Six companies investing in African agribusiness, and what we can learn from them
HowWeMadeItInAfrica | 27 February 2013
BY JACO MARITZ
Martin Richenhagen, Chairman, President & CEO of AGCO Corporation.
Africa’s agriculture and food industries are attracting increasing interest from investors. This trend is largely fuelled by the fact that the continent has 60% of the world’s uncultivated arable land, with favourable weather conditions in many countries. There is also a belief that rising incomes will spur demand for food products in the years to come. To examine the opportunities and challenges on the continent, How we made it in Africa looks at six companies that have invested in the region’s agribusiness sector.
Cassava is one of Africa’s most widely grown crops, but has not been a great commercial success. A Nigerian company, Thai Farm, has, however, achieved success by producing cassava flour.
Silk Invest – betting on food
Silk Invest is a United Kingdom-based frontier market investment company. The firm manages the Silk African Food Fund, which is a private equity fund that invests in processed food, beverages and quick-service restaurant companies on the continent.
Silk Invest sees opportunities in targeting the African consumer from a food and beverages perspective. The fund invests in scalable food companies with the potential to become national and regional leaders.
A significant volume of the packaged food that Africa consumes is currently being imported, creating opportunities to produce these products locally. In a 2011 webcast, Waseem Khan, Silk Invest’s head of private equity, gave the example of Ethiopia, which he said is a large consumer of biscuits. More than 50% of the biscuits consumed in Ethiopia is currently imported. Khan noted that there is a small company based in the Middle East that quadrupled its earnings when it started exporting biscuits to Ethiopia.
Silk Invest’s fund is currently focusing on Kenya, Ethiopia, Egypt, Morocco, Ghana and Nigeria. The fund has so far invested in a confectionary company in Egypt, a quick service restaurant brand in Nigeria, and a biscuit manufacturer in Ethiopia.
Silk Invest believes there is currently a formalisation of food products happening in Africa – a move to branded and better packaged items. “It is about a formalisation of something that is already consumed. It is basically moving from fresh milk directly from the farmer, to fresh milk in a bottle. The price typically does not change, what is changing is the packaging,” said the firm’s CEO Zin Bekkali.
He added that by selling products in improved packaging, many food companies on the continent have been able to grow their revenues by between 20% and 30% annually.
It is often difficult and expensive for African companies to borrow money from banks, and therefore private equity offers an alternative for them to grow their businesses. Khan, however, said that it is important to show these companies that Silk Invest is not there to take over their companies, but to help them grow. “Our view is to be involved in active management with them, and to be there with them for the next three to four years, where they can make money, and we can make money,” he noted.
AGCO – taking advantage of the trend towards mechanisation
Suppliers of agricultural equipment are also looking to Africa as a new growth market. AGCO, a New York Stock Exchange listed multinational company – that designs, manufactures and distributes agricultural machinery such as tractors and harvesters – last year announced that it will invest US$100 million into Africa. AGCO is the world’s third largest agricultural equipment maker and a manufacturer of brands such as Challenger, Massey Ferguson and Fendt.
AGCO’s push into the continent is mainly because it believes African agriculture is drawing growing interest from international investors, attracted by the shift to commercial farming. According to Nuradin Osman, AGCO’s director for Africa and the Middle East, there are three reasons why the company is optimistic about the continent’s agricultural sector. These are:
Global factors such as rising populations, increasing income levels in emerging markets, and a growing scarcity of arable land and water.
The World Bank attributes 60% of the world’s uncultivated land to Africa, and also suggests that investment in agriculture has the potential to create millions of jobs on the continent.
About 10% of cropped land in Africa is prepared by tractor, and only 4% of land is irrigated.
In addition to large-scale commercial farms, AGCO is also targeting smallholder farmers. The vast majority of African farmers are smallholders, and most agricultural companies have some kind of strategy to also cater for their demands. However, most of these small-scale farmers cannot afford tractors and other equipment. To address this, AGCO is partnering with local and regional banks, as well as various development organisations, to provide financing solutions to these farmers. The company is also looking at leasing tractors to farmers.
AGCO also sees value in partnering with local companies in Africa. “There are numerous other benefits for being part of a joint venture with a local partner in Africa. We benefit from the local partner’s knowledge about the country’s culture, language, political system, and business systems. Since a joint venture also entails a significant equity investment, both companies invest significantly in resources, talents, and commitment to the new firm. This provides both companies with advantages in terms of sharing development costs and risks,” said Osman in an interview.
He added that joint ventures have less chance of being nationalised, as the local company also has a significant stake in the business.
