09/05/2023
Investing in African Agribusiness
Introduction
I'd like to welcome you to this series of articles about investing in African agribusiness. You have probably opened this page because you have an interest in agriculture and the food sector or you have seen the headlines around the world concerning food insecurity and afterwards, you did a google search concerning regions of the world with the most arable land and freshwater sources and this search brought you to Africa and eventually led you to this page.
Whatever, the route you took to get here, I am pleased that through our small efforts as a company, we can highlight the fantastic investment opportunities on the continent of Africa and provide potential investors with a roadmap of how they can navigate what is still unfortunately a very challenging investing terrain called ‘Investing in Africa’.
As the first article in this series on agribusiness, I will be highlighting the opportunities in this sector within Africa and then in subsequent articles, we will discuss various strategies to invest in this sector.
Throughout my writings, I will be speaking from three perspectives: as a business owner, a policy maker/professional advisor and an investor. The reason for this is that I have had the incredible opportunity to participate in all three of these areas with confidence from a position of personal, past and current experiences within these sectors.
First as a business owner, within this, I will be discussing entering these sectors as a business owner/founder/ entrepreneur that is primarily concerned with making money in Africa.
Second, as a professional adviser/ policy maker. Within this perspective, I will be speaking about how these sectors can be optimized, risks managed and the challenges of balancing what can sometimes be very challenging choices between what is best for international investors versus the needs of the local populace.
Thirdly, as an investor; I will be speaking about the various approaches to investing in Africa, whether investing as an individual, a company or even a fund management entity.
We will also consider the various strategies, structures and asset classes that could work for the various types of investors as well as risk management techniques.
With this approach, anyone can find themselves somewhere along the spectrum and for those of you that fit into more than one of these categories, then your chances of success has also increased and indeed, my plan is for those who are professional advisors and entrepreneurs to enter the third category as an investor.
This will drive development in the continent and will also dramatically accelerate the growth of your personal net worth.
What is Agribusiness
When we speak about agribusiness, we are speaking about the commercial process of ‘Farm to Plate’.
There are many processes that takes place to put seeds in the ground, all the way to the time that products are on someone’s plate and most often far away from the nation where that product was first planted.
Within agribusiness, we look at the business intelligence that drives both the supply and value chains and with this, we will know that when we hear phrases like ‘food insecurity’, we understand that one or more of the links of the supply chain has been broken and where these problems arise, they also give rise to business opportunities to those that can create solutions.
Typical Food Supply Chain
A typical food supply chain will consist of the following.
• Primary Agriculture
• Transportation
• Processing
• Storage
• Wholesale Distribution
• Retail Distribution (supermarkets, shops, HORECA (hotels, restaurants, catering).
Depending on the region concerned, there will be various weaknesses in the system.
An example is Ukraine, which has always been very strong in primary agriculture, particularly in commodity products like wheat and sunflower and were making great strides in food processing before the war.
As a result of this strength, many development finance institutions investing in Ukraine, focused only on primary agriculture and yields grew exponentially every year, but this growth highlighted and exacerbated the problem of transport infrastructure in Ukraine.
This is because the majority of the crops grown were for export, but they needed to be delivered to seaports, and the only options were trucks and a very unreliable railway infrastructure that was operating beyond its capacity.
The only other option was by road with trucks, and this had a very negative impact on the roads as well as the environment. When the products finally arrived at the port, there were additional difficulties to overcome because the ports had an excessive number of goods but relatively few storage facilities.
The net effect of these was the price of transportation which made Ukrainian wheat uncompetitive and, in many cases, the quality suffered because of the challenges of handling, storage and transportation which resulted in large amounts of Ukrainian wheat rejected by some of their main buyers like Egypt and several of the Gulf nations.
Therefore, if I was investing in agribusiness in the Ukraine, I will be looking to invest in a solution for the challenges of transportation and as a professional investor, I would have been looking at raising capital for a fund that invests in Ukraine’s transportation infrastructure, specifically focusing on climate friendly food transportation systems.
Even in more developed markets, there are also more advanced opportunities like last mile distribution and as we saw during the COVID lockdown period, the food supply chain in developed markets are far too optimized with the application of what are called JIT (just in time) systems.
These systems were not able to withstand shocks to the global food supply chain, this is another area where opportunities for investments remain.
For Africa, there are two main challenges (amongst a host of other smaller but equally important problems) in the food supply chain that acts as bottlenecks, and these are post-harvest losses and a significant lack of food processing facilities.
The former is much more critical than the latter and should be the priority. This can be improved to a large extent by capacity building through training for farmers on correct harvesting and handling techniques and a more optimum amount of storage facilities.
With these in place, the groundwork will be ready for more investors to invest in primary agriculture, especially when warehouses and storage facilities can be linked to financing through mechanisms for the trading of warehouse receipts.
Sectors Involved in Agribusiness Food Supply Chain
In addition to the supply chain shown above, there are many sectors that serves the agribusiness sector.
• These include the following:
• Agricultural Inputs (seeds, fertilizers)
• Machinery
• Education and Research
• Agricultural Technology
• Financial Services (banking, insurance, fintech, trade financing)
• Logistics (packing, transportation, warehousing)
• Processing Engineering
• Risk Management
• Marketing and Sales and much more.
For agribusiness and food supply chain to work, financing is critical, but this financing cannot be general because of the inherent risks in the sector and hence, specific financial products have to be created for each specific part of the supply and or value chain.
I briefly mentioned warehouse financing, since this is one type of financing with defined risk parameters. We also have inputs financing which relates to seed and fertilizers, as well as contract farming through which financing can be released, together with trade financing, which can fall under the broad heading of commodities financing. Lastly, we have venture capital for specific technological applications like biotech, insurtech, fintech and agtech.
Conclusion
These topics will be discussed in much greater depth as we move forward, but a significant portion of the difficulty associated with financing this industry, particularly in Africa, is simply due to the fact that financial instruments are not specified enough, the outcome is unclear, and the risk parameters are quite broad indeed. We will go into much more detail in the coming weeks and I look forward to speaking more on such topics.
Kind regards,
Evans Osemwegie
