The underestimated potential of agribusiness in Africa

July 5, 2013 1:24 am0 comments by:

imagesusikuWith the globe reaching 9 billion people by 2050 and food commodity prices climbing to record levels, “investment is essential for the growth of the agricultural sector if there is to be enough food to feed the world population”(AE Investor, 2013).  The African continent, in this sense, seems to be the perfect venue to fill a gap between a skyrocketing demand and a supply that is becoming more and more scarce.  Agribusiness is not always seen as the most attractive sector for investors because of its lower levels of margins, nevertheless  a long term commitment in this sector could become extremely profitable for all players involved.

According to World Bank, Africa holds almost 50 percent of the world’s uncultivated land suited for growing food crops, comprising as many as 450 million hectares that are not forested, protected or densely populated. These numbers alone would be enough to picture quite well the opportunity that agriculture represents.

But despite the immense potential, the agribusiness sector in Africa is often perceived by both investors and local institutions as backward and little profitable. Margins are of course lower than with other natural resources, but several elements and past experiences seem to suggest that agribusiness, if receiving long term support, could not only reduce worldwide starving but could also turn into the driver of that structural transformation so much needed by many African countries and an outstanding growth opportunity for investors.

According to a recent report from African Economic Outlook, the pace of GDP growth all over the continent in recent years has been impressive and is likely to continue, but if we look at the employment-to population ratio, which measures  the share of working age population in active employment, it is possible to notice that it remained virtually unchanged over the last 20 years: from 59% in 1991 to just 60% in 2011. How can these stale figures be tackled?  The example of China, who built its economical success by leveraging on agriculture as the first layer of growth, would be a good example of the steps that need to be taken by Africa as well: by investing in agribusiness in fact, China not only managed to feed its immense population, but also managed to create new job opportunities and make a very important step that allowed the country to become one of the major exporters in food commodities in subsequent years.

But  shifting focus from traditional capital intense sectors(such as oil, gold and diamonds) to job intense sectors (such as corn, rice and maize) could also represent several advantages other than job creation: countries that invest in a wider range of natural resources, tend to have comparative advantages also in a wider range of value added products, decrease their dependence on high-rent extractive commodities and eventually orient themselves towards performance rather than rent seeking.

From an investment point of view, the above points together with the current lack of financing,  seem to demonstrate that there is a scope for investment funds focused on African agriculture, but a long-term non speculative approach seems to be mandatory: if the local governments and private investors will manage to work together to address the current resource constraints and lack of infrastructure on a long term perspective,  the opportunities could be immense both for investment returns as well as for real economical development.

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