November 23, 2015

Duncan Vink UFF Asset Management Manager of Old Mutual Investment Group’s Agriculture Funds

The African agriculture sector hasn’t been without its fair share of challenges in recent years. In South Africa alone, farming has been plagued by issues such as land reform, trade challenges and minimum wage disputes. However, agriculture is still emerging as a sought-after asset class for institutional investors. During this year’s Grow Africa Investment Forum, private-sector investors in African agriculture reported significant improvement in the enabling environment, which comprises a mix of government policy, access to finance as well as ease of transportation and telecommunications infrastructure.

With this in mind, and despite the headwinds, the investment momentum in agriculture is being driven by a number of compelling factors, the most pressing of these being Africa’s food security.

Food for thought
The world’s land and water resources are finite assets that are under pressure from a swelling population. Africa, in particular, has the highest fertility rates of any region at 4.7 children per woman.

The UNICEF report, Generation 2030 | Africa, highlights that while in 1950 Africa accounted for only 9% of the world’s population, today 16 out of every 100 people are African and it is a well-worn statistic that by 2050 Africa will account for a quarter of the global population. Demographic trends are presenting a world that is an ever more African place.

Unfortunately, coupled with this growth in population is persistent undernourishment and hunger that continues to stalk Africa more than any other region globally. According to the United Nations (UN), Africa is expected to be the most challenging region with regards to food security as the continent’s population doubles in the next 35 years. And it is against this backdrop that agriculture – which currently employs 65% of Africa’s workforce – is increasingly seen as the continent’s untapped gold mine.

Source: FAO Food and Nutrition in Numbers 2014

A hungry world
According to the latest publication by the Food and Agriculture Organisation of the UN (FAO), when compared to the production levels of 2006, a 70% increase in agriculture production is needed to feed the more than 9.7 billion people expected worldwide in 2050, 25% of this being in Africa. And as demands on the global food supply soar, the greatest opportunity for agricultural profits is most likely in Africa.

Africa offers 39 million hectares of land physically suitable for irrigation, yet only 7% of this arable land is irrigated (and merely 3.7% in Sub-Saharan Africa), states the Africa Infrastructure Country Diagnostic (AICD). Therefore, despite enjoying some of the richest natural resources for agricultural production in the world, Africa presently spends in excess of $25 billion annually for food import.

There is, however, an increased focus on agriculture-led growth on the continent, with African countries making up eight of the 10 countries that have the fastest growing food sectors in the world.

This focus on agriculture as an economic driver is influenced by a number of socio-economic factors, including the aforementioned population growth, as well as poverty and unemployment. These factors present acute challenges and make unlocking African agricultural potential not just an attractive option, but a necessity. The UN Conference on Trade and Development (UNCTAD) has estimated agriculture’s annual investment gap for the 2015-2030 period at USD260 billion in the developing world.

This context presents a significant role for institutional investors looking for a good capital preservation tool that is also a reliable inflation hedge and has low to negative correlation with traditional asset classes.

Investing in feeding the world
In the current global environment, agriculture is progressively presented as an attractive asset class for a diversified portfolio. Given the recent economic turbulence globally, the low interest rate environment, and a search for safety as well as yield, investors with a long-term horizon are looking to increase their allocation to real assets such as farmland.

Due to the availability of low-valued, premium farmland and agribusinesses on the continent as well as the shortage of locally available capital and skills for agricultural development – agriculture is particularly a viable opportunity for investors seeking stability and higher risk-adjusted returns.

A fruitful track record
When we assess past performance, farmland investments in South Africa have consistently yielded a higher return in comparison to local and international equity indices, the local bond index and local real estate. Compared to other asset classes, SA farmlands have produced higher returns with moderate volatility.

Source: UFF Agri Asset Management

The Impact
According to the World Bank, agricultural investments have a two- to four-times greater impact on poverty reduction than investments in any other sectors in terms of GDP. FAO concurs, with its studies showing a positive correlation between levels of investment in agriculture and food security and poverty reduction in developing countries. In Sub-Saharan Africa, growth in agricultural employment accounted for half of all employment growth between 1999 and 2009, stated the FAO.

Countries such as Ghana, Ethiopia and Burkina Faso have experienced rapid agricultural growth; in some cases outpacing growth in other sectors. In Ethiopia poverty has declined by 33%, according to the World Bank, and agricultural growth has been cited as a main driver. Mali stopped importing cereal crops over the last five years and is rather planning to export 500 000 tons of maize to its neighbours this year.

Other possible success candidates include Nigeria, Senegal, Rwanda, Angola, Zambia and Tanzania, all of which have large tracts of arable, uncultivated land with large rivers that can be tapped for irrigation.

These cases illustrate that African agriculture could, and should, be thriving. Africa not only has the potential to feed itself, but to also become a major food supplier for the rest of the world.

The opinions expressed in this editorial are the authors’ own and do not reflect the views of GAI News.