Agricultural investment in Africa - Plugging the Supply Gap

This and a host of other investments in food and cash crops as well as biofuels production has got people asking why agriculture? Why Africa? And, Why now?

Plugging the Supply Gap

Due to economic expansion in China and India amongst others, there has been an increase in the demand for food. The trend -which has caused food price inflation in the last three years-, is expected to continue in tandem with economic growth. This therefore means that the supply gap must be plugged, and to investors this presents itself as a good opportunity to make money. For governments on the other hand, food security is crucial because high food prices leads to political instability amongst others.

Africa right now has comparative advantage in Agricultural production. Comparative advantage means given a nation’s resources, you are the lowest cost and therefore most efficient producer of a product in this case, it is crops for Africa. According to the Food and Agriculture Organization (FAO) only 14% of the continents 184 million hectares of arable land is under cultivation. Agriculture also accounts for 17% of GDP and 57% employment. This represents underutilization of resources or to put it in another way, virgin territory.

This is immensely attractive, in terms of returns to capital. In a global capital market, capital will flow to any part of the world where it is guaranteed highest returns. Right now at least for Agriculture that place is Africa. That is why funds are flowing to Africa not Russia, Brazil or the USA, which are large countries with developed agricultural sectors. This is also like outsourcing where production will move to the lowest cost producer.

Africa has absolute advantage in the production of certain crops - like coffee from East African for instance. Land and labour is relatively cheap when compared to the rest of the world. This is largely due to underutilization of resources. Other factors include fertile and varied soil to grow different kinds of crop. Governments in Africa are inclined to participate to boost domestic production and economic growth in their respective countries. Historically Africa has been ‘the continent’ for agriculture the first farming implements, irrigation and technology was invented in Africa by Africans. Slaves from some parts of West Africa were taken to North America because of their expertise in Agriculture

All Hands on Deck

Indeed countries like Russia, Brazil and the USA produce a lot of food and have developed agricultural sectors but they are not Virgin territories like Africa. They also have to deal with higher taxes, subsidies, higher land and labour costs which add inefficiency to the production process. Africa does not have these limitations.

A deal reached recently by the Tanzanian government and a British biofuel company to lease millions in acres of land for a century (100 years) in return for just $20 million begs the question;

We are in a new era. Hopefully this will not be another situation where Africa grows food for the rest of the world to her detriment. Elected leaders and policy makers across the continent must do their home work. All hands must be on deck to make sure the mistakes of the past are not repeated.