Original repost from Emergingfrontiersblog.com
Reposted from The Financial Times
By Brendan Maton
If agriculture seems like the investment story of the moment, then Africa is its most exciting chapter.
One-third of private equity funds specialising in agriculture are focused on this continent, according to analysis by the International Institute for Environment and Development.
Sub-Saharan Africa alone offers 590m hectares of available cropland to develop, according to Zürich-based advisory firm, EBG Capital. The rest of the world offers just 380m hectares. This is key given that cropland use has only increased 2 per cent globally in the past 15 years.
The cost of land in Mozambique is a ninth of that in Russia while monthly wages are little more than a seventh.
Water also exists in greater quantities in sub-Saharan Africa than other regions: almost three times more plentiful per inhabitant than in Asia and 20 per cent more plentiful than in eastern Europe, often considered a strong agricultural region.
No wonder that 62 per cent of all large-scale land acquisitions since 2000 have occurred in Africa, according to the Land Matrix Partnership.
Given such favourable statistics, the only surprise might be why more investors have not turned their attention to Africa.
“You might be able to buy a hectare of land for $300 in countries like Mozambique but each hectare may cost you $1,000 to clear it for planting, add another $200 to $2,000 to develop ‘bulk water’, and finally add $2,000-$3,000 for the irrigation equipment itself,” says Mark Terken, an agribusiness entrepreneur and adviser currently seconded to the World Bank’s Principles for Responsible Agricultural Investing.
Mr Terken, who spent 14 years building up a regional paprika business in Zambia, Malawi and Mozambique, doubts whether the 15 per cent annualised returns promised by some private equity funds are achievable in a short period.
Even Guy Scott, Zambia’s vice-president and a farmer himself, last year aired concerns that the majority of promises made by foreign investors do not materialise. Mr Scott’s point was not that foreign investors are unscrupulous, merely that farming is a complex business while raising capital is about painting the rosiest picture possible.
Like many other African nations, Zambia offers various tax breaks to foreign investors willing to put capital into its biggest economic activity. And yet the struggle of some private equity funds to raise capital proves the point that international investors are not easily convinced.
“The private equity partnerships have an average life of five years but break-even for agricultural investments is seven to eight years,” says Mohit Arora, head of agribusiness at Standard Bank in Johannesburg. “Some funds are turning themselves into operational companies to access borrowing in a more traditional identity.”
Bobby Console-Verma, chief operating officer of EmVest, a private equity agribusiness across a whole range of produce – from cattle to cabbages – in southern Africa, agrees: “We’re thinking of converting into a company because raising capital has been difficult. When we started, we thought investors would be happy at our diversity, and because we also process and distribute. In fact, they’ve liked the geographical diversity [EmVest operates in five countries] but not the breadth of products.”
Mr Console-Verma supports those who argue agriculture in Africa is not for those who want to make a quick buck. He says returns of 15 per cent annualised are possible for a diversified company like EmVest, but investors have to be patient.
This is a familiar refrain from the private equity sector; that returns follow a “J-curve” that delivers the greatest bounty in the final years. One reason to doubt their promise is that for many in Africa, this is their first period of business. They have neither deep roots in the continent nor in the agricultural sector (many of the actual farm managers in southern Africa employed by international funds are white Zimbabweans exiled by the regime of Robert Mugabe).
Over time those roots may develop. But for today, there are many ways for foreign investors to access the Africa agriculture story. Bernd Schanzenbächer, managing partner at EBG Capital arranged a 12-month loan for a producer of macadamia nuts in Mozambique from a Swiss investor that was unsure of making a longer commitment.
Standard Bank’s Mr Arora, meanwhile, says more than 100 deals have been done in the past two years in the African retail food sector alone. One agribusiness giant born out of Africa is Olam International, listed on the Singapore Stock Exchange and a constituent of the DAXglobal Agribusiness Index. Only 22 years old, Olam began as a cashew exporter from Nigeria, and now has sales of €10.7bn. A portion still comes from African cashew nuts, so there is plenty of money to be made on this continent. And it does not have to take decades to arrive.