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Agribusiness In Africa: Investor Reveals Which Areas Hold The Most Potential

Nigeria Student Forum / General Discussion / Agribusiness In Africa: Investor Reveals Which Areas Hold The Most Potential

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Sani Ibrahim
Abubakar Tafawa Balewa,University
Agricultural economics and extension
100Level, Nigeria.
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AgDevCo is an impact investor specialising in agribusiness
investments in sub-Saharan Africa with a portfolio consisting of
over 40 active investments in production, processing and
distribution companies. How we made it in Africa speaks to
Chris Isaac, chief investment officer at AgDevCo, about the
continent’s agribusiness opportunities and the investment
lessons he has learnt.
Which agribusiness sub-sectors in Africa are you most
enthusiastic about from an investment perspective?
We have been involved in many ventures over the past
decade. We’ve learnt a lot of lessons from our investment
mistakes and successes, which has led us to focus on a few
areas where we see the greatest potential.
The first is tree crops, particularly avocados and macadamia.
There is significant – and still growing – global demand for
these crops, and if you can provide the right quality into the
international supply chains, then it’s a good business. There
are some risks, as there are major new plantings happening in
Africa and around the world because prices are good at the
moment. However, there are advantages to having export
crops that bring in dollar revenue. Southern and East African
countries have the possibility of being globally competitive
because they can hit particular seasonal windows, they’ve got
the right agro-ecological conditions, and you can build
profitable new industries, as we’re seeing developing in
Mozambique and Malawi.
Another area is livestock for supply to domestic markets,
which plays into Africa’s demographics with an emerging
middle class, increasing affluence, and a switch towards more
protein-based diets. We’re doing quite a lot in poultry,
including some innovative work that provides improved breeds
to small-scale farmers. We also have investments in pig
breeding.
The third sub-sector would be high-quality, competitively-
priced basic foodstuffs. African consumers will buy good
quality, locally-produced products if you can come in at the
right price point. We’re currently involved in maize meal
processing and groundnuts. You can find success in this area
if you can assure the consumer the food is safe and if it’s
well-packaged and well-branded.
Are there any areas you would be hesitant to invest in?
We’ve found you really need to know what you’re doing if you
are going into large-scale production of commodity crops –
like maize, soya or rice. These are relatively low-margin
commodities where there is global competition and significant
economies of scale (especially if you look to South America or
Asia), so you really need to be sure that you can be an
efficient producer and you’ve got the necessary scale. You are
also sometimes dealing with unpredictable policy
environments, where there may be intermittent export bans or
changing tariff regimes, so primary production of low-value
commodity crops is really difficult. It can make sense as part
of a strategy where you’re vertically integrated and you’re also
involved in the processing, but we’ve found it very challenging
to make a success of doing straight primary production of
those crops.
A similar challenge is if you move into, say, tomato processing
or cassava starch – again, you’re taking on global suppliers
who often benefit from subsidies, which makes it very difficult
to get the cost of production below that of imports. It can be
very tough to make those models work.
Explain the long-term impact of Covid-19 on Africa’s
agribusiness industry.
We don’t know, is the honest answer. So far, the agriculture
sector in Africa seems to have weathered the storm
reasonably well. As one of our non-executive directors, Sir
Paul Collier, has said, we are operating in a situation of
“radical uncertainty”, and so all you can do is try and design
strategies that will be more or less robust regardless of the
pandemic’s outcome.
Initially, there was quite a lot of obstruction to logistics –
borders closing, congestion at ports, supplies not going in or
out – which seems to have eased. I would be surprised if we
were to see further lockdowns. We were concerned earlier in
the year that this was really going to hit our portfolio quite
hard; we haven’t seen that yet, but I don’t think anyone knows
what is going to happen over the next year or so. Hopefully,
growth in the agriculture sector will be able to continue, as it
has done remarkably well relative to other parts of the
economy thus far.
In a sense, we are dealing with this type of uncertainty in
agriculture all the time. You never know if a harvest is going to
fail or if prices are going to collapse, so it’s one reason why
you need an investment approach that is long-term, flexible,
and that allows you to ride out the bumps that will inevitably
come.
Covid-19 has focused attention on the fact that the continent
