Sitting in the middle of Antananarivo, the capital of Madagascar, you cannot ignore the diverse landscape of the country and its potential for agribusiness investment. Madagascar, similar to large part of Africa, has a vast amount of arable land that is bringing in investors in droves. Africa contains 58 percent of the world’s uncultivated, arable land, most of which lies in Sub-Saharan Africa. Agribusiness has become the buzz in investment circles. This week’s article—the last in our series on FMCG in Africa—will look at the emerging investment opportunities coming out of African agribusiness.

A person holding coffee seeds

Coffee production in Africa.
Photo credit: Rogrio via flickr.com

The International Cocoa Council (ICCO) recently announced that four West African countries—Nigeria, Cote d’Ivoire, Ghana and Cameroon—produce more than 70 percent of the global cocoa supply yet 1 percent of finished chocolate comes from Africa. There are few African chocolate companies. A big opportunity exists to move the value chain onshore. Africa produces arguably the best tasting chocolate, and Madagascar’s Madécasse is one of the chocolate business’s most unexpected success stories.

In discussing building a chocolate company in Africa, Co-Founder of Madécasse Tim McCollum describes the “knowledge gap between consumers in the U.S. and the producers in Madagascar” as a major challenge. When consumers in the U.S. see chocolate bars made in Madagascar, they struggle to understand the story and its relevance. Most cocoa farmers in Madagascar manage a small plot of family land. Accordingly, Tim describes a long investment process to achieve scale where getting “farmers to work together, to trust a cooperative farming system” is “easier said than done.”

Coffee is another opportunity to move the value chain onshore. According to the Tanzania Coffee Board, the total value of coffee exports is expected to surpass $200 million. This number is a paltry percent of the global coffee market, including fresh and instant coffee, which was worth more than $71.5 billion in 2012. Coffee-producing countries are expected to capture a little more than one-third of that global value. According to the Fair Trade Foundation, coffee growers, of which 80 percent are smallholder farmers, can only expect to receive 7 percent to 10 percent of the retail price of coffee in the supermarkets. As a result, coffee growers capture a minimal percentage of the value chain.

Government Efforts to Boost African Agribusiness

In order to help smallholder farmers, many countries have implemented policies to capture and boost the value within the country.  For example, in Tanzania, the Tanzania Coffee Board has separated coffee growing zones into wet and dry coffee processing zones and provided financing for processing machines while Rwanda and Ethiopia have restricted the highest quality of coffee to export. The same policy has been debated in other African countries, especially when the highest grade cannot capture the same price locally as it can globally, particularly when local incomes cannot afford the global price.

The value in foreign markets for many African resources is ten times the local price. East Africa accounts for more than 14 percent of global tea supply. Yet, for example in Ethiopia and Tanzania, a kilo of tea that may garner $50 in the United States may only garner $10 locally. In Malawi, tobacco is a big cash crop yet only a few large scale operations in cigarette making exist. Liberia is a natural rubber hub and with local companies is seeing more of the value moved onshore. These are only few drops in the large African agribusiness bucket of opportunities.

Investment Is Needed In African Agribusiness

While government efforts to help the sector are commendable, there is a need to build local companies that can export a high quality local brand. The challenge in moving the value chain onshore within African companies are numerous but not insurmountable. While development banks and development finance institutions have made credit available to more small and medium sized enterprises, credit and capital constraints are still obstacles to growth.

Beyond capital, the greatest need is technical expertise and business skills. Scaling in African agribusiness involves many hurdles, including building international networks with importers and distributors, managing the quality of the product and timing (variations in quality and delays are not allowed), managing quantities and prices on the market, and putting in place infrastructure (i.e., bagging facilities, washing machines, etc.) to support the business. Investors must a play a role in combating these hurdles and many more. Additionally, “[investors] need to ‘get’ social enterprise and Africa,” says Tim in describing how to find the right investors.

Investors’ impact will go beyond balance sheets. The growth of agribusiness is Africa is vital in the reduction of poverty. In West Africa, 70 percent of cocoa is produced on small family farms, where farmers generally live on less than $2 per day and rely on cocoa for 60 to 90 percent of their income. Any growth in the value chain on shore adds money to the pockets of smallholder farmers and boosts the often ignored small local farming communities.