Asia's Foray Into African Farming: Early And Troubled Days

BMI View: Despite large media coverage about China's 'land grabs' in Africa, the country and the broader region remain a minor player in terms of agricultural investment in the African continent. However, we believe investments will gather steam in the coming years, driven by supportive policies from African government and the need to secure land. They will also come from a larger number of countries, as Singapore, Malaysia and Vietnam join India and China in their land acquisition spree.

  • Asia is still a minor player in terms of agricultural investment in Africa compared with the Gulf States. However, the number of investments is likely to rise in the coming years.

  • Apart from India and China (the largest Asian investors in Africa) Singapore, Malaysia and Vietnam are venturing into Africa.

  • Most investments go to Eastern and Equatorial Africa and focus on grains, sugarcane and palm oil plantations.

  • The bulk of investments is still in the early phase of projects and is not yet operational. This highlights the heavy hurdles to acquire land and grow crops in African countries.

Land acquisition has attracted heavy media coverage around alleged 'land grabs' which leave African countries at the bottom of the value-added commodities supply chain. China drew mostly negative headlines over claims that it is aiming to tackle its problem of feeding 1.3bn people, 20% of the world's population, by importing food from a swathe of farms purchased abroad. The size of Asia's land grabs in Africa have been overstated, as the actual acquisitions are generally limited in size and number of transactions, compared with other investors from the Gulf and the West. However, these reports do highlight the recent interest of Asian agribusiness players in Africa's agricultural and food processing sectors.

Diversified Players
Agriculture Investment In Africa By Country Of Origin (LHS) And Destination (As % of total hectares acquired by Asian countries in Africa)

Not Only A China Story

Despite large coverage of China's land acquisitions in Africa, China is neither the pioneer nor the largest Asian investor in Africa. Indian companies have been present in East Africa for decades, while large Chinese companies have only recently started to look at Africa (isolated farmers have been emigrating from China to Africa over a longer time). A much longer historical presence of an Indian Diaspora in Eastern Africa has enabled smoother and less controversial economic involvement in Africa than China. India is now the largest foreign leaser of Ethiopian farmland, and the total amount of land acquired by the country is far larger than China's. In fact, China's agricultural outbound investments are still limited, as only 1.1% of its total net overseas direct investments, or US$798mn, was in the agriculture sector in 2011, compared with 4.6% (or US$500mn) for India. Asian investors are dwarfed by Gulf countries in Africa, which account for 22% of total foreign land acquisitions in Africa according to the NGO GRAIN, compared with 12% for India and 3% for China.

Select Projects - Agricultural Investments Of Asian Companies Into Africa (as of mid-2012).
Host State Originating State Investor Ownership Size (ha) Crop Status
Note: Due to the lack of information and fast changes of those projects, the data (especially regarding the size of the deals) must be taken with caution. The list includes some of the largest land acquisitions deals and is not exhaustive. MoU = Memorandum Of Understanding. Source: BMI, Grains, International Institute for Sustainable Development.
Sudan South Korea South Korean government Government 690,000 Wheat Done
Zambia China Chinese government Government 600,000 Biofuels Unknown
Ethiopia India Karuturi Private 311,000 Corn, palm oil, rice, sugar Done
Gabon Singapore Olam International Private 300,000 Palm Oil Done
Liberia Malaysia Sime Darby Private 220,000 Palm Oil Done
Liberia Singapore Golden Agri Resources Private 220,000 Palm Oil Done
Cameroon India Biopalm Energy Private 200,000 Palm oil Done
Sierra Leone Vietnam Long Van 28 Company Private 200,000 Rice In process
Democratic Republic Of Congo China ZTE Energy Company SOE 100,000 Palm oil, corn, cassava, rice MoU signed, project on hold
Ethiopia India Chadha India Private 100,000 Sugarcane Done
Senegal China Chinese government Government 100,000 Peanuts Not confirmed
Tanzania China China International Water & Electric Corp SOE 100,000 Corn Unknown
Zambia India Neha International Private 100,000 Crops Done
Zimbabwe China China International Water & Electric Corp SOE 100,000 Corn, sorghum Contract signed
Ethiopia China Adventure Ethiopia Agricultural Dev JV with local companies 50,000 Biofuels Not confirmed
Tanzania India Yes Bank Private 50,000 Rice, wheat In process
Côte d'Ivoire Singapore Wilmar International Private 47,000 Palm oil, Sugarcane Done
Tanzania Singapore Intrasia Capital Private 30,000 Rice Done
Madagascar China COMPLANT SOE 22,000 Sugarcane In operation

