In this article, we talk to Susan Payne, CEO of Emergent Asset Management and discuss Agriculture, a keystone industry for Sub-Saharan Africa, a region which is home to almost a billion people and presents one of the greatest humanitarian challenges and economic opportunities of modern civilisation. In this exclusive interview, we discuss the future of Agriculture in the region, climate change, hunger, investment opportunities, macro-economics and more.
Sub-Saharan Africa (SSA), home to over eight hundred million people (around 10% of the world’s population) represents one of the greatest development challenges facing our world. The region is a vast swathe of continent, encompassing many countries including Angola, The Democratic Republic of Congo, Kenya, Ethiopia, Somalia, Botswana, South Africa, Zimbabwe, Ghana, Nigeria, Sierra Leone and Senegal.
Global agencies agree that this region presents one of the greatest development challenges which our civilisation faces, with political, economic, social and environmental crises, exacerbated by domestic and international conflict, corruption, health and other issues. Current statistics from the UN Food and Agriculture Organisation show, for example, that 210million people are already chronically malnourished across the region (30% of its total population), resulting in at least three million hunger related deaths annually.
In the past decade, international aid and support have brought a degree of change to SSA, meaning the probability of an African country experiencing growth acceleration increased to 46% in the last decade, up from 21% in the previous decade; the probability of growth deceleration decreased to 12%, down from 36%. Looking at a specific measure, in 2000–2006 the average GDP per capita growth in SSA was 2.0%, up from –0.7% in 1990–1999 with overall GDP being US$744 billion, which was equivalent of 28% of China’s GDP, 69% of Brazil’s, 74% of Russia’s, and 80% of India’s. (Source – World Bank)
With almost 44% of the population aged between 10 and 14, and estimates putting the total population of the region at 1.5 billion by 2050, it is clear that not only are these significant challenges to meet, but significant areas of economic opportunity.Critical to the economic and social wellbeing of the region is Agriculture, with around 65% of SSA’s total population relying on subsistence farming. The keystone nature of this industry is highlighted in the United Nations Development Programme’s “Millennium Goals” where the first key target is to, by 2015, “Eradicate extreme poverty and hunger”. Most international agencies concur that agricultural development is the focus to achieve this result.
Sub Saharan Africa has, though, potential to become a global-agriculture powerhouse, but still remains a net food importer (with, in 2005, a negative balance of $4.6billion) and struggles to meet the basic needs of feeding its population. While challenging environmental conditions have certainly contributed to these reduced crop yields (less than 30% yields versus equivalent land in Asia), foreign aid into the sector has significantly declined (cut by almost 75% in the past decade) which has prevented farmers gaining access to the infrastructure and technology to exploit land, improve crop yields (taking lessons from the Asian green revolution) and build an economy.
Historically and recently, many of the world’s great social challenges have been supported by private enterprise, whether through philanthropic foundations, or commercial ventures. Africa’s issues are no exception to this, with a mix of organisations ranging from governments, to NGO’s, and private enterprise entering the market to bring about the rapid changes the country needs to survive and prosper.
Susan Payne is the Chief Executive of Emergent Asset Management who are a multi award winning UK investment management firm. She is ranked as one of the top 100 most influential women in European Finance, and has over twenty years experience on buy and sell side of emerging markets. “The Emergent African Land Fund”, in their own words, “offers investors the opportunity to participate in the growing Sub-Saharan agricultural sector. It applies modern management disciplines and introduces improved farmland techniques to increase crop yields and investment returns. Initially, the investment focus has been in South Africa and Mozambique, though the portfolio is swiftly being expanded within Africa to include (but not limited to) countries such as Botswana, Zambia, Angola, Swaziland and the DRC. Emergent has partnered with Grainvest, a firm of professional agricultural traders and one of the top five participants on the South African Securities Exchange, involved in agriculture locally, including farming, manufacturing, and transport and trading. Together with Grainvest, Emergent has formed the operating company “EmVest Agricultural Corporation”, which has brought together a highly-experienced farm management team to manage the Fund’s investments. The Fund qualifies as a Socially Responsible Investment (SRI) in keeping with the co-managers’ investment philosophy, endeavouring to make a positive contribution to the well-being of the local communities in which it invests.”.
In this exclusive interview, we talk to Susan about the Emergent African Land Fund, the impact of agriculture now, and in the future, why African Agriculture represents such an opportunity for investors, and the impact of climate change, politics, technology and economics on the region.
Q: Why invest in Agriculture? And what are the key drivers for your investment and return model?
[Susan Payne] Regarding why agriculture: There are various alarming statistics in food security. Globally, we have neglected this topic [agriculture] for decades. We have, worldwide, over a billion undernourished people. Food prices have risen over the past few years, with our own research showing these should accelerate up from 2010. The world’s demographics are also alarming: The world’s population has quadrupled in the twentieth century, doubling between 1960 and 2007. For the first time in history, we have seen the global urban population exceed the rural one, and, over the past forty years, agricultural-land has increased by only 10%. Two words, food security, are central to our model.
