Risk Management in African agribusiness – five common questions from our investors.
Our African agribusiness interests face many of the same challenges no matter what part of Africa, whether in West Africa (such as Gabon), East Africa (such as Uganda) or southern Africa (such as Zambia).
Our approach to successful risk management in African agribusiness uses a systematic and a value-chain approach to ensure that the project becomes integral to the local social and economic community and that yield and market risks are carefully managed and offset by judicious investment in infrastructure, processing and strong access to markets. Clearly, financial and insurance products can help manage some risks, but good design of the business system and strong execution are much more important.
Here we highlight a number of risks commonly raised as concerns by investors in Agribusiness in Africa and our partners and outlines some of the approaches we typically use to manage them:
1. How do we manage commodity price risks?
The products we grow are affected by world markets, production conditions and government intervention (e.g. through import or export restrictions). We carefully choose the crops to be grown taking account not only the agricultural conditions, but also the market access and economic conditions as well, so as to ensure there is a diversification across the project and our portfolio. For example, in countries such as Zambia, we do not just consider the established crops such as maize, we also consider coffee, pecans, macadamia, cashews, among others.
We also favour crops where we can be involved in local processing (including creating enterprises linked to food processing (e.g. pastes, canning, juicing), as well as those where there is a marketing partner able to secure buyers early in the project (e.g. specialist tree-nut companies with good access to growing markets).
2. How do you manage potential political risks?
In emerging markets there is always a risk of political interference in business activities or instability. We manage this by careful selection of the countries in which we work. Also using a structured approach for extensive stakeholder engagement helps to identify and work with those with particular interest and influence over a project.
We strengthen our position by ensuring that all projects are both commercially viable and deliver substantive benefits to the local community and economy. We believe strongly that having developing local entrepreneurs and the local economy, as well as actively demonstrating commitment to local and national government plans is critical to long term sustainable business relationships. For instance, in Zambia the government is looking for “huge investment in the sector especially that which will benefit small-scale farmers”. As mentioned in earlier posts on the ImpactAgri blog, there are a number of models that can be considered to develop these micro/small scale enterprises.
3. What do you do to attract and retain experienced managers?
The success of any project often hinges on having managers skilled at developing, and implementing them. The challenge is ensuring key individuals have the blend of financial, technical and social development skills. We have an extensive network of individual and corporate partners that we can draw on to deliver projects and we are continually looking to extend the network. We also believe that a clear sense of purpose, strong team ethos and a set of shared values are essential to effective delivery of often complex projects.
4. How do you ensure the projected yields be realised?
Agricultural projects by their nature are subject to risks such as weather patterns resulting in floods, droughts, pest and disease infestations resulting in crop failure etc. At the same time, there is a strong link to rural societies: for instance, the current drought in Southern Africa is affecting national food security and therefore the performance of companies. In our projects there are a number of measures we put in place to manage these risks:
- Avoiding dependency on rain-fed agriculture using some of the leading drip, pivot, micro-spray technology
- Design and management of project using diagnostics to ensure best practices are used on farms
- Work closely with local communities to improve their distribution/efficiency of production
- Selective use of insurance products on crops and products.
5. How do you manage the risk of default on contractual obligations?
Agricultural projects involve establishing agreements with banks, customers (e.g. processors, exporters etc.), equipment providers and a plethora of other parties. In any location, there is a credit risk where the counterparty does not meet its obligations. While only working with well-established companies is an approach used by many, it is important to not overlook some of the emerging partners bringing new technologies, investment models etc.
There are, of course, a number of other key issues to consider when discussing risk management in African agribusiness such as managing exposure to inflation and foreign exchange rates, managing cash flow and liquidity.
We would be happy to discuss your particular project or interest in investing or partnering in large-scale commercial agricultural projects in Africa.
For more information, please email email@example.com