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An African growth story

iriscake.com | 16 September 2012
“You might be able to buy a hectare of land for $300 in countries like Mozambique but each hectare may cost you $1,000 to clear it for planting, add another $200 to $2,000 to develop ‘bulk water’, and finally add $2,000-$3,000 for the irrigation equipment itself,” says Mark Terken, an agribusiness entrepreneur and adviser currently seconded to the World Bank’s Principles for Responsible Agricultural Investing.
originally posted in the Financial Times (blog)
 
The public debate about the ethics of investing in farmland is being ignored by serious investors who seem to have had no qualms about buying up large tracts of land in Africa, according to a report in Monday’s FTfm.

It could be that they were following the advice of Jeremy Grantham, co-founder of asset manager GMO, who recently recommended a 10 per cent strategic allocation to “things in the ground”. Or it could be that they simply thought it was cheap. Either way, 62 per cent of all large-scale land acquisitions since 2000 have occurred in Africa, according to the Land Matrix Partnership.
 
If investors had been thinking the land was cheap, some purchases might have been misguided.

“You might be able to buy a hectare of land for $300 in countries like Mozambique but each hectare may cost you $1,000 to clear it for planting, add another $200 to $2,000 to develop ‘bulk water’, and finally add $2,000-$3,000 for the irrigation equipment itself,” says Mark Terken, an agribusiness entrepreneur and adviser currently seconded to the World Bank’s Principles for Responsible Agricultural Investing.

Terken says private equity funds who have been touting African farmland investment might find it hard to achieve the 15 per cent annualised returns that some are promising.

The problem is that farmland investing is a great deal more complex than most investors expect.

“The private equity partnerships have an average life of five years but break-even for agricultural investments is seven to eight years,” says Mr Mohit Arora, head of agribusiness at Standard Bank in Johannesburg. “Some funds are turning themselves into operational companies to access borrowing in a more traditional identity.”

Bobby Console-Verma, chief operating officer of EmVest agrees that investing in agriculture in Africa is not for those who want to make a quick buck. He says EmVest, a private equity agribusiness is thinking of converting into a company because raising capital has been difficult.

For investors looking for shorter-term, more straightforward ways to gain exposure to African farmland, the loans market could be something to investigate.

Bernd Schanzenbächer, managing partner at EBG Capital arranged a 12-month loan for a producer of Macadamia nuts in Mozambique from a Swiss investor that was unsure of making a longer commitment.

Thinking shorter term, rather than patiently waiting for those 15 per cent annualised returns, could be wise. Dr Alex Awiti, an ecosystems ecologist based at Aga Khan University in Nairobi, has recently blogged that Africa’s land grab is a disaster in the making.

He argues that African countries should learn from Asia. Pakistan, he says, flooded its way to its own Green Revolution leaving hundreds of thousands of hectares of land unusable. In India the story is also one of unsustainability. India’s annual abstraction of ground water is 100 cubic km more each year than can be recharged by rainfall.

There is simply not enough water in Africa’s rivers and water tables to irrigate all of this newly acquired land, he says.

To ethical issues, investors should add issues of judging the timing, or so it seems.

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