Q: Why Africa? And what is the role of Agriculture, as a sector in Africa’s social development?
[Susan Payne] Africa is an enormous continent, larger than the US, China and Europe combined. It represents 20% of the global land mass, and only 10% of the world’s population. It offers an un-crowded space of opportunities including minerals, natural resources, water and agriculture.
Africa has many drivers. It is the fastest growing continent globally, and the African population between now and 2050 will grow faster than anywhere else in the world including in India, China and Latin America, other countries with compelling demographics. When you look at the numbers, over half the sub-Saharan African population is under 18 years old, versus Latin America, where over half the population is under 25 years old and Asia, where it is under 35 years old. In short, these EM populations are young, expansive and dynamic, not like the stable, more risk-averse populations of the world’s developed economies.
Finally, over 70% of the labour force in sub-Saharan Africa (SSA) is involved in agriculture. This means the sector forms a lynch-pin of society. Our focus at this time is SSA as the region is highly productive and fertile. The SSA zone makes up 6.5% of world GDP, but has enormous upside. To give you a comparison, let’s look at Latin America versus sub-Saharan Africa. In Argentina, 50% of the GDP is derived from agriculture, while in South Africa that number is only 6%. With the introduction of better technology into SSA, as we are now doing, there will be a dramatic increase in productivity and GDP growth. In other words, there is strong upside potential.
Historically, Africa has been viewed by many countries as a ‘burden,’ whereas the BRIC’s see it as an enormous opportunity. To put this in context, Europe has twice as much trade with Africa as does even China, so Europe must wake up to the fact that Africa is an important and relevant opportunity, not a burden. China is, though, already making inroads on the continent, building roads, dams, commercial real estate and generally financing expansion from Angola to Ethiopia. This level of Chinese interest has, invariably, lowered western leverage. How Africa is now perceived is interesting, and Obama is the proponent Africa has had for a very long time.
Q: What are the key challenges EAML faces on the ground? And what are the development strategies EAML employs?
[Susan Payne] In any investment, but particularly in emerging markets, the investor must be well rewarded for the risks taken. The returns in Africa are very strong, and we are experienced on the ground with our various local relationships. The risks, though, to the strategy are, in no specific order:
Climate change is a J-curve, not linear. Rates of change globally are occurring at a faster pace than the global population expects, and will impact food production. To mitigate the fund’s risks, we have diversified across ten to twenty commodities and across several countries with different longitudes and latitudes. We have focused on the various micro-climates available on the highlands, and our farms are always located beside large water reservoirs, lakes or rivers.
The risk of commodity price fluctuations is also a threat, which we mitigate through hedging and price modelling. We employ production protection (insurances) against natural disasters. Political risk is another, and we work closely with local governments, who are very supportive of our work as we address their own concerns of providing local employment, training and socially responsible projects, and increasing food production through the introduction of cutting-edge technology.
Technology is an important part of our strategy, key to maximising production. Green tech is revolutionising farming in tilling, water, electricity and other areas.
We are also importing technologies from around the world and, unlike Europe in particular, these countries are open to employing technology which can bring about great increases in productivity.
Finally, once we have checked and been satisfied that the potential risks to our projects have been addressed, we can begin to optimise our assets, and build capacity quickly.
Q: What are the infrastructure capabilities in African banking in terms of trading of agricultural commodities and hedging? And how does Africa’s financial system engage with the sector?
[Susan Payne] Africa is turning a corner, and it is important to consider the bigger picture. From about 2000, Africa has come into an economic renaissance: Between 2000 and 2008, we saw a marked improvement in macro-economic stability, with inflation falling and interest rates hitting single digits even in areas like Nigeria. We have seen robust GDP growth, 17% in Angola and 5.5% in Ghana and Nigeria in 2008 for example, combined with increases in FDI (Foreign Direct Investment), which was up25% year on year between 2000 and 2005. In many countries, we have also seen a return to democratic rule, with the liberalisation of sectors such as telecommunications, and a range of financial reforms. These changes span from countries such as Nigeria to Egypt, Mauritius to Mozambique. There has definitely been a sea-change, first in South Africa, and now in other countries we are seeing investment in job creation, infrastructure, and concerted attempts to achieve an open and transparent environment. Ghana had its first democratic election, for example, in 1992, South Africa in 1994 (Mandela’s era), and thereafter there has been a whole series of political changes on the continent.
In Africa today, we see sounder monetary policies than a decade ago, strong GDP growth, and twenty four stock markets posting good returns, excepting 2008. They are not big (apart from South Africa and Nigeria), and many are quite illiquid, but they are growing. A study completed over the last year on regulation by the World Bank highlighted Burkina Faso, Botswana and Senegal as three of the top ten best regulated countries in the world.
Q: What impact has climate change had on African agriculture?
[Susan Payne] Climate change is a key consideration in the agri space for obvious reasons. We have a number of “Big Picture” themes for our investments, and climate change is a cornerstone to these.
