The investment case in food businesses
AS players in the private equity space, we have witnessed a growing interest in the African food sector from several global investment firms as well as companies looking to drive the food-security agenda.
In fact, the food demand theme is attracting multinationals to the region while several regional food producers are looking to tap into this growth theme and have adopted aggressive expansion strategies.
From a broader Sub Saharan African context, we note huge latent demand for consumer products on the back of a plethora of factors that are acting to drive the emergence of middle-class consumers.
Some of the key factors include rapid GDP growth, strong population growth rates, bottom-heavy demographics; and improved urbanisation.
Rapid GDP growth
According to the International Monetary Fund, Sub-saharan Africa (SSA) is expected to continue registering higher GDP growth rates when compared to developed economies. This should translate to robust domestic demand for food.
The African region has been one of the fastest growing regions as it is supported by natural resources.
The demand for commodities from nations such as China has also driven foreign direct investments (FDI) in the region.
While GDP per capita levels in Africa remain low compared to Developed and EM standards, there is a solid room for growth.
On average, GDP per capita levels of about USD8K in Africa tend to lag those of developed countries, averaging around US$25 000. Overall, improvements in GDP per capita are expected to continue driving consumer demand across Africa.
Strong population growth
A number of countries in the developed world are either experiencing slow or negative population growth. However, the population picture in Africa is one that presents many opportunities for sustained expansion in consumer markets given that the continent has some of the highest population growth rates ranging on average 2%-3%.
Rapid population growth and increased economic prosperity are expected to create substantial demand and opportunities for the agricultural sector of Africa.
The Sub-saharan African region accounts for more than 950 million people, approximately 13% of the global population. By 2050, this share is projected to increase to almost 22%, or 2,1 billion.
The major constraint is that total food production (primary crops and meat) has been growing but at a very slow rate of less than 1% per year. This is rather alarming considering the fact that food production growth rate is not statistically different from population growth rate, which raises concerns about the region’s ability to self-insure against food insecurity.
Bottom-heavy demographic profiles
Most African countries have young populations with average ages of well below 35 years. With a young and increasing population, Africa presents a growing consumer base that will have a sustained demand for food.
Generally, bottom-heavy demographic profiles tend to support sustained demand for company products as brand loyalty and consumer habits are formed at an early age.
In addition, a comparison between population pyramids of developed countries with that of developing nations clearly shows that there is a rapid increase in the number of young people in developing countries.
Improving urbanisation levels
Over the last two decades, the African population has become more urbanised. Africa has historically been characterised as a rural and sparsely populated region with few developed urban centres. Mckinsey & Company estimates that by 2050, almost two thirds of the population will live in cities vs. 40% in 2010. According to urbanisation trends elsewhere in the developing world, most national wealth will be consolidated in these few urban mega-cities.
It is expected that urbanisation will also drive African consumers to purchase more goods and services.
Overall, the above-mentioned factors support the emergence of a growing middle class in Sub-saharan Africa that will create a sustained demand for food and consumer products.
A concern is that without both food imports and serious effort to boost food production, Sub-saharan Africa may not be able to insure adequate food supply for the population. Climate change will likely make it even more difficult. This puts Sub-saharan Africa as a region with greatest food security risk. On the other hand, while Sub-saharan Africa has the necessary fertile land and labour to be food self-sufficient, the scarcity of inputs such as adequate water and fertilizers is a major constraint.
Agriculture is still mostly rain-dependent, and this dependence makes it vulnerable to late rainfall onsets and precludes it from obtaining the best possible output.
Despite the headwinds, a report by Deloitte shows that the agricultural value in Africa has grown primarily as a result of foreign direct investment (FDI) inflows.
The countries that were found to be highly lucrative spaces for investment include Ethiopia, Nigeria and Tanzania.
The report also lists six crops, namely cassava, maize, wheat, rice, ground nuts and soya beans, as the most lucrative based on market sentiment and demand across the continent and the globe.
Inputs in the agricultural sector are also key. In addition to fertilisers and adequate water supplies, hybrid seeds will also be critical in boosting yields on farmlands.
All in all, we recommend investors to take positions in the food demand growth story through private equity opportunities as well as publicly traded stocks.
A company like Seed Co International remains well-positioned as it is set to benefit from developments in the Sub Saharan African food sector.