Agribusiness is the future of Africa

When most people think of agriculture in Africa, images of poor and overworked farmers with crude tools on a rural farm easily come to mind. Many people on the continent, especially young Africans, still think that agribusiness is a poor man’s occupation. It’s no surprise that nowadays everybody wants a white-collar office job in the city. Agribusiness is hardly on anyone’s mind. But did you know that since 2009, investors from the USA, Europe, Middle East and Asia have been buying and leasing millions of hectares of African land for agribusiness purposes?

If you’re looking into the future, and have nursed a few thoughts about joining the agribusiness revolution on the African continent, this article will serve as a great introduction.

Many people may not know it but there’s a trend of serious land grabbing by foreign interests for African land. Did you also know that Foreign Direct Investment in African agribusiness, which was $10 billion in 2010, is projected to reach $45 billion by 2020?

With a current population of just over one billion people, and projected to reach 2.2 billion by 2050, it’s hardly surprising to see why investors around the world are drawn to Africa’s untapped agribusiness potential, both as a major producer and consumer market. That’s not all. According to the UN, Africa’s agribusiness industry will be worth $1 trillion by 2030! By all accounts, agribusiness will become the “new oil” on the continent.

Sub-Saharan Africa is home to nearly 50 percent of the world’s fertile, usable and uncultivated agricultural land. The size: over 200 million hectares. This is one of the biggest reasons the continent is widely considered to be the future breadbasket of the world. It is this abundance of unused land resources that gives Africa a strategic opportunity to feed the world.

Agriculture in Africa

Africa’s Trillion-Dollar Agribusiness Opportunity

If you’re looking into the future, and have nursed a few thoughts about joining the agribusiness revolution on the African continent, this article will serve as a great introduction.

I started my journey as an urban farmer in Lagos, Nigeria’s economic capital and one of Africa’s largest cities. Without any formal guides, I followed my entrepreneurial instincts and started an agribusiness operation in the outskirts of the city. The content of this article is based on my hard experience and on-the-ground observations of the workings in the agribusiness industry, and I’m sure you will find it very useful.

What exactly should you produce?

In my opinion, this should be the first and most important question on your mind before you get started with agribusiness on the continent. Do you want to grow crops or livestock? Do you want to produce heavily-consumed local foods, or imported and niche products?

This decision is very important because it largely determines your requirements for land, labour, equipment, seedlings, start up and working capital and several other requirements.

In my case, I opted to produce a heavily-consumed local crop – cassava. In my country, and in many parts of Africa, cassava and its derivatives are a staple, and a key source of edible starch in diets across the region.

You see, production isn’t really the problem with agribusiness in Africa. I have found that more than 50 percent of perishable agricultural produce never make it to the final consumer

It didn’t take me long to figure out why we worked so hard on the business, but earned so little. A lot of people, especially in the rural areas, have been cultivating crops like cassava for generations. Many of them use crude farming techniques and I found their production cost base to be significantly lower than mine. Unless my farming operations were fully mechanised such that I could produce at scale and lower cost, there was no way I could outcompete the smallholder farmers.

Being a seasonal crop, we all planted and harvested cassava around the same time; thereby suffering from market glut and very low prices.

And that’s how I stumbled on an uncomfortable truth.

You see, production isn’t really the problem with agribusiness in Africa. I have found that more than 50 percent of perishable agricultural produce never make it to the final consumer. Due to logistical challenges like bad road networks, poor preservation and storage, and a limited shelf life for most of these products, heaps of rotten tomatoes, cassava tubers, fruits and vegetables are common sights during the post-harvest period, and in many major markets on the continent.

Agriculture in Africa

Nigeria is Africa’s top producer of raw tomatoes, with an average annual production of 1.5 million tonnes. Ironically, the country is also the continent’s largest importer of tomato paste, spending up to $300 million on the product in 2013.

Africa’s agribusiness opportunity isn’t really production. It’s value addition.

If you can differentiate your products through adding some extra value beyond the farm gate, that’s when you start to make progress in agribusiness on the continent.

A key aspect of adding value is processing perishable produce into stable products that have a longer shelf life.

I’ll give you an interesting example: 

Nigeria is Africa’s top producer of raw tomatoes, with an average annual production of 1.5 million tonnes. Ironically, the country is also the continent’s largest importer of tomato paste, spending up to $300 million on the product in 2013.