Asian Newcomers

The origin of investors in African countries is becoming increasingly diversified, as new bidders in Singapore or Malaysia multiply their investments. Those newcomers are focusing on palm oil plantation and crop production, and include some of the largest agricultural companies in the region, such as Olam International, Wilmar international, Golden Agri Resources and Sime Darby. Indeed, as a result of land and labour limitations in Indonesia (producers are often based in Singapore but operate in Indonesia) and Malaysia, palm oil companies are increasingly looking to venture into Africa, which boast attractive features for palm production. Vietnamese companies have also recently started acquiring land in different countries for rice cultivation, including Sierra Leone and Nigeria.

Securing Land On Strong Demand And Limited Farmland

Outbound investments from China and India are being driven by the rapid rise in domestic demand for agricultural products and by the loss of farming land due to urbanisation and industrialisation processes ( see 'Water Stress Major Risk To Long Term Agricultural Growth', September 26, 2012 and ' Investment Opportunities Amidst Water And Land Pollution' May 16). From 1997 to 2011, China lost 8.2mn hectares of arable land, due to urbanisation, forest and grassland replanting programmes, and damage caused by natural disasters. Although China and India are currently essentially food self-sufficient, both countries will see an increase in food based imports in the coming years, a trend that will be even stronger in the case of China ( see 'China Future Imports: Enduring Trends & New Trajectories', June 17). India will maintain a broadly balanced food supply for many staples, but it will grow increasingly import dependent for its vegetable oil and pulses demand. Pushed by supportive outbound investment policies from their respective governments (such as high-level trade diplomacy, lines of credit from the trade banks, etc.), both countries are increasingly securing land abroad in an attempt to secure food and feed supplies in the future.

Select Countries - Outbound Direct Investment (ODI), US$mn.
2008 2009 2010 2011 2012 (April/Sept)
Source: BMI, China Bureau Of Statistics, Reserve Bank Of India
China Total ODI In Agriculture 171.8 342.8 534.0 798.0
As % of total ODI 0.3 0.6 0.8 1.1
India Total ODI In Agriculture 2,380.0 950.0 1,210.0 500.0 300.0
As % of total ODI 12.3 6.3 7.0 4.6 5.3

Welcoming Governments

At first sight, various African countries typically boast interesting characteristics for agricultural investment, such as relatively cheap and abundant agricultural land as well as in some cases good availability of water. According the World Bank, Sub-Saharan Africa has huge agricultural potential, boasting 60% of the world's uncultivated land. India's largest investor in Ethiopia, Karuturi, reported it acquired land there at a rate as low as INR59/ha (US$1.1/ha), while agricultural land in the state of Maharashtra costs no less than INR100,000/ha (US$1,560/ha) according to various reports. However, the actual availability of land and operational costs are sometimes wrongly estimated (see the 'Bitter Harvest' part).

Moreover, the favourable conditions offered by many governments for land acquisition is also pushing Asian companies towards Africa, at a time when foreign investment rules in Latin America and Oceania are tightening. The governments of Ethiopia, Tanzania, Sudan, Uganda and Senegal are amongst the most eager to attract foreign investors. They usually grant cheap land leases over long periods, fiscal exemptions, and other incentives allowing a maximisation of the profit. Sudan proposes leasing almost 25,000 ha for 8-32 years per companies for as low as US$0.6/ha. Ethiopia plans to sell or lease over 3.5mn ha to foreign and domestic investors. The country provides land for lease for less than US$10/ha, for up to 99 years.

