8 top agriculture investment opportunities in Malawi

Malawi provides potentially lucrative investment opportunities for foreign investors in agribusiness sector.

Malawi has vast untapped agribusiness potential. The Southern Africa country has good transport connections for exports to regional and international markets. It also has preferential access to major markets represented by COMESA, SADC, LOME IV and AGOA.

The agriculture sector has seen hard times in the recent past due to drought and political instability. Government’s reaffirmed commitment to democracy and good governance and significant flow of international development funding are helping to resolve historic problems.

There are a few good news stories for agriculture coming out of Malawi, including the resumption of peanuts exports after a long lull, and high level political support for agricultural development initiatives.

Investment opportunities

Cotton production

Malawi has been a cotton growing country since the colonial era. The cotton sector was vibrant for many years but started to slump in the early 1990’s due to the decline in global prices for cotton and the increasing cost of cultivation, which eroded the profitability of the crop for many smallholder farmers.

More recently, things have been looking up. Agricultural research institutions in the country have developed cotton varieties suitable for local climatic conditions and yields are improving. It is hoped that, with the introduction of foreign investment and expertise, yield levels can be increased from a current estimated 800 kg/ha to as much as 3,000 kg/ha in coming years.

Investment opportunities exist in the commercial cultivation of cotton through contract farming, village adoption, cooperatives and associations. These help to improve the production and quality of cotton with the objective of providing raw materials to the textile industry for its preferential markets under the African Growth Opportunity Act (AGOA), and the EU.

There are also larger-scale opportunities, such as the call for an investor to establish a second spinning, weaving and knitting plant in the country – to meet the demand of garment manufacturing companies operating under Export Processing Zone (EPZ) status. The investor will address the issue of inadequate raw materials, particularly of knitted fabric.

Increasing capacity and moving up the value chain are two major issues for the cotton sector in Malawi. With existing ginneries using only 25% of their ginning capacity, there are opportunities for investors to help increase productivity and add value to the cotton crop by converting it from raw cotton into other cotton products.

Tea production and processing

Tea is the second most important export crop for Malawi and it contributes around 8% of total export earnings. Tea is exported to European, Asian and American markets. Since tea is a major foreign exchange earner, additional investments are necessary through joint ventures with Malawian companies in the processing of tea and other byproducts and also in the actual farming of the crop. New opportunities also exist in the processing of green tea for East Asian markets. The Tea Association of Malawi coordinates information on the production and processing of tea in Malawi

Macadamia nuts processing

Macadamia is among the most important cash crops in Malawi. The nuts have a variety of uses, ranging from usage in confectionery products, eaten raw or roasted as dessert nuts. They are also used for household oil extraction and cosmetic manufacturing. Macadamia products are exported to both Asian and European markets. The current total area under macadamia cultivation is 2,200 hectares. Production of macadamia nuts is by both smallholder farming and large-scale estates. The cost per hectare in Malawi is very low. So far, macadamia bodies have been established and two processing plants are already operating. However, due to increasing demand for the product, more foreign investment is being sought to boost the production and processing of the nuts into various

Arabica coffee production and processing

Arabica coffee is the fourth most important export crop in Malawi. Exports are made to European markets, Asia markets and American markets. Coffee offers more profits than most other crops.  In order to boost production, the government has privatised the Smallholder Coffee Trust, which empowers smallholder farmers to control coffee production. Opportunities for investment exist in form of joint ventures in production and processing of coffee into marketable products.

Soya bean processing

Malawi produces more than 35,000 metric tons of soya beans per year. Most of the soya bean is exported raw and little is processed for food domestically. Malawi’s soil is very conducive to soya bean cultivation and farm gate prices are internationally competitive. There is a growing demand, both locally and internationally. The government is encouraging increased growth, production and utilisation of soya beans. As such, investment opportunities exist in the processing of soya beans into soya milk, soya oil and other secondary products.

Cut flower production

Investment opportunity exists in the production of cut flowers exclusively for the export market in Europe. There are already some firms that are successfully exporting to Europe and additional investment in this sector will create economies of scale and hence make Malawi’s cut flower industry more competitive on the international market. Malawi has a favourable climate and weather for the production of cut flowers. Since flowers do not do well in cold seasons in Europe, Malawi has an advantage over producers in Europe during the festive cold seasons of November-February in Europe. Investments are likely to yield high returns and an initial investment capital might be no more than US$2m. Sufficient labour is readily available for such a project within the city of Lilongwe and surrounding districts where cut flowers can be directly exported by air to Europe.

Fruit processing and canning plant

Malawi currently has no processing plant using local fresh fruit. The country has a favourable climate for the production of a wide range of fruits that include pineapples, tangerines and mangoes. The local market for these products is good and there are export opportunities to South Africa and other regional markets. An investment opportunity exists to set up a fruit juice processing plant in the southern region of Malawi. The estimated project cost is US$5mn and the expected return on investment is 33%.

Sesame processing

Sesame is used in Malawi both for consumption purposes and as a cash medium in some rural areas. It is used in confectionery products, for seasoning side dishes, and in soap making and cooking (including sesame oil). The crop grows along the lakeshore, in the Shire valley and on the warm plateau areas of Lilongwe, Mzimba, Rumphi and Chitipa. Estimated annual production has averaged 205 tons over the past 10 years. Opportunities exist in production and processing of sesame oil into marketable products.

