Land unlocked: Earning double-digit returns in Uganda

Fresh infrastructure projects and political will could soon put the country more firmly on the radar of investors, but risks are commensurate with potential rewards.

When his plane first touched down in Uganda, Jeremy Stroud was in for a surprise. “I wasn’t expecting to see a lot of rice, because of the water shortages we often hear about,” the agricultural analyst says. As it turns out, Uganda’s wet flatlands have ample water resource; the country counts nearly 100,000 hectares of rice paddies. “I was pretty impressed to see their rice production, and yields are pretty high for our standards.”

Stroud just came back from the country, where he took part in a five-year, $100 million project being carried out by the World Bank. Speaking to Agri Investor, he described the market as a land in transition, where changes under way could help bring about an environment that makes overseas investors more comfortable. The opportunity is already worth it: Stroud reckons patient equity plays can generate 20 to 30 percent IRRs.

Building bridges

In Uganda, barriers to attracting foreign capital have long been of the tangible kind, he says. “Uganda is a landlocked country, which limits their agrifood system quite a bit in terms of consolidation and outside investment. And, historically, they’ve had a relatively broken down infrastructure during the war and other internal conflicts.” It used to take twice the time to ship a container from Kampala to the nearest port in Kenya it did to send it from Kenya to China, he reckons.

That is changing. Transport networks are being built between the three main cities around lake Victoria, which he expects will make a big difference in the next three to five years, when construction completes. He also underlines significant investment being made to boost the country’s water infrastructure as well as efforts to incorporate solar energy in production facilities.

“Within the next 10 years, we’re going to be seeing a lot of investment in irrigation in Uganda. I think that’s going to enhance the productivity of the agricultural system by a large margin,” he notes.

Ownership issues

There is a catch, however. With land reforms far from complete, disputes around ownership can rapidly become a major problem. Kaweri Coffee Plantation, a wholly owned subsidiary of Neumann Gruppe, has been in court since 2003 over a lease it took on in 2001. That transaction had allegedly led to the forcible eviction of farmers from their land (we’ll be dwelling on this case in tomorrow’s Weekly Letter).

“Eighty percent of the land is currently not titled properly. So no one is owner of the land except for the people who are living on the land, and whose ancestry has had that land, but it’s not documented adequately. That poses a major issue for investment.”

He observes that some of these issues are being cleared, with state and military actors, eager to see more dollars go into modernizing agriculture, recently pledging free leases to investors looking to invest at least $5 or $6 million. “So the risk could be mitigated going forward. But it’s very real, and one that investors should definitely consider.”

Stroud also warns that reaping the expected profits takes time. “You’re looking at a couple of years generally before returns take place.” That’s especially the case, he reckons, if you are investing in high-risk, high-value crops such as pineapple, avocado and mangoes. Knowing where water supplies exactly are is also crucial. “The amount of water resources there is not distributed well. So you have flooding in certain areas and then you could have droughts in other areas.”

The country’s risk profile means institutional investors have shied away from the market, he argues, though their appetite may increase after a few more years of internal stability and lower interest rates. Impact investors, however, have a “decent” base, Stroud says, in addition to family offices and private equity players, notably Chinese. Cultivated crops are also expanding: historically focused on coffee, maize, cassava and yam, they now include potatoes and sweet potatoes as well.

“In my opinion, though, the most high-value opportunities for crops remain mangoes, pineapples and avocados,” he concludes.