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Africa Insights – Investments in agri-production and cold chain logistics to reshape the future

Africa by right should be one of the great bread baskets of the world, but despite boasting roughly 60% of the arable land on the planet, barely a fraction is being fully utilised. The continent’s tradition of small-scale subsistence farming is, however, rapidly changing and enjoying an unprecedented boom in foreign agricultural investment over the past two decades as global firms diversified into emerging markets. At the same time, improvements in digital technology have made it easier for rural operations to function and for a growing class of wealthier farmers to access financial, insurance and advisory services. As Africa’s population continues to grow and urbanise, food production and processing will take centre stage along with opportunities in other auxiliary industries, such as cold chain storage and food processing. These developments are all evolving against the backdrop of depleting water resources, skills deficits, and tough political and legislative environments. With these in mind, understanding the investment climate of Africa’s agriculture sector will prove imperative going forward.

Liberalised markets create a boom for Africa’s cash crop agriculture

Africa’s traditionally ambivalent stance to the global agricultural industry has shifted significantly since the start of the millennium, prompting a pivot away from food self-sufficiency towards a greater share of the world’s cash crop production. This change has been further accelerated by more systemic shifts in African society, as local populations have become larger, wealthier and more urbanised. Between 2007 and 2017, the continent received US$48 million in foreign direct investment in its agricultural space, half of which in turn went to the development of supply inputs like fertilisers and pesticides to the greater benefit of the industry as a whole. More than 420 agreements comprising 10 million hectares were completed between 2000 and 2016, with one of the largest investments in Africa to date from Indian firm Siva, which invested US$2 billion in Cameroonian palm oil plantations in 2011. Another source of growth has been the expansion into Africa of supermarket conglomerates, such as Carrefour, Lulu and Shoprite, and fast food chains, including KFC, McDonald’s and Nando’s, which have promoted the development of the local agriculture space through local supplier networks and out-grower schemes.

Emphasis on agriculture as a key economic sector grows

In stimulating further growth, African governments have promoted the industry as a vehicle for job creation and improvements in welfare in rural communities. Numerous partner initiatives between African states, the African Union and foreign stakeholders have helped facilitate foreign investment in the agricultural sector. Among these is the so-called African Marshall Plan, a German-led initiative to create 20 million new jobs in Africa annually with a specific focus on sustainable agricultural development. Similarly, the G20 Compact for Africa promotes focused private sector developments in Africa and includes the Alliance for Food Security and Nutrition Growth in Africa as its partners in the agricultural space. African nations are increasingly subscribing to the Comprehensive African Agriculture Development Plan (CADP), which aims to improve food security and financial returns for local farmers through public investment in the local food industry.

Cocoa beans drying in Southern Ghana. Image courtesy: Francesco Veronisi/Flickr

Prompt government action creates space for post-pandemic economic recovery

The stronger emphasis on food production and agro-processing over cash crops is a deliberate move. Though Africa now plays a vital role in many global commodities markets, and has created enormous profits for certain industries, it is still debatable whether this has been worthwhile for producers on the ground. Self-sufficiency in terms of food production had gradually been abandoned as a continental policy since the 1980s, with the focus instead shifting towards highly marketable commodities. The problem observed in crafting this strategy was that African countries funded their industrialisation efforts and were prevented from investing in infrastructure through excessive debts, leading to an overdependence on a few key cash crop industries. By 2019, half of Africa’s agricultural industry comprised cash crops like cotton, cocoa, palm oil and soybeans. The case of cocoa in West Africa is one such area, with Cote d’Ivoire and Ghana being the dominant suppliers to the multi-billion dollar international confectionery industry, however, it has also resulted in a heavy cost in terms of environmental degradation, widespread use of child labour and the impoverishment of local farmers. West African governments, cocoa industry bodies and the European Union (EU) are actively pushing for legislation that will see wide scale regulations implemented to curb systemic issues like labour exploitation and deforestation, but many experts and industry insiders agree that the best solution is for local cash crop production to dramatically decrease in favour of diversified food crops.

Sources: Science Direct, Copernicus Organisation, CG Trader; 2017-2020

Africa positioning to provide the food of the future

Africa’s agricultural potential remains largely untapped, but given sufficient investment the continent could provide an additional 20% to the global supply of grains and cereals. While the globalised economy utilises only a handful of staple foods for most of its food production, African agriculture still utilises dozens of unique foodstuffs that are yet to reach their full potential in the global market. Two notable examples are cassava, a tuber similar to sweet potato, and fonio, a type of cereal grown in the Sahel; both are particularly unique as they are naturally gluten free. Despite the potential of these products, they have hardly been industrialised, which offers favourable opportunities to early market entrants interested in disrupting the global health food market. Though positive, these growth opportunities are not universal and require a cautious approach on the part of investors. Africa’s public image as an endless reservoir of potential agricultural land is a little misguided if one considers that much of this land remains inaccessible either due to infrastructure shortfalls or legal barriers. Instead, it is likely that those African countries with already existing agricultural industries and access to rail, road and port infrastructure will be best able to navigate up the value chain.

