3/02/2011

Zambia: Rich African farms draw international investors

TradeInvest Africa | 2 March 2011

Nelly Nyagah

"We have worked with the Multilateral Investment Guarantee Agency (MIGA), a member of the World Bank Group, to obtain political risk insurance on our investments," says Neil Crowder, a founding partner at British firm Chayton Africa, which recently acquired a 20,000 ha farm in Zambia.
Private investment in Africa's agriculture is rising. Neil Crowder, a founding partner at British firm Chayton Africa, which recently acquired a farm in Zambia tells TradeInvestAfrica that he intends to focus on the continent's markets where opportunities abound.

International investors who previously avoided Africa's agriculture are now looking at the sector. What has changed?

There is a growing interest in African agriculture, not only from private equity investors with a traditional focus on Africa, but also from investors who have not historically considered Africa. We think there are several reasons for this growing trend. First and foremost, agriculture as a broad investment theme has increasingly gained momentum in the past several years. While agriculture previously displayed cyclical, commodity-type returns, there are now signs that we are entering a period of sustainable growth. This is being driven by a variety of global factors including rising population, rising income levels in emerging markets, and a growing scarcity of arable land and water.

Africa itself is showing demographic factors that suggest a rapidly rising demand for food in the coming decades: economic growth across the continent compares favourably with growth in traditional markets and the foundation for investing has been steadily improving across many of the countries in Africa, with better transparency and a more stable legal framework.

Finally, valuations remain attractive in Africa. With land available at prices that are attractive in an international context, much of sub-Saharan Africa benefits from rich soil and a climate that allows for double-cropping, or two crops per year. This leads to the potential, in well structured investments, for high productivity and strong cash returns relative to other agricultural markets.

Investors are treading carefully, as it is a new asset class for many. As a result, investments that have been well structured with proper governance and control will likely be sought after. Investors are fortunate to have available a wide range of tools to mitigate risk. As an example, we have worked with the Multilateral Investment Guarantee Agency (MIGA), a member of the World Bank Group, to obtain political risk insurance on our investments. In our view, such coverage is a beneficial protection mechanism for our investors and provides comfort to those concerned about the types of risk typically present in the region.

How do you see your investment in Zambia contributing to food security, affordability and technology transfer in southern African?

Chayton Capital has a very specific investment strategy. We believe that the domestic markets within Africa will experience the same kind of secular growth we are seeing globally, perhaps to an even greater extent. Most countries in sub-Saharan Africa are relatively large net importers of food. As a result, we believe that properly managed commercial farming operations in the region will benefit from the secular trends in the region.

Zambia is an attractive market and we selected it as the country in which to make our first investments. With good availability of land and abundant water, the location is also attractive as several neighbouring markets are importing food. Additionally, the country has a very good investment climate and is a relatively easy place to do business.

We are in the process of aggregating 20,000 hectares of production in one specific region of the country. We intend to focus on primary food crops such as maize, soya and wheat. By achieving scale in production we will be able to upstream the business into storage, milling and transportation. The total investment required for this investment is roughly $85-million. Once established, our project will have numerous competitive advantages. The scale of the operations will allow us to overcome some of the infrastructure issues that mid-sized commercial farmers are challenged with, often due to lack of capital and expertise.

Our production model is technologically advanced. Cropping is done under full irrigation and we employ conservation tillage practices, an environmentally friendly style of farming that lowers the cost of operations, reduces erosion, and enhances soil fertility. By concentrating our assets in one geographic location, we are able to better utilise the capital we are putting into the project.

Additionally, by establishing a meaningful presence in one specific region, we are able to work closely with the community on an out-grower basis. This means we can provide training on soil management, inputs and the use of our capital investments. As a result, the overall productivity in the region rises.

Which areas of the agribusiness sector are the most profitable?

We believe that a successful agribusiness investment that incorporates primary production must include other elements in the value chain such as processing, storage and transportation. We are interested in expanding in all of these sectors. Geographically, we are looking to markets that meet our requirements for investment, including secure availability of water and access to markets. Additionally, we look for political stability and a good legal framework for land investments. We have identified Botswana, Malawi, Mozambique and Tanzania as target markets for our investments.

Where is the potential for linking small-scale farmers to larger agribusiness supply chains?

Traditional small-scale farmers in Africa face many challenges, including limited access to markets, availability of inputs and often a lack of education on effective farming techniques and soil management. Our strategy of building large scale 'production hubs' allows us to overcome many of the challenges within Africa. Our scale will allow us to build related businesses that not only support our operations but support the small-scale farmers in the region. We can provide the community with access to inputs and access to markets. At the same time, by working with the local farming community, we can help enhance their ability to increase productivity on their farms. There is a clear benefit to the community, but our business benefits by greater use of our operating businesses.

Why isn't Africa attracting enough international investors despite the potential benefits of investing in agriculture?

Investment activity into agriculture is increasing within Africa, but there is still a need for greater commitment of capital from investors outside Africa. While there have been well publicised investments made by Middle Eastern and Far Eastern investors looking for food security, we have also seen growing interest from more traditional international private equity investors. Although it has been slow to develop, there has been a noticeable increase in activity over the past year. Further, we would put the pace of investing in context: according to a recently released MIGA report, following the onset of the global financial crisis, in 2009 FDI inflows to developing countries dropped by 40%. The good news is that as the global recovery continues to strengthen, these inflows are projected to increase and it is our view that the agriculture sector in Africa should benefit.

We believe that over the past year investors have largely been educating themselves on the potential returns and risks associated with an investment in Africa; in a global context, it remains a frontier market. It will take time for the continent to be considered more mainstream amongst traditional investors. However, we have seen an dramatic increase in our activities in the past year and I am sure this is reflected at other firms as well.

How would you advise international investors interested in farming in Africa?

I think there is an extremely compelling case for investing in agriculture in Africa. A properly structured investment, we believe, will generate superior returns to any we have looked at in other emerging markets around the globe. However, Africa has its own challenges and nuances across the continent and each country is different in terms of the investment framework. Investors need to take the time to understand the issues specific to Africa to judge if any investment is well-researched, structured and that it will be well managed over time.


Neil joined Chayton Capital from Goldman Sachs where he was a partner managing director. Most recently, Neil was co-heead of European Research and co-chief operating officer of the Global Investment Research Division. Prior to Goldman Sachs, Neil worked for American Express and St. Paul Companies gaining both direct and indirect real estate investment and workout experience.

Chayton Africa seeks to make pioneering investments in African agriculture, agribusiness and related infrastructure and intends to unlock the potential of agricultural land and assets by optimising production and operational efficiency across the agricultural value chain.

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