Dateline: Invercargill, New Zealand
Participating in the African agricultural investment boom is not as easy as investing in gold or oil, as it presents the significant challenge of identifying where the next boom will occur and how you can play that boom to become dirty, filthy, stinking rich.
I have no moral objections to looking solely at agriculture as a way to make money.
Sure, I’m not a heartless person who wants to see people starving in the street, but I’m of the belief that the aim of charity should be to make people independent of it.
Giving people food and money for nothing creates a welfare state. I won’t go on a tirade about welfare states because chances are, you currently live or have lived in one.
Africa is a prime example of where decades of charity have made little difference. But how have countless millions of people been dragged out of poverty? Investment, business, innovation and personal drive.
These are the reasons that so many Africans are now joining the ranks of the middle class.
Twenty years ago, you couldn’t turn on the TV without seeing a World Vision ad with a poor starving child on it.
While there are still plenty of people living in poverty, but now it is far more common to see the picture of an African in business attire holding a cell phone.
So, how do you identify the areas that are going to see the most growth? Easy, follow the big boys.
Low agricultural production in Africa is the problem that needs an investment solution. At the start of 2013, Syngenta – a Swiss-based agri-business giant – pledged to invest $500 million in Africa in an attempt to boost its own sales there and to promote more efficient food production.
Now, all caring intentions aside, Syngenta is investing in Africa because they know that is where a boom is going to occur and it will return spectacular profits for their shareholders.
By the year 2050, there is forecasted to be over 9 billion people on the planet, roughly 2 billion more than there is now. The majority of the population growth will be centered in Africa.
UN population growth figures show the African population expanding by 107% between 2007 and 2050 against a global average growth rate of 30%, and only 2% in high income countries.
This presents a tremendous opportunity for entrepreneurs and diligent investors to capitalize on. As people become wealthier, they demand more and better quality food.
Syngenta is a massive global producer of chemicals such as herbicides and pesticides, but the demand for these agricultural inputs in Africa is currently low as African farmers have poor access to funding with decent conditions.
This lack of demand is purely cost driven and will be solved in the near future as more venture capital moves in, driving down borrowing costs.
Syngenta, DuPont and Monsanto are all betting on explosive growth on the continent over the next 30 odd years.
Syngenta will be focusing outside of South Africa, as its competitors have already established a market presence there.
The company’s $500 million investment will aimed at some of the continents fastest growing markets, they include: Kenya, Tanzania, Ghana, Ethiopia, Ivory Coast, Mozambique and Nigeria.
Agriculture now represents almost 65% of all employment on the continent and nearly one third of its total GDP.
The great majority of men and women who work in agriculture earn their income on small farms where the production is just for subsistence. These farms could produce a surplus to sell on the open market but there are two issues constraining production.
One is low yields due to inefficient fertilizer use, lack of herbicides and pesticides, climate change, poor irrigation practices and lack of access to funding on reasonable terms.
The other issue is the lack of an effective logistical mechanism to bring the goods to market. Up to 20% of surplus agricultural production is lost on the continent due to the lack of effective storage facilities and poor roads.
Let’s build these darn roads before the respective governments attempt it.
Individual investors can identify problems like these and invest capital in solving them, reaping the resulting profit. One opportunity to make an absolute killing will be the provision of irrigation systems to the market.
As previously mentioned, poor irrigation practices are part of the reason that surplus crops are not being grown.
In South Africa, irrigated land traded for R$10,000 per hectare in 2011, whilst equivalent dry-land achieved only R$2,000.
By investing in companies that will be providing irrigation equipment to the market, funding the purchase of irrigation equipment, buying or leasing land and installing the infrastructure or introducing equipment to the market, you can take advantage of this truly spectacular opportunity.
As noted before, Africa still has some 700 million people living in food insecurity circumstances, but the continent also has at least 50 percent of the world’s uncultivated arable land.
All the resources exist on the continent to provide for the increased production, the mechanisms and inputs simply need to be delivered.
Of course, we cannot forget that the reason this has not already occurred is because of the involvement of the state. Where ever there is government, there will be some gronk who has never had a real job in their life that insists that regulation and protectionism is the solution. Fortunately, African governments – with all their faults – are beginning to liberalize their markets.
Many Nomad Capitalist readers would be familiar with the World Bank “Doing Business” website. This is an essential tool to use when investigating an area to invest. If you filter for continent, you will see that many sub-Saharan countries are not that easy to do business in, so it takes diligent research to be aware of all the risks present on the content.
Reform of regulations will take some time, but those who get in early will reap the biggest rewards. Following the investments made by the big agricultural giants can help you identify the areas that are most stable to invest in.
These companies will not put billions of dollars on the line in countries that have systemically high risk.
When you’re assessing political risk in any given jurisdiction, it does pay to remind yourself that the government with the most political risk to you as an investor, is that where you live.
