Key Agribusiness Themes: Middle East & Africa

BMI View: This quarter, we believe that the region's key themes will pertain to investment into the continent and growing food consumption. We believe investment in Africa will increase in the coming years, particularly in terms of palm oil production. However, challenges remain, as illustrated by Asia's foray into agriculture investment in the region, and the threat of rising food price inflation. We see opportunities amid the underdevelopment in African agriculture and specifically highlight the potential for African cotton production.

For this quarter's Middle East and Africa regional overview, we highlight in particular palm oil production, Asian investment, and global food price inflation. Below, we focus on five key medium- and long-term themes across the region.

1. Strong Growth Potential For African Cotton

Global Outperformers
Selected Countries/Region - Forecast Cotton Production Growth, % change (2013-2018)

BMI View: This quarter, we believe that the region's key themes will pertain to investment into the continent and growing food consumption. We believe investment in Africa will increase in the coming years, particularly in terms of palm oil production. However, challenges remain, as illustrated by Asia's foray into agriculture investment in the region, and the threat of rising food price inflation. We see opportunities amid the underdevelopment in African agriculture and specifically highlight the potential for African cotton production.

For this quarter's Middle East and Africa regional overview, we highlight in particular palm oil production, Asian investment, and global food price inflation. Below, we focus on five key medium- and long-term themes across the region.

1. Strong Growth Potential For African Cotton

We see strong potential for growth in cotton production in Africa over the coming years. This will come from increasing use of biotechnology, sector privatisation, government support for input purchases and generally improving business environments across the continent. The failure of recent WTO trade talks to provide a level playing field for African cotton producers is the only downside risk we see to production and export growth in the medium term. The most important cotton producers in the region, Burkina Faso and Mali, have favourable bio-safety laws and started field tests as early as 2003 and commercialisation in 2009. Monsanto is the main player in these countries and is collaborating with local cotton companies to improve Bt cotton varieties. Cotton companies have said that Bt cotton yields can be 30% higher than conventional cotton if farmers follow the technical itinerary and use enough organic fertiliser.

Global Outperformers
Selected Countries/Region - Forecast Cotton Production Growth, % change (2013-2018)

2. Middle East And Africa Region To Lead Sugar Demand Growth

Recent strong sugar import data from the Middle East and Africa show that these regions are taking the lead in potential demand growth in the coming years. Anecdotal reports have pointed to sharp increases in import demand from both regions over summer 2013, with imports turning to refined sugar at the expense of raw, as the refined variety trades at a smaller premium to raw sugar. The US Department of Agriculture forecasts sugar demand in major markets in both regions to grow by an average of 59.0% between 2009/10 and 2013/14, with the strongest growth seen in Tunisia, Ghana and Saudi Arabia, and the weakest in South Africa. This reflects the very different sugar consumption pictures across the two regions: Per capita consumption in most of Africa is very low, while some markets in the Middle East and North Africa (Egypt, Saudi Arabia) as well as South Africa already have average-to-high levels of sugar demand per capita.

Rising Up The Ranks
Select Regions - Sugar Imports (% of global)

3. Investment To Aid Palm Oil Balance, But Controversies Remain

We project strong palm oil production growth in various African countries, namely Ghana, Liberia, the Democratic Republic of the Congo and Sierra Leone. These countries produce a much smaller amount of palm oil than Nigeria and Côte d'Ivoire but have seen a ramp-up in investment in capacity in recent years, which could aid production in the medium term. We believe Nigeria will remain the largest palm oil producer in Africa over our forecast period to 2018, but Côte d'Ivoire is expected to see the strongest rates of production growth over the coming years.

Nigeria On Top
Select Countries - LHC: Palm Oil Annual Production; RHC: Output In 2011/12 ('000 tonnes)

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

Despite significant 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 the 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. Most investments go to Eastern and Equatorial Africa and focus on grains, sugar cane and palm oil plantations. The bulk of investment is still in the early phase of projects and is not yet operational. This highlights the heavy hurdles in acquiring land and growing crops in African countries.

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

5. Food Price Inflation: Where Are The Risks?

We continue to expect CBOT grain prices to generally average lower in 2014 than 2013 as supply improves and demand growth remains relatively subdued. However, we highlight some key flashpoints that could drive food prices higher in the coming months. In particular, we see upside risks to prices from prospects for stronger ethanol production, the possible return of El Niño, improved livestock production and trade disruptions. The effect of these issues could be exacerbated by speculative sentiment, which has been rebounding and shows room for further upside.

A Return To 2010 Unlikely
S&P GSCI Grains Index & % chg y-o-y

6. African Agriculture: Opportunities From Underdevelopment

African officials who gathered on March 24 for the United Nations Food and Agriculture Organization (FAO)'s 28 th regional summit in Tunis were presented with a daunting challenge. Africa's agricultural sector is woefully inefficient, and low yields - less than half those in other developing regions - contribute to the fact that Africa is the only continent where the number of people suffering chronic hunger is still rising. Once a net food exporter, surging populations mean that Africa now spends more than US$50bn each year importing key staple crops. Given that 60% of Africans work as farmers, growth and poverty goals will be impossible to reach without significant reform of the agricultural sector.

Despite this grim picture, BMI believes that Africa's agricultural underdevelopment means there is significant potential for faster economic growth. African farmers are being held back by inadequate infrastructure, market-distorting policies, and systemic underinvestment rather than by geography or climate. These obstacles can be overcome, and the right policies could contribute to a boom in production.

Farming Output: You Get What You Pay For
Selected Regions - Agricultural Land Use, '000ha (LHS) & Fertiliser Use, Tonnes Of Nutrients Per 1,000ha (RHS)

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Geography: Ghana
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