Now might be the time to invest in African agritech

18 July 2018 James Rae, Baker McKenzie

The World Bank report, Agriculture in Africa– Telling Facts from Myths 2017 recently noted that economic growth and urbanization, higher food prices, and change in demographics and climate were all affecting the agricultural environment in Africa and testing the validity of common agricultural wisdom on the continent. These changes are leading to a growing focus on innovative solutions that are able to address challenges in the African agricultural sector.

Thanks to this innovation in the agricultural sector, agritech has become the latest buzzword. However, to give technological advancement a name in the agricultural industry is something of a misnomer because technology has played a driving role in the agricultural industry for two and a half centuries. Fertiliser was an agricultural innovation, as was the introduction of the tractor, irrigation, and even the early manipulation of waterways to form canals. That being said, much like the agricultural revolution of the 18th century, current technologies are paving the way for a new era in farming. The technologies available in today's world are fundamentally different and part of a new wave of innovation that some have called “Food System 5.0” or the “third green revolution”.

For the agricultural sector, the most obvious application of technology is “autonomous everything”. Less labour is usually equivalent to cost-saving but in Africa, this is not necessarily true. In fact, in developing nations, the cost-benefit analysis includes a far-reduced labour cost in comparison to developed nations. Also, the socio-political impact of employment needs to be considered in developing countries. Because so much of the African population is employed in agriculture, the cost of moving to autonomous farming is much greater than in agricultural industries across developed nations.

However, Food Systems 5.0 is about much more than self-driving tractors. In many industries including in the agricultural space, a much cheaper, arguably more promising advancement is real value data. Technology has enabled the collection of more data, and software is getting smarter at mining the large volumes available. Other industries have recognised the power of information, offering services for free in exchange for user data. That is why the technologies that are likely to make the most difference in the agritech space are tools such as data capturing devices and sensors, data analysis software platforms using artificial intelligence and machine learning, biotechnology, and gene-editing, robotics/automation and novel arming systems such as indoor agriculture.

Despite the engineering and manufacturing dominance of Western machines, Africa is no stranger to agricultural innovation, although usually on a microscale. For example, irrigations systems are often locally engineered and produced in Africa. Another example of simple innovation is Ghana's Agrocenta, which provides a platform to smallholder farmers, allowing them to connect to a wider online market to trade, access truck delivery services and get real-time market information. Agritech has real potential in bridging gaps which have not been plugged by large established corporations. It is not surprising then that there is a broad range of start-ups in Africa that focus on agritech.

According to Agrinnovating for Africa: Exploring the African Agri-Tech Startup Ecosystem Report 2018, there are currently 82 start-ups in the agritech industry (52% of which started in the last 24 - 30 months). The report notes that the industry funding round raised 121% more capital in 2017 than in 2016. For investors weighing up the pros and cons of investing in agritech businesses in Africa, the name of the game is to scale and there is plenty of room to scale throughout the value chain.

Further, the entire agricultural sector is predicted to grow in the coming years. The Food and Agricultural Organisation (FAO) notes that the agricultural sector in sub-Saharan Africa will grow to USD 1 trillion by 2030 (from USD200 billion in 2015). Further, the annual report from the Organisation for Economic Cooperation and Development and the UN's Food and Agriculture Organization found that global agricultural and fish production is projected to grow by around 20% over the coming decade and that strong growth is expected in developing regions with more rapid population growth, including Sub-Saharan Africa. The World Bank noted also that the sector currently employed 55% of the Africa’s workforce, and contributed 32% to Africa’s gross domestic product (GDP).

With economic growth in sub-Saharan Africa forecasted to pick up to 3.1% in 2018 and to 3.6% in 2019-20, it makes sense to invest in agritech ,which will likely be driving growth by bridging infrastructure gaps through innovation and disrupting the current system. Investors hungry for good deals might find that investing in agritech, provided the risks are mitigated by consulting advisors with local, specialised knowledge, could bear serious fruit.

There is always risk associated with investment, but with higher risk comes higher returns. Baker McKenzie focuses on mitigating investment risks through appropriate financing and investment vehicle structures for those investing in tech companies. We make it our mission to understand the African market, not only from a legal perspective, but also a commercial one.

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