October 4, 2021

By Ben Palen, Ag Management Partners

During the past 10-15 years, the amount of investment in agriculture by what are known as NTIs (non traditional investors) has grown from barely a blip on the radar screen to a figure that is undoubtedly well into the tens of billions of dollars. Large institutionally supported funds have poured billions into farmland, followed by ag technology, plant-based proteins, vertical farming—the list could go on and on.

Africa seems to be lagging far behind other regions of the world with regard to the amount of investment from NTIs in its agricultural sector.  To be sure, some good headlines were generated by chatter regarding enormous investments (real or proposed) by Asian and Middle Eastern entities in green field projects in certain parts of the continent, but on the ground, reality remains much different than perception. And, while some well-intended socially conscious investors have promoted food self-sufficiency at the individual level, those efforts seem unlikely to turn the African continent into a significant player in the world agricultural arena.

As someone who has past and current involvement in the African agricultural sector, I have seen firsthand the promises and the pitfalls, and I have pondered the financial risks and rewards of putting money into African projects. Some observations from my experience are set forth below.  The reference points for my thoughts are in large measure the lessons learned from a lifetime spent in various phases of agriculture in the United States, and in some foreign locations.

With the panoply of agtech tools available today, it may be tempting to think that applying such tools in what I will refer to as a “raw” setting would lead to great results. My reply would be—not so fast. The first task is realizing that the data points, such as reliable soils data and historical weather data that are so easily accessible to those of us involved in U.S. agriculture, are simply not available in many instances. The phrase “back to the basics” is shopworn, but it must be front and center for any African agricultural project to have a chance at success.

The second task is realizing that there is “African time,” and then there is regular time. Everything takes longer; while a U.S. farmer can get five quotes for inputs with a few clicks of the computer, that is not possible in Africa. And, when one does get quotes for, say, inputs, that does not mean that they will arrive in a day or two. It might take weeks to get what a farmer in other, developed regions could get on hand in 24 to 48 hours.

The third challenge is having a market for crops grown, and the infrastructure of storage and transportation to get those crops to market in a timely manner.  Coupled with these factors is the assurance of payment for the crops produced.

A further challenge is political risk. Much has been written about this topic in the context of why there has not been more foreign direct investment in Africa. With the history of expropriating land and other assets in some countries, political stability has not exactly been a key selling point for certain African nations. There are signs of hope in this regard, however, and it seems clear that anyone contemplating investment in African agriculture should have a reliable local partner with strong political ties at all levels of government. It also appears that the newer generation of African leaders is taking a more worldly view when it comes to politics, economics, and the realization that their nation’s fortunes must be based on the reality of being a reliable participant in world affairs.

Another challenge is the lack of a trained workforce that is needed for the various levels of a farming operation. That ranges all the way from tractor drivers, to agtech specialists.  In conversations with a native Zimbabwean who is a senior executive with one of the world’s largest farm equipment manufacturers, I asked him to list the top three challenges for the ag sector in that country. At or near the top of his list was education and training for the workforce. He said that there was a general eagerness to learn, and to improve one’s lot in life, but a critical lack of the fundamental elements of expertise needed to handle most agriculturally related jobs.

With all of the above challenges, that begs the question—”why bother with this can of worms?”

The answer starts with the facts that there are (a) large tracts of land that, in many cases, can be obtained for a fraction of the cost of similarly productive land in established regions, (b) plentiful supplies of water for irrigation in some areas, (c) attractive shipping rates to food importing countries in the Middle East and other areas; and (d) a population whose standard of living shows signs of increasing in some parts of the continent.

An African agricultural project should not always be viewed from the lens of current and potential farmland values, That is a fundamental difference from many other regions of the world, where land ownership is secure, and a well-established market provides transparency about land values.  A somewhat common project in African farming is likely to involve a decades-long lease from the government of a nation. While the financial partner in the project does not have an owned asset—land—to book, there is not the risk of owning land that might be seized by governmental authorities. Further, the cost of leasing that land is typically far less than owning or renting land in other farming regions of the world.

