bank) and still has significant food risk and nutritional deficiencies in many regions. This is despite the fact that the continent holds much of the world’s potential agricultural land. Indeed, it is forecast by the World Bank and others that by 2030 agribusiness will grow to be a US$1 trillion industry in Africa.
3 Reasons for Unrealised Potential in Investment in Agriculture
- Smalholders: In many Sub-Saharan African countries outside South Africa, agriculture is dominated by smallholder farmers, or is based on operations for export markets. Activities focusing on smallholder farmers have not resulted in major flow of capital into the sector. There are only limited number of small-scale farmer projects that are supported by commercially viable business plans.
- Scale: Many of the business models are not sufficiently scaleable and therefore suitable for growth capital. While, there are many people investing in agriculture at a $1-2 million scale, there is a much smaller number of investors making much larger investments (e.g. KKR’s investment in Afriflora of about $200Million investment in 2014)
- Greenfield vs Brownfield: Many of the agricultural opportunities are greenfield or early stage. However, most investors are looking for brownfield, or existing businesses with track records. In some cases, investment in agriculture is being made where processing facilities are struggling with their security of supply.
5 Ways to Encourage Investment in Agriculture
This is not to say that major investment opportunities cannot be developed. However, investors looking at African agriculture have to consider a number of factors:
- Managing Risk: While “greenfield” investments can be seen as too risky, with the right partners a ‘greenfield’ project can be less risky than an established operation in a poor supply chain.
- Consider the entire value chain: Many investors looking for opportunities in food processing often overlook associated agricultural projects providing inbound supply for the plant.
- Size & Aggregation: Global capital needs to more effective in considering farms at the 500 Ha – 10,000 Ha within the portfolio. This includes developing more effective models for aggregation. It cannot focus solely on established operations at scale or farms over 50,000 Ha farms; which are unlikely to be socially or politically acceptable in the long term.
- Scalability: A more systematic approach for assessing plans for rapid scale-up once proof of concept has been demonstrated needs to be developed.
- Blended Finance: There are many sources of finance. Often these can be overlooked. Projects need to consider the role of vendor finance, development finance institutions and impact investors among others. People need to have a holistic view of the project and consider where an additional type of funding can leverage both commercial and social impacts of the investment in agriculture.
Author, David Lyon of ImpactAgri which creates and improves large scale, sustainable agricultural value-chains. ImpactAgri acts as both principal and project developer, also working globally, acting as advisors to major companies, investors and governments.