Source: Developing Markets Associates

Visit www.frontiermarketnetwork.com to view business and investment opportunities in the agriculture sector.

Practical tips for success in Africa

Financial services group reveals the secrets to successful investing.

Mark Tunmer, CEO of financial services group, Imara Holdings, shared with us the secrets to the company's success. The BSE-listed company operates in nine African countries.

What factors are driving the growth of your company at home and on the continent?

Our growth as a financial services group rooted in Africa is underpinned by a range of positive developments, including the growth rates achieved by many economies in sub-Saharan Africa, often above 5% a year, growing liberalisation of most  economies, the growth of the middle class, growing disposable incomes, growing demand for consumer goods and financial services, growing liquidity on some markets, growing share values, and the development of African institutional investors such as pension funds, insurance companies and asset management firms. Another factor is growing awareness among ordinary Africans that provision has to be made for the future through savings, pension funds and other wealth-building instruments such as shares.

Growth can be quite dramatic. For example, in the year up to our fifth annual investor conference in Zimbabwe in early June the market capitalisation of Delta, Zimbabwe’s biggest brewer, rose from US$836-million to US$1.7-billion. Over the same period, the market capitalisation of the Econet telecoms group was up from US$677-million to US$1.1-billion. In the same period, the Zimbabwe Stock Exchange has registered gains of 39% in US dollars.

Gains of that magnitude indicate growing participation by equity investors in African listed companies and explain growing international investor interest in our markets. Rates of growth and levels of sophistication vary tremendously across Africa. The South African and Zimbabwean stock exchanges have been in place for over 100 years while a stock market has only recently opened in Rwanda. Varying levels of development obviously affect the rate of growth of our own business and the prospects in individual markets.

What problems did you overcome to find success that you are enjoying in other African markets?

The fundamental challenge relates to education. At an individual level, it takes time to develop a proper understanding of the need to save and invest. Our offices in all markets engage in on-going shareholder education and commit to constant communication. At a corporate level, you do also confront a similar educational challenge. For a financial services business like Imara to grow, we need instruments in which to trade, meaning market liquidity has to grow.

For this to happen, more private companies need to list on the stock exchanges. However, family owners traditionally grow their businesses out of their own cash flow or borrow money from a bank. The alternative is to issue equity or raise cheaper long-term finance. This in turn means a commitment to transparency and full reporting to shareholders or new partners. This involves a seismic shift in the mindset of owners who might have held total control of their businesses for generations. It is a slow process. Patience is required. Education takes time.

Where do you see future growth for your company coming from, and how do you intend to leverage on these opportunities?

There are specific opportunities relating to developments in certain markets, for instance, the plan to open a stock market in Angola and, hopefully, the opening up of opportunities in financial services in Ethiopia. But, the strategic opportunity for future growth relates to macro-developments such as the realisation in many of the world’s financial centres that Africa represents the last great opportunity, from a low base, to achieve sizeable growth for decades to come. This realisation will tend to support the growth in foreign direct investment and in portfolio investment.

Clearly, oil and gas discoveries in East Africa and other parts of the continent will have sizeable impact, but we also see potential for substantial growth in the non-oil economy across sub-Saharan Africa. The growth of the African middle class will deliver knock-on benefits across the financial services industry as families save, contribute to pension funds or drive the continued growth of listed companies through growing demand for consumer goods and services.

We see this as a 20-year journey. Being well placed on the ground across Africa will enable Imara to identify opportunities at an early date and then offer appropriate solutions.

What do you look for when deciding which countries/markets to enter?

The criteria we use to decide which countries to enter differs from case to case. However, there are some common themes such as political stability and some evidence that government has launched programs to liberalise the economy or has made a firm statement of intent to begin the process of reform.

We also scrutinise the regulatory and legal framework within which we are expected to work. A key factor is the presence on the ground of good potential partners. The search for credible partners may take two to three years. We are firm believers in the need for deep understanding of local conditions and will not enter a market unless we have a strong local partner.

How do you compete and interact with foreign companies in Africa?

Our competitive advantage that has put us ahead of our foreign competitors is our presence on the ground. Every Imara professional, with only two exceptions, lives and works in Africa. Imara has direct representation in eight African countries and has strong links in another two through enduring relationships with local partners. Our researchers do not depend solely on desktop research. They take a bottom-up approach and speak regularly to the executives of African listed and unlisted companies. They visit factories, speak to the local banks and have first-hand knowledge of the markets they study. This level of understanding and our direct, local representation bestow a sizeable advantage versus foreign competitors.

What tips would you have for companies that are interested in the African market?

The need for patience cannot be stressed enough. Coming in as a total outsider can be challenging. Invest time in finding the right local partner. You can’t achieve success from afar. A foreign investor looking to make a success of their investment should visit Africa, take time out to visit companies, speak to executives and local professionals and build a personal understanding of specific markets. Personal relationships count for a lot in Africa. You need to look people in the eye and make personal assessments for yourself.

Once you have developed better market understanding, commit to the long haul. Africa has boundless potential, but it will take time.

Click here to access Frontier's database of investment and business opportunities in financial and insurance sectors in Africa.