Investment in African Ag
Investment in the agricultural sector of countries in Africa has been a hot topic of discussion the last several years, although the volume of investment compared to worldwide trends seems to have been relatively small. Movement on this investment front is continuing, but there hasn’t been much of an improvement in the risk involved.
In a late June ranking of country risk, only five countries were ranked as a low risk investment country—South Africa, Ghana, Botswana, Namibia and Mauritius.
The ranking of countries on the continent was produced by Euler Hermes, which asserts itself as the world’s leading provider of trade credit insurance, monitoring risks and opportunities for agriculture-related businesses throughout the world.
“For the last few decades, Africa has lagged far behind other world zones when it comes to foreign investments due to an overly high level of risk associated with the African economic and business environment,” explained Bruno Goutard, sector economist for France-based Euler Hermes’ Americas office.
“But the trends in global commodity markets (a middle-longterm price increase) have become strong incentives for investing in Africa. Nevertheless, in addition to the noticeable technical and management issues related to the agriculture sector, investors still have to deal with the challenging business and economic environment in a number of African countries.”
TANZANIA SELF PROMOTION
Even though some African countries are strongly encouraging investment, such as Tanzania, there are concerns. Tanzania has been issuing announcements begging for investors to check out its opportunities, but Euler Hermes recently ranked the country’s political and, therefore, its investor risk as medium/sensitive.
The Southern Agricultural Growth Corridor of Tanzania (SAGCOT) is a joint public-private initiative to boost agricultural output in the country, which is a prime agricultural zone of Africa. Information explains that SAGCOT is encouraging livestock, sugarcane and rice segment investment and development.
“Commercial investors in the corridor stand to gain from complementary investments by the government, donors and other private investors in infrastructure, input-supplies, herder training, finance and so on,” according to the promotional brochure from SAGCOT. How much is hype or over promise?
The Tanzanians know what to highlight with promises and claims. Overstating reality is normal for any government. The southern agricultural corridor seems like a miracle growing area—“major river systems; ample rainfall and sunshine hours; rich alluvial valleys for rice and sugar; rolling plains for maize, sisal, oilseeds, ranching; cool highlands for tea, coffee, horticulture; lush tropics for tree crops—cocoa, palm, timber.”
The corridor’s infrastructure sounds just as superior—“International highways connect all major agri-zones in (the) corridor to main consumer markets in Dar, Arusha, Nairobi and Lusaka; international port and airport at Dar with direct connections to Middle East, Asia and Europe, second international airport to open in Mbeya; main power grid runs through corridor, with several major hydro projects already in place and potential for agri-based power producers to supply directly to grid.”
Tanzania has described itself like the Garden of Eden for investors, but seeing would be believing. It is no secret that food production suffers in emerging nations because of limited mechanization in farming, poor harvest techniques, inferior storage and poor transportation. Investment in an emerging country means overcoming these problems.
Trade or export is a major driver in decisions by investors. Private investors want return from marketing crops, and government backed investors or Sovereign Wealth Funds are interested in establishing production to supply their home country.
U.S. INTERESTED IN EXPORTS TO AFRICA
The point of view of U.S. agricultural commodity/product organizations is to increase U.S. exports more than encourage investment. The U.S. government is looking for a positive trade balance for the U.S., rather than the African nation.
A trade mission to promote U.S. agricultural trade and investment in sub-Saharan Africa conducted Sept. 16-20, launched the U.S. Department of Agriculture’s Sub-Saharan Africa Trade Initiative, which aims to expand U.S. agricultural commercial ties in the region.
Delegates traveled to Mozambique “to learn first-hand about the region’s rapidly evolving market conditions and business environment—information that will enable agribusinesses to develop export strategies for sub-Saharan Africa.”
The mission included 18 U.S. companies and 16 U.S. agricultural commodity trade associations that represented a variety of agricultural products including snack foods, beverages, fruit and nuts, agricultural machinery and more. They met with African buyers from across Sub-Saharan Africa.
“Sub-Saharan Africa’s strong economic outlook, growing middle class and surging demand for consumer-oriented foods creates a promising market for U.S. food and agricultural products. Over the past decade, U.S. agricultural exports to Sub-Saharan Africa increased by more than 200 percent. Last year, bilateral agricultural trade between the United States and Sub-Saharan Africa totaled more than $4.75 billion,” USDA noted.
Gross Domestic Product (GDP) is a number to look at when figuring if countries have the businesses and consumers that are able to purchase imports from the U.S. or elsewhere. Euler
Hermes’ Goutard notes that the African nominal GDP doubled between 2005 and 2012, a growing economic path which was similar to Asia. In 2012, the African regional GDP, as estimated by Euler Hermes, will be $2 trillion, which will be 2.8 percent of the world GDP. A closer look shows that 15 nations account for 85 percent of Africa’s GDP. The leaders are South Africa, Nigeria, Egypt and Algeria.
INVESTMENT ACTIVITY OUTLOOK
Source: Euler Hermes Goutard explained the investment activity occurring during the last few years. “To a large extent, the agriculture sector has raised the interest of investors over the last few years due to a couple of factors. First, soaring commodity prices fueled by a global increase in demand primarily from emerging countries (growing middle class, change in consumption habits, etc.) and biofuels production (and therefore land values) have enticed investments by private companies. Those companies have sought to expand their production capacities or to follow a pattern of vertical integration. In addition, there is increased interest from financial investors, which have expectations of financial returns generated by the mounting prices of arable lands in this sector.”
Euler Hermes also provided a visual descriptor of the annual change in investments in African agriculture along with projections through 2015. The numbers aren’t indicating a rush to invest in African agriculture. Although Goutard reported that “more than 60 percent of the local (African) investment promotion agencies see agriculture as the most promising sector to attract foreign direct investments in their own country during the 2013-2015 period, ahead of the mining, quarrying and petroleum sectors, according to the United Nations Conference on Trade and Development.”
Source: Euler Hermes
Goutard said, “The trade prospects appear to be buoyant for commodity-rich and coastal economies.” He provided an analysis that shows estimates for export gains and import gains by selected countries during the next 10 years in billions of dollars. (See the country map of Export and Import Gains.)
Euler Hermes provided another graph that shows the total investments estimated for 2012 in a number of African countries (i.e. the percentage of the investment in the country as it relates to the country’s total GDP).
Source: Euler Hermes “Being fueled by financial inflows generated by booming commodities’ markets,” Goutard said, “most African countries have enjoyed continuous economic growth that has spurred and will spur domestic investments. We forecast that these investments will be crucial growth drivers in Africa in the coming years and will provide benefit to a large spectrum of sectors not related to commodity markets.”