Standard Bank analyst Simon Freemantle recently produced a series of five research papers on the trends powering Africa’s economic growth. During the course of the week, How we made it in Africa will examine each of these five trends in more detail. In our fourth article, Freemantle discusses the growing interest in Africa’s agricultural sector.
Concerns around the earth’s ability to nourish a population of 6 billion people, expected to rise to 9 billion by 2050, are increasingly abundant. According to the UN’s FAO, food production will have to increase by 70% to feed the globe’s larger, more urbanised, and more affluent population, by 2050, necessitating a total average annual net investment in developing world agriculture of US$83 billion.
Much of the new demand for food continues to originate from the developing world’s rising, and increasingly affluent, population. For many emerging markets, rising demand is being met with diminishing local resources – most principally arable land and irrigable water – placing pronounced strain on local governments. In China, which is home to 20% of the world’s population and less than 8% of its arable land, total cropland is expected to decline from 135 million hectares today, to 129 million ha in 2020 (120 million ha is considered the “red line” for Chinese food security). Meanwhile, in large part due to rapid urbanisation and excessive water use by China’s industrial sector, almost half of China’s cities face water shortages.
Attention is increasingly turning to Africa
Naturally, as nations seek external sources of nutrition, focus is narrowing on those regions which still have large untapped agricultural potential. No region (with the exception to an extent of Latin America) epitomises this residual allure more than Sub-Saharan Africa. It is estimated that over 60% of the world’s available and unexploited cropland is in Sub-Saharan Africa.
While water scarcity is increasingly prominent in most North African, and some Southern African, nations, for much of West, Central and parts of East Africa, renewable water reserves are plentiful. Central Africa receives around 38% of total precipitation in Africa per year, and holds 48% of Africa’s total internal renewable water reserves. The Gulf of Guinea region is similarly well-endowed, with 15% of Africa’s total annual precipitation and 24% of the continent’s internal renewable water resources. The Congo River Basin alone holds 23% of Africa’s irrigation potential, while the Nile River Basin holds a further 19%.
Investment is key to unlocking Africa’s potential
The majority of the large investments concluded in recent years have been structured on a government-to-government basis. Unsurprisingly, Gulf States have been prominent, though several Asian nations, most prominently China and South Korea, continue to play pivotal roles.
Beyond government transactions, the potential value inherent in untapped farmland within a climate of elevated global demand and volatile prices has inspired a surge of private and institutional investor interest, much of which is focusing on primary agriculture as opposed to agri-business and other agricultural support industries. For instance, London-listed Agriterra owns a variety of African agricultural assets, including 14,000 ha of land for ranching, as well as a maize processing facility in Mozambique. Private Indian investors, often backed by government loans, have purchased land in several African countries – principally Ethiopia, Kenya, Madagascar, Senegal, and Mozambique. Indian horticultural firm Karuturi Global has, for instance, emerged as the world’s largest exporter of fresh cut roses on the spine of its investments in Kenya and Ethiopia. In Ethiopia, the firm has since branched out into agriculture, leasing 100,000 ha of land (Karuturi claims it has access to 300,000 ha) in the Gambella Province to produce crops primarily for local demand.
Meanwhile, alternative investment firms, such as Emergent Asset Management through its African AgriLand Fund, have in turn attracted private investors to Africa’s agricultural sector. Private equity interest has also spiked considerably since 2008.
The reasons for Africa’s underperformance are complex, and varied. Yet, certain elementary causal dimensions are clear. For one, African governments have persistently underinvested in the sector. On average, African countries allocate 4% of their budgetary expenditures to agriculture, compared to 14% in Asia. Spending on agricultural research and development has also been consistently minimal, even declining between 1991 and 2000 in Sub-Saharan Africa.
Then, Africa’s largely small-scale farmers rely disproportionately on rain-fed agriculture, in the absence of sufficient irrigation systems. Indicatively, only around 6.5% of African farmland is irrigated, compared to 40% in Asia. Irrigation has the ability to raise agricultural productivity by more than 50%.
In addition to insufficient use of irrigation systems, which places Africa’s smallholder farmers in a constant state of insecurity given the unreliability of rain patterns, access to and use of fertilisers remains low. According to World Bank data, Sub-Saharan Africa uses just 11.6 kg of fertiliser per hectare of arable land, compared to a world average of 119 kg/ha, and a South Asian average of 148 kg/ha of arable land.
Meanwhile, given inadequate storage and transport facilities in Africa, post-harvest waste is a perennial concern. It is estimated that post-harvest grain losses in Sub-Saharan Africa are equal to $4 billion per year – approximately 15% of total output.
Finally, and related to both insufficient irrigation and fertiliser usage, smallholder farmers in Africa are generally locked out of the formal economy, unable to raise finance for investing in the means to secure increased output.
Policies are increasingly supporting Africa’s own Green Revolution
Fortunately, new levels of investment in African agriculture are increasingly being supported by enhanced policy frameworks. Under the New Partnership for Africa’s Development’s (NEPAD) CAADP, 22 African countries have committed to raise the budget share for agriculture to 10%. CAADP aims to see agricultural productivity in Africa increase by 6%. Meanwhile, critical research support is being lent to small-scale farmers by organisations such as the Alliance for a Green Revolution in Africa (AGRA). And innovative financing mechanisms between donor institutions and commercial banks are increasing access to financing for African farmers. For instance, in Kenya, Equity Bank is administering a $47.6 million credit line from AGRA and the International Fund for Agricultural Development (IFAD) for small-scale Kenyan farmers.
These shifts are inspired in part by the tremendous success of so-called green revolutions in other emerging markets – principally Mexico, Brazil, China and India. In Africa, as in some of these markets, investment in agriculture, bolstered by adequate policy support, has the ability to substantially raise growth, and create new employment opportunities.
This article is a shortened and edited version of Freemantle’s original report, titled Africa’s dormant resources potential.