Thai Farm – adding value, while overcoming challenges
Thai Farm is a cassava processing company in Nigeria. Cassava, a woody shrub with an edible root that looks like a large sweet potato, is one of the most widely grown crops in Nigeria, produced largely by subsistence farmers. Although cassava roots can be processed into a variety of products – including cassava flour, starch, ethanol and glucose syrup – the crop has not been a great commercial success.
Thai Farm is processing cassava into baking flour, and it is also looking at moving a step up in the value chain by producing starch. There is currently a growing interest in high quality cassava flour. This is because the Nigerian government has issued a directive that requires bakers to add a certain percentage of cassava flour into their mixes. This was done to reduce dependency on imported wheat flour, and to boost the local agricultural industry. Cassava flour is also much cheaper than wheat flour. Last year, Flour Mills of Nigeria, a Nigerian Stock Exchange listed company and one of the country’s largest wheat milling companies, bought a controlling stake in Thai Farm.
Thai Farm’s South African-born founder, Louw Burger, told How we made it in Africa that despite the company’s success, it is facing a number of challenges.
One of the company’s headaches is finding the right people to work at its plant. Cassava factories need to be situated close to the farms due to the crop’s short shelf life. After it has been taken out of the ground, cassava needs to ideally be processed within 48 hours before it goes bad. This means that once the crops come in, the factory often needs to operate 24 hours a day.
“Finding people in these villages that actually have an education, that actually have a work ethic, that can apply themselves, that have a place to sleep during the day, so that when they are on night shift they have rested during the day – these are all major challenges,” Burger explained.
Transport is also a challenge. Burger told How we made it in Africa that transport is generally very expensive in Nigeria, and typically run by small companies that are often not that reliable.
In addition he has to deal with bad roads and harassment by officials. Burger said that he carries 48 different documents in his vehicle, and even then he gets stopped by somebody trying to squeeze money from him by selling him another permit.
Zeder – not naïve about the risks
Zeder is the agribusiness arm of South Africa-based investment company PSG Group. Zeder has stakes in a variety of South African agricultural food businesses. Last year, however, it made its first investment into the rest of the continent when it bought a controlling stake in a company called Chayton, which owns a commercial farming business in Zambia. Crops cultivated include soya beans and wheat.
One of the reasons why Zeder felt comfortable with Zambia as an investment destination is because of the government’s strong focus on agriculture, as a way to diversify the economy from mining.
Chayton’s land is part of a designated farming block that was bought by the government from local chiefs. To encourage investment in the region, the Zambian authorities supplied infrastructure such as roads and electricity. The land can be acquired on a 99 year lease. There are currently around 90 farmers in the area from countries across the world such as Zimbabwe, South Africa, the US, Australia and Russia.
Chayton’s farm in Zambia caters primarily for local demand, and the business hasn’t built its model on exports. However, Chayton has the opportunity to export as Zambia is bordered by eight countries, all of whom are net food importers.
Despite the generally favourable conditions, Zeder did take some measures to protect itself from political risk. “Although this investment looks very good on paper, we are not naïve to think that there aren’t any risks,” said Willem Meyer, an analyst at Zeder who was instrumental in the Chayton acquisition.
Chayton is covered by political risk insurance from the World Bank’s Multilateral Investment Guarantee Agency (MIGA). In case of any trouble, the company is covered for all the capital that it invests in Zambia. In addition, the business has also signed an Investor Promotion and Protection Agreement with the Zambian government. Among various things outlined in the document, it allows Chayton to continue to export commodities in the event of a closure of the country’s borders.
During 2012, the Zambian government did introduce two measures that could negatively impact companies operating in the country. Firstly, it drastically increased the minimum wage. Secondly, it also prohibited companies from invoicing in US dollars.
Despite the potential that Africa’s agricultural sector offers, doing business on the continent is often romanticised. Although Chayton’s farming block comprises a community of farmers with a country club offering golf, tennis and cricket facilities, Meyer acknowledges that the life of a foreign farmer in Africa can often be very isolated, having its toll on marriages and relationships.
Even though Chayton currently has good managers, one of the company’s biggest challenges of expanding the business will be finding the right management. If we want to build a big business, we need the right management and we need to make it attractive for them to go and work in Zambia. It will cost us two more in terms of salaries to convince the good guys to relocate, but it makes sense when one looks at the possible returns,” Meyer told How we made it in Africa.
KFC – an opportunity for farmers
Although fast-food restaurant chain KFC is not strictly an agribusiness firm, it does get all its products from farming, and its expansion into the rest of the continent is opening up various opportunities for farmers.
