Fall in oil prices presents opportunity for African agriculture, says PwC

Agriculture men and carrots

Food security has become a global concern. In most developed markets farming yields have been maximised and there is no great untapped agricultural areas left. On the other hand, some industrialising economies are losing the ability to feed themselves. For example, China is now losing its self-sufficiency in maize.

However, despite a large agricultural deficit, Africa holds the majority of the world’s uncultivated, arable land. In a recent PwC report, titled Food security in Africa – water on oil, the continent’s opportunity to take the lead in agricultural production was compared to Brazil’s a few decades ago, with key advantages including fertile land, abundant water and cheap labour.

“African agriculture is likely to witness a transformation over the next two decades. We believe Africa will see a change similar to that of Brazil over the past forty years. Urbanisation, the rise of superfarms, and the need for food security are key drivers. New investment models tailored for Africa will become increasingly prevalent,” continued the report.

“Advantages in the demand side are rising food requirements, both locally and globally.”

Furthermore, the report argues that the recent decline in oil prices could be seen as an opportunity to develop agricultural production capabilities on the continent.

From oil to agriculture: reversing the resource curse

Much of Africa’s growth story over the past decade was underpinned by strong demand for its commodities. But with the decline in oil prices since the second half of 2014, a number of oil and gas producing economies – such as Nigeria, Ghana and Angola – have experienced a collapse of their currencies. For example, the Nigerian naira has since depreciated by close to 25%, resulting in a number of fiscal and monetary changes that has slowed GDP growth. According to the report, the Central Bank of Nigeria predicts GDP growth in 2015 to total 2.6%, compared to 6.3% in 2014.

However, the depreciation of currencies in these economies also presents an opportunity for the agricultural sector. It could counteract some of the effects of the ‘Dutch Disease’ and ‘resource curse’ many of these economies have been experiencing.

The Dutch Disease describes the negative economic impact of a country’s reliance on one booming export sector – such as oil and gas – which causes an inflow of foreign currency, resulting in the value of the local currency to strengthen against foreign currencies. This makes the country’s other products less price competitive for export, while imports become cheaper.

The Dutch Disease, alongside government mismanagement, is also one of the causes of the resource curse, a paradox seen when countries with an abundance of natural resources end up having poor development outcomes. This has been witnessed in a number of resource-rich African countries.

“Any Nigerian over a certain age will tell you how advanced the country’s agriculture sector was in the 1960s during the early flushes of independence. However, the discovery of oil in the Niger Delta – along with other political and economic factors – helped to weaken established industries such as palm oil, cocoa and rice production,” continued the report.

“Malaysian and Indonesian groups now dominate the palm oil industry; Nigeria has a 7% market share of global cocoa production versus a combined 65% for Côte d’Ivoire and Ghana. Meanwhile, Nigeria imports over 3m tonnes of rice per annum, almost 50% of consumption.”

Today Africa has a US$35bn agricultural deficit, and PwC estimates that Nigeria may account for around 15% of this deficit.

However, while a weaker local currency pushes up the cost of food for consumers domestically, it can also incentivise local production by offering greater returns for domestic producers and exporters. This has been seen in the past with the 1999 and 2001 exchange rate devaluations in Brazil and Argentina, which drove agricultural exports in both countries.

“The collapse in oil prices has forced food security and agricultural development to the top of the political and economic agenda across Africa,” summarised the research.

But “to thrive economically and socially, Africa needs first to deal with its own $35bn structural food deficit before it can play a role in alleviating long-term strategic supply impediments across the world”.