is a net importer of food products, which needs to be
reversed. It accelerates the trend toward orientating
businesses to cater for growing demand in local and regional
markets. That said, I don’t think it completely changes the
game, and we’re not expecting a complete breakdown in
international supply chains. You still have to focus on being
internationally competitive and be able to deal with the fact
that chicken can be imported from Brazil to southern Africa at
very low cost and rice processing costs in Asia are a fraction
of what they are in Africa.
Various stakeholders have highlighted the potential for
African agribusinesses to tap into the global health and
wellness trend by exporting organic products from Africa to
Western markets. Do you agree that this is a good
opportunity?
At one level, yes. There is value if you have full traceability
back to the farmer who supplied the product, and can be sure
that banned chemicals haven’t been used, coupled with
sustainable and equitable trade relationships with farmers.
For example, we’re involved in sourcing organic cocoa from
farmers in Sierra Leone . This achieves a premium in the
market, allows us to share more value with the farmers, and
it’s a good business. You could see this happening in coffee,
tea, and some of the other traditional export crops, which are
otherwise very low margin. If you can show consumers they’re
getting a quality product and they know the farmers are
getting a fair deal, I think there is a willingness to pay for that.
However, if you shift focus to niche crops – such as
superfoods and that sort of thing – the challenge that you face
is how big the market demand really is and to what extent you
can supply that market and earn a reasonable margin without
having to invest in a sophisticated marketing operation. Some
people do this brilliantly, but they are really marketing
businesses rather than farming businesses.
We’ve found that in order to be successful in these markets,
you need a certain scale to be able to build a network of
farmers and suppliers, and ensure that the company is going
to be sustainable, profitable, and therefore able to maintain
those relationships with farmers over time. There is a risk with
new crops where the level of demand is not proven yet, and
we’ve seen too many businesses spring up for a few years, but
then don’t manage to achieve long-term sustainability, which
risks farmers being left without a market.
What other agribusiness trends are you seeing in Africa?
Besides increasing domestic demand for better quality food
and more protein-based diets, we’re seeing companies
realising they need to think about vertical integration. The
more successful players are becoming involved all along the
supply chain in order to ensure end-to-end quality and
consistency of supply. Currently, you can’t always rely on there
being a steady supply of raw materials – for example, quality
feed, if you are involved in the livestock sector. As markets
mature, I think you’d see more specialisation again, but right
now vertical integration – either through companies building it
themselves or acquiring complementary firms – is a sensible
strategy.
Which African country are you most optimistic about?
One country that is perhaps under the radar but where we’ve
had great success is Malawi. It has a relatively small
economy, but a history of commercial agriculture in tobacco,
sugar, and to some extent tea, and an investment climate that
is very good for agriculture. There’s also a strong overall
supportive environment; Malawi has a solid legal system, it’s
relatively painless dealing with the authorities, and you can get
things done. We started investing there about eight years ago
and have businesses in poultry, macadamia, sugar and
peanuts that are all doing well.
Describe one of the investment lessons you have learnt over
the years.
Perhaps the key lesson as an investor is getting the balance
right between sensible caution and being decisive. In the early
days of my career, there was perhaps a tendency to see every
opportunity as exciting and I might have been tempted to give
benefit of the doubt to a business plan. But then as you get
more experience, you see more, and you become a little more
sceptical. The thing is to not go too far in that direction – it’s
too easy to start saying “no” to every opportunity. There are
always risks and at some point you have to take the plunge
and say “yes”.
One thing that is challenging in the African agriculture sector
is that you have to make decisions without perfect
information. We are often backing companies that are doing
pioneering things and who are the first movers. So, you’ve got
to do your due diligence and you can try to look at things from
every angle, but at the end of the day, you do have to be
decisive and trust your judgement. You won’t get it right all of
the time. You are most likely to succeed if you build a team
with experienced people who have seen what works and what
doesn’t on the ground. We’ve also found that, as an
entrepreneur, it’s important you have a business model that
incorporates flexibility and allows you to course correct as you
go along in order to manage uncertainty.

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