A Trend Set To Gather Steam

India and China are unlikely to reverse their investments in Africa on the back of a short-term economic slowdown. Indeed, although we forecast their GDP growth to falter in the coming years, economic activity is likely to reaccelerate, especially in the case of India (we forecast GDP to grow by 6.3% annually on average between 2014 and 2018, compared with 5.0% growth in 2013). Moreover, both countries will maintain their support policies for outbound investment in agriculture. In the case of China, the actual level of outbound investment is still small but we expect both upstream and food processing overseas investment to increase in the coming years on the back of the government's support and greater access to capital. The 12th Five-Year Plan (2011-2015), which sets China's economic development and targets, designates agriculture as one of the key sectors for outbound investment. Apart from 'soft loans' at below market rates granted by the government through its policy banks such as Export-Import Bank of China and China Development Bank, the government has launched a number of initiatives aimed at encouraging agricultural businesses to expand abroad including subsidies.

Leaving Something To Be Desired
Select Countries - BMI Business Environment Ratings For Infrastructure and Institutions & Long Term Political Risk Ratings

Bitter Harvests

Despite the acceleration of land deals in recent years, a large part of the investments have failed to materialise for now. Many of them remain at the project stage, or the land acquired is not in operation yet. In fact, according to various reports from the World Bank, the rate of failure for agricultural investments in Africa is relatively high. Moreover, few large-scale Chinese agricultural investments in Africa have been recorded to this day, and the majority of the projects have been smaller than 10,000 ha. Those trends highlight the hurdles to invest in African countries and their sometimes weak business environment and political profile.

Complications over land acquisition processes and uncertainty regarding land rights for a land-hungry activity like agriculture is the main risk for foreign companies investing in Africa. One of the most common misconceptions about this continent is that of the supposed availability of fertile land (due to low density rates and the lack of deeds of property), which is in fact already used for cultivation or grazing of animals. The acquisitions of such lands can later lead to tensions with local villagers over resources utilisation (water or grazing land). In most African countries, land ownership resides with the state, which is technically the sole entity empowered to grant land concessions. However, in practice, land usage is much more complicated and acquiring land implies getting approval of many different stakeholders, including local communities which retain considerable power over land, local governments and central governments. The land acquisition process in Africa is often complex and cumbersome, as problems arise of identification and delimitation of the community and of the representation of those communities.

Moreover, infrastructure is still lacking in those regions, and any establishment there would have to include heavy investment in farm and irrigation equipment and transport. Currently, it is estimated that just 10% of cropped land is prepared by tractor, and only 4% of cultivated land is irrigated. Investing in greenfields imply many hidden costs. Although acquiring prices are usually very low, clearing the land in a context of limited equipment and transport infrastructure can end up expensive. For example, it was reported that the cost of clearing land and making it into a farm is about US$1,500/ha in Ethiopia.

The experience of India's Emami Biotech, which pulled out of a US$62.4mn and 40,000 ha biofuel plantation in Ethiopia a year after the project was announced, highlights the difficulties to bring an investment to the operational phase. The company tried to grow food crops after its initial project to grow jatropha for biofuel production proved unviable. However, the land acquired was arid, as jatropha needs little water, while corn, pulses and beans require more of it. Moreover, a part of the land, the company claimed, lay along a disputed border between Oromia and the neighbouring country of Somaliland, which impeded to grow crop on the estate. Finally, the company and local villagers clashed over scarce water supplies.

Despite increasingly optimistic reports on Africa's economic performance and business environment, the risks related to agricultural investment in Africa are not decreasing. Quite on the contrary, now that more countries are engaging with Africa, the options for African countries are wider at the time of choosing a land acquirer. As a result, future investors may not get as much preferential treatment as in the past, and we expect the scrutiny on contracts to grow from now. Finally, we believe the media coverage of this much debated trend, along with NGOs anti-land grab campaigns, will not fade away. Although the African countries mentioned above maintain an agricultural investor friendly attitude for now, the scenario of a tightening of foreign investment rules, following the examples of Latin America and Oceania, cannot be ruled out.

This article is tagged to:
Sector: Agribusiness
Geography: Asia

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