Industry growth will rely on an extensive cold chain network

Successful production ultimately relies on the quality of supply chains that service agricultural businesses and distribute their products. The reason why many African agri-operations have relied primarily on the export of raw unfinished products is due to the lack of supporting industries necessary for adding value in the supply chain. West Africa has no confectionery industry in part due to the absence of cold chain storage capability for domestic dairy production, thereby nullifying the comparative advantage of being the world’s premier cocoa producer. Across the continent processed and frozen foods are scarce, especially in rural areas due to lack of local cold chains that can keep goods refrigerated. Estimates note that anywhere between 40% and 60% of Africa’s produce goes to waste before it reaches the end customer. Cold chain development is thus an essential step in developing both local food security strategies as well as the ability to export abroad. To this end, Rwanda University in partnership with local governments has launched the African Centre of Excellence of Sustainable Cooling and Cold Chain (ACES), which seeks to promote the roll-out of sustainable cold chain solutions across the continent. For a successful case study, investors need look no further than East Africa, which has now become a dominant exporter of cut flowers to the EU thanks to local investments in cold chain networks.

A retail worker in Uganda. The spread of supermarket franchise chains across the continent has played a key role in fostering growth of the local food market. Image courtesy: Muzungupeter/ WikiCommons

Mechanisation and digitisation set to play their part

In parallel with the production and distribution chain, there exists a host of related industries that could serve to bring African agricultural efficiency in line with global standards. Outside of South Africa and a small number of North African countries, there is a chronic backlog in the use of irrigation techniques and mechanised equipment, such as pivot irrigators, tractors, harvesters and seed drills among others – emerging local farmers are an ideal market for these. Furthermore, even the most established farmers on the African continent have done little to embrace the spread of digitisation currently disrupting the global agricultural market, chiefly due to lack of knowledge and finances. This is a major problem as the gains in efficiency brought about by automated data collection and monitoring systems are enormous. Africa’s unique circumstances make it more amenable to these offerings than some would at first suspect. The widespread adoption of mobile devices creates a perfect touch point for digitisation providers to offer financial, insurance, data collection and advisory services, as demonstrated by successful startups like E-soko in Ghana among others.

Sources: World Bank, Food and Agriculture Organisation, Metropolis, 2018-2020

Environmental degradation and public health must be front of mind

Externalities pose significant danger for local agricultural operations. Decades of mismanagement and over-exploitation of resources has created systemic problems like aquifer depletion, soil pollution and erosion, and exacerbated public health risks from zoonotic diseases, while climate change has only served to accelerate many of these harmful processes. In South Africa’s rural Eastern Cape province, overgrazing and soil erosion have made farming at scale practically impossible. Similarly, in the Western Cape winelands water levels have declined so dramatically in recent years that it prompted experts to warn of an imminent Day Zero, on which piped water would no longer be locally available. The 2014 Ebola virus outbreak in West Africa was linked to locals ingesting Ebola-infected monkeys made accessible due to clearances of wilderness for farming. Future investments into African farming will need to address these issues by carefully devising how operations can be sustainable and regenerative to their surrounding environment.

A woman stands next to an empty waterhole in Mozambique during the 2016 drought. Such erratic water shortages will be an ongoing systemic risk for the industry in the years to come. Image courtesy: International Federation of the Red Crescent/Flickr

Legislative hurdles and public suspicion will continue to pose risk

African countries have traditionally been lacklustre in allowing full ownership of local land by foreigners. While a degree of liberalisation has taken place since the 1990s, foreign companies are still obligated to work through local partners in securing access to property, which poses the risk of compliance issues. This is also reflective of the broader climate towards foreign business interests; local agriculture investment is a particular sore point as it conjures up close parallels to the continent’s painful relationship with its colonial past. Large-scale purchases of local farmland by foreign interests in countries such as Madagascar and Tanzania among others have frequently been described by local media and academia as “land grabs”, highlighting the extent of local suspicion. In South Africa, the government has sought to progressively limit the purchase of land by foreigners and has pushed for legislation to allow for the expropriation of property without compensation, citing the land needs of the indigenous population. Beyond these political uncertainties, companies also have to wrangle with extensive local supply requirements, which can prove an obstacle for efficient operations when local service provision is not yet up to standard.

 

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