KFC has been operating in South Africa and some of its neighbouring countries from as early as the 1970s. However, it was only at the end of 2009 that it expanded its footprint further north into sub-Saharan Africa with the opening of the first KFC outlet in Nigeria.
By the end of 2012 KFC had stores operating in Angola, Nigeria, Namibia, Botswana, Mozambique, Lesotho, Malawi, Swaziland, Ghana, Kenya and Zambia. KFC has plans to extend its reach to Zimbabwe, Tanzania and Uganda in 2013, with much longer-term growth plans to establish itself in the Democratic Republic of Congo, Ethiopia and Senegal.
During a 2012 interview with How we made it in Africa, Keith Warren, KFC’s managing director for Africa at the time, noted that in some African countries KFC burgers did not have lettuce on them. This was not to cater for local tastes, but because KFC couldn’t source lettuce in the qualities and quantities it required.
Warren said that in many cases growth is being held back by inadequate farming capacity to supply the company with chickens and vegetables. Warren used the example of Nigeria. “The only limiting factor we’ve got in Nigeria right now is actually chicken supply, and finding suppliers who are able to meet our global quality standards in sufficient quantity. The commercial chicken industry is horribly underdeveloped.”
When KFC entered the Nigerian market, the company had difficulty in persuading farmers to become its suppliers. “When we first went into Nigeria, it took a lot of convincing to get one of the chicken farmers to partner, because of the amount of investment [he] needed to make to achieve our quality standards. The other chicken producers weren’t particularly interested. But once they saw the success we were achieving with that one farmer, they then went and said, ‘We better get on board’,” Warren explained.
Demand for quality fresh produce not only comes from the growing number of fast food restaurants in Africa, but also from supermarket chains expanding into the continent. South Africa-based retailer Shoprite has arguably been one of the most successful in this area, while its rival Pick n Pay has also been growing its footprint. South African supermarkets are, however, not the only ones with plans to expand their operations. Kenyan retailers such as Nakumatt and Uchumi have also entered countries outside their home market.
Karuturi – it takes time
Karuturi is an Indian agribusiness company that first started operations in Ethiopia in 2005 with a 10 hectare flower farm. Today it is a major producer of cut roses in the country. Karuturi has also started with the growing of cereals, rice and sugar from its 100,000 hectare farm in Gambella province, in western Ethiopia. Some commentators have described the deal as a land grab.
While many still associate Ethiopia with famine and poverty, it has been one of the world’s fastest growing economies in recent years. With a population of over 84 million, it is Africa’s second most populous country.
The land that Karuturi is farming on has never been cultivated. “We are talking of virgin lands, which have never been ploughed for hundreds of years. We are trying to do that for the first time,” said Birinder Singh, executive director of Karuturi Agro Products, at a conference in Ethiopia last year.
Another challenge faced by Karuturi is the scarcity of workers in the thinly-populated area of Gambella. Singh noted that when Karuturi’s farm is fully developed it will require around 25,000 people to work in the fields. Urbanisation is also not helping the situation. “Able-bodied men who can work on the fields are leaving the villages and going to the urban areas … What is left behind is children and women,” said Singh.
Karuturi has, however, discovered that people are willing to relocate to the area if they are given proper housing. “We are creating large-scale infrastructure in terms of bringing people from outside our farm… People live in straw houses and if you are able to create infrastructure and provide them proper housing, people are ready to come and stay over there.”
Some of the difficulties faced by the company are also more unusual. Next to Karuturi’s farm is a major national park with around 800,000 antelopes. To protect its crops from the animals, Karuturi has now requested the government to give it permission to put solar powered electric fences around its farm.
Singh said that the Ethiopian government has assisted Karuturi with some of the problems it was facing. For example, Karuturi was struggling to find quality seeds and agro-chemicals in the local market, but the government has allowed it to directly import these inputs. Four mobile network towers have also been installed on Karuturi’s farm. “Communication has become easy, internet has become easy.”
He underlined the importance of making the challenges experienced by commercial farmers known to the government. “For the country this type of commercial farming is new. As we are new to the country, the country is new to this concept of commercial farming. There are enough interactive sessions where you can put forward your points. If the decision makers are convinced that there needs to be a policy change, it happens.”
Despite the challenges, Karuturi remains optimistic about their ventures in Ethiopia.
Said Singh: “There are challenges, there are concerns, but still Ethiopia is a wonderful country to cut into agriculture. It offers an excellent recipe for agriculture – excellent lands, water, fertility of the lands, cheap labour … stable government, and a corruption free regime.”
“Agriculture is a journey, and we have only made a beginning. The results cannot come overnight,” he added.
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