I discussed climate change earlier, but, in short, natural disasters are rising globally, thereby increasing risks, and climate change is impacting weather patterns, habitats and ecosystems in every environment. We are seeing retreating glaciers, hotter temperatures, and rising sea levels globally.
Water, for example, is a major issue. The concentration of water levels around the world is very interesting, and sub Saharan Africa, for example, has a full four times higher the water concentration level than South America. It is only half of Canada’s but is still well saturated compared to most of the globe, with concentration levels similar to Eastern Europe, yet with land that is one seventh the price.
Obama’s Global Change Research Programme which, three months ago, released a paper highlighting the impact of climate change in America, noted shorter winters, increased flooding and declining forestation. The key finding of the report was that, “climate change will intensify and challenge society’s ability to adapt”. This is a fact, and we are, for example, very alert to global changes. If you look at global warming and temperature change, increased desertification is one outcome. China, for example, loses 1 million hectares every year desertification, an area the size of Greece and Nepal combined. The effects will be greater in the Northern than the Southern hemisphere, with expected temperature rises in Africa being lower than its counterparts north of the equator.
We can see, therefore, that what is needed is a co-ordinated approach, covering all facets of human economic and social development, ranging from healthcare to education, telecommunications to infrastructure and energy to government.
For Sub Saharan Africa, the challenge is acute. This is a region which should be a global economic powerhouse, but is currently facing economic and social crises of huge proportions, with some arguing that many countries in the region are on the brink of a Malthusian catastrophe. At the heart of all these approaches is Agriculture which is not only the only solution to a hunger crisis, but provides the keystone in generating social, economic and even political stability for these regions, and the impetus to grow and develop. “Africa…” said Mafa Chipeta of the Food and Agriculture Organisation, “needs to be offended at the idea of a grown-up continent being fed by others that have no obligation to do so.”
The solutions are, though, faced with challenges, one of the largest being Climate Change. On September 30th 2009, the International Food Policy Research Institute released an important report, entitled, “Climate Change, Impact on Agriculture and Costs of Adaptation”. The report discusses how, “The unimpeded growth of greenhouse gas emissions is raising the earth’s temperature. The consequences include melting glaciers, more precipitation, more and more extreme weather events, and shifting seasons. The accelerating pace of climate change, combined with global population and income growth, threatens food security everywhere. Agriculture is extremely vulnerable to climate change. Higher temperatures eventually reduce yields of desirable crops while encouraging weed and pest proliferation. Changes in precipitation patterns increase the likelihood of short-run crop failures and long-run production declines. Although there will be gains in some crops in some regions of the world, the overall impacts of climate change on agriculture are expected to be negative, threatening global food security. Populations in the developing world, which are already vulnerable and food insecure, are likely to be the most seriously affected. In 2005, nearly half of the economically active population in developing countries—2.5 billion people—relied on agriculture for its livelihood. Today, 75 percent of the world’s poor live in rural areas.” The IFPRI conduced extensive research with a climactic model to simulate various scenarios of climate change from mild to extreme, and in the results of the analysis suggest that, “agriculture and human well-being will be negatively affected by climate change” with specific findings including:
• In developing countries, climate change will cause yield declines for the most important crops.
• Climate change will result in additional price increases for the most important agricultural crops–rice, wheat, maize, and soybeans. Higher feed prices will result in higher meat prices. As a result, climate change will reduce the growth in meat consumption slightly and cause a more substantial fall in cereals consumption.
• Calorie availability in 2050 will not only be lower than in the no–climate-change scenario—it will actually decline relative to 2000 levels throughout the developing world.
• By 2050, the decline in calorie availability will increase child malnutrition by 20 percent (almost 25million more malnourished children) relative to a world with no climate change.
• Climate change will eliminate much of the improvement in child malnourishment levels that would occur with no climate change.
• Aggressive agricultural productivity investments of US$7.1–7.3 billion are needed to raise calorie consumption enough to offset the negative impacts of climate change on the health and well-being of children.
These are startling and real statistics which arguably are the effect of mankind as a cause.
We are seeing a pivotal point in our civilisations story. We have emerged through hundreds of years of conflict, colonisation and development to a point where we, as a race, are globally connected and (arguably) enlightened.
“Business…” said Jeffrey Sachs, “often does a good job supporting communities: the arts, universities, and scientific enterprises… But that philosophy has rarely reached poor countries. Even businesses that are enlightened in their home bases see Africa, Latin America, and parts of Asia as places to exploit natural resources or use cheap labour.”
This attitude has been symptomatic of the past half-century, but is an attitude which must shift. Economic and Social injustice have been a part of our world since records began, but this is the first time in our story that we are technologically, economically and intellectually able to create change. The shift in view comes at a huge ‘cost’ to our incumbent attitudes, but as we have seen through history, it is these very shifts which bring about benefits to all of humanity economically and socially.
“You cannot hope to build a better world without improving the individuals. To that end each of us must work for his own improvement and at the same time share a general responsibility for all humanity, our particular duty being to aid those to whom we think we can be most useful.” – Marie Curie