While tomato farmers in Nigeria are faced with losses and poor sales due to logistical and perishability challenges, importers of tomato paste are the biggest winners.

This interesting gap in the market has brought in players like Tomato Jos and Erisco who have started processing locally-grown tomatoes into paste in Nigeria. In fact, Africa’s richest man, Aliko Dangote, could not resist the lure of this lucrative market as he set up a $20 million tomato processing facility in Northern Nigeria to explore this interesting market.

Do you see where this is going?

Yes, I know it sounds counterintuitive, but you should be thinking of a different kind of production if you’re considering agribusiness in Africa. You should be thinking of interesting ways to add value to the existing agricultural produce that can be sourced from local farmers.

The goal is to differentiate your product in ways that give you an advantage in a market that’s dominated by smallholder farmers.

If you must go into basic agricultural production – of crops or livestock – I strongly recommend that you focus on niche foods that may not be available locally, or target niche customers (like supermarket chains and export markets) that have high quality and service standards that limit the competition.

But if you must focus on heavily-consumed local foods like I did, you may have to invest in a mechanised production model that allows you to produce on a large scale at lower unit costs.

Beware of the learning curve: 5 Things To Look Out For

When you’re getting started with agribusiness in Africa, you need to ready yourself for a very steep learning curve. While the rewards can be attractive, agribusiness is by no means a get-rich-quick adventure.

Here are 5 important things you should always look out for:

Land, arguably the most important factor of production in agribusiness, can throw you some curved balls in Africa. Access to land and ownership tussles on land matters are common place on the continent. You don’t want to spend your hard cash acquiring acres of farm property only to find yourself in the middle of a dispute. In my case, I opted for a short 3-year lease. That way, I could limit my financial risk while testing the waters.

Of course, this strategy may backfire if you’re interested in producing perennial crops like oil palm or fruits that require significant land preparation and upfront investments.

Another thing to look out for is labour. Finding the right people with the right levels of skill, experience, commitment and motivation is a big challenge. In my case, we hired and fired several times that I lost count. This experience is not typical for all agro entrepreneurs, but you should anticipate this challenge all the same.

The third thing to look out for are the middlemen. Depending on your choice of product, you may have to deal with these people. They are very influential in the market and have access to extensive distribution systems and contacts. As a result of this ‘market power’, these guys know how to drive a hard bargain. As you learn the ropes of your agribusiness, these middlemen are a necessary evil. Over time, you will develop your own contacts and distribution networks and depend less on them.

The last point is to understand the rules. This especially applies if you’re planning to export products to foreign markets where the guidelines and standards for food products are very strict.

The fourth thing to look out for is working capital. You should never underestimate the amount of working capital you will need to sustain your agribusiness. A friend of mine has a fish farm and ran out of money to purchase feed for his fish stock which was going through a critical growth spurt. There were two reasons for this. First, he didn’t anticipate the sudden jump in market prices for fish feed. Second, he didn’t realize his fish stock would consume so much feed!

The last point is to understand the rules. This especially applies if you’re planning to export products to foreign markets where the guidelines and standards for food products are very strict. I find that many agro entrepreneurs are unaware of the basic principles, technicalities and requirements of export trade. Make sure you understand the rules before you risk your investment.

Are you ready for Africa’s new oil?

Africa’s agribusiness landscape presents a two-fold opportunity. In addition to its large and growing domestic market, Africa has the scarce resources and potential to produce enough food for itself and the world.

But this opportunity can only be unlocked by entrepreneurs who are keen to take on the challenge of this industry and find innovative ways to solve the continent’s agribusiness conundrum.

This window of opportunity will not be open forever.

The time to act is now.

Originally published in The African Perspective Magazine Issue 8

By John-Paul Iwuoha

About the Author:

John-Paul Iwuoha is an impact entrepreneur, business strategist, and founder of Smallstarter Africa. He works with entrepreneurs and investors to start up and grow businesses in Africa. He is also the co-author of '101 Ways To Make Money in Africa', the widely-acclaimed book which reveals several interesting business ideas, market opportunities, and inspiring entrepreneur success stories across Africa. For the latest updates on business and entrepreneurship across Africa, follow Smallstarter on Twitter, @smallstarters