For the reasons just noted, most African farming ventures should be treated primarily as an income play, and with the added benefits of providing a means of attaining ESG goals for the financial partners. Those goals can include job creation and export earnings benefits for the host nation, jobs for the citizens, and lots of dollars being spent locally that will have a multiplier effect on the national economy. In addition, environmental goals such as carbon sequestration have potential significance. Unlike established farming regions where sustainable farming practices may have been in place for years, a greenfield development in Africa offers a very low threshold from which to show benefits from such practices. An example would be carbon sequestration. A challenge faced by many participants in that sector is that a farmer who has, say, used no till methods for years, has already made such strides on sequestration that finding a benchmark for improvement is challenging—to say the least. From what this writer has seen on some African projects, land that has never been in agricultural production, and which has minimal vegetative cover, will provide large changes in soil carbon levels once it is developed for farming and good practices are utilized.

As far as the social aspect of ESG is concerned, there is much room for positive impacts by a farming venture in Africa. That could be by providing employment where formerly there were few opportunities that paid more than a bare subsistence wage, setting aside land and inputs for use by local residents to grow more of their own food, and generally improving the nation’s food security. That kind of security goes hand in hand with political stability. And, of course, that relates directly to the security of the investment.

I have performed financial analyses of irrigation development projects in Africa, and compared results to what is typical in established farming regions of the world. Those analyses have been done against a backdrop of climate changes, and especially drastic changes in irrigation water availability in some key producing regions, such as the western United States, and portions of southern Europe. A case in point is alfalfa. Whereas California has for years been a large provider of alfalfa and other forages to Asian and Middle Eastern markets, the current realities of lack of water and climate change, are making for major shifts in sourcing of these, and other agricultural commodities. The cost of water for a typical California alfalfa grower can often be six to seven times higher than those for a grower in, say, Zimbabwe. The “land triage” that seems likely in California (due to lack of water) is going to result in the shift of production of certain crops to regions where water is readily available, and where other production costs are competitive. That suggests an upward trend in overall agricultural potential for Africa.

Another point of comparison is South America. Certain countries in that region are highly competitive with the U.S. for exports of crops such as corn and soybeans. And, clearly, there is expansion potential in some parts of South America. That said, there is increasing concern about the environmental impact of bringing more land into production there, and climate change has put some question marks on the long term reliability of sufficient rainfall in some of the key South American growing regions.

There can be little doubt that Africa, in general, lags far behind many other farming regions of the world by almost any measure. That said, as water availability and environmental concerns impact crop production in other parts of the world, and as a greater recognition of the importance of political and economic stability is apparent among many African leaders today, there are opportunities for agricultural expansion. Alliances among farmers, financiers, and government are in the offing in some African countries, and they likely provide the best potential for successful ag projects (as compared to a stand-alone investor/investment). While in many ways African agriculture lags behind the U.S. and other areas as far as good agronomic practices and the use of ag technology, that can be viewed in a positive light. The return potential from implementing even such generally accepted practices as variable rate fertilization is higher than the norm. Likewise, the return potential—economically and socially—from a trained workforce that attains a higher standard of living—is significant.

Anyone considering investment in African agriculture must have patience.  That is true in all aspects of a project in this region. The lay of the land is different than it was even 10 years ago. Further, ESG considerations favor investments in African agriculture because the “returns” have potential to be far more impactful than in, say, a mature agricultural sector. The political winds have tended to shift towards more acceptance of outside investors. Opportunities abound for NTIs to have a meaningful impact in many ways in African agriculture.

ABOUT THE AUTHOR:

Ben Palen is a fifth generation farmer with experience in many aspects of agriculture, including projects in the United States, Africa, and the Middle East.  The focus on all projects is sustainable practices based on a mix of boots on the ground work and selected use of ag tech tools.

**All views, data, opinions and declarations expressed are solely those of the author(s) and not of Global AgInvesting, GAI News, or parent company HighQuest Group.