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Monday, March 20, 2023

Why We Don’t Invest in Agriculture – Cowrywise

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Cowrywise a fund manager licensed by the Securities and Exchange Commission (SEC) of Nigeria has outlined the reasons why it does not invest in Agriculture.

Over the last three years, agricultural crowdfunding platforms have gained popularity with the Nigerian investing public. A lot of these entities have sprung up, with most of their operating names combining “Agro”, “Invest”, “Farmer” and so on.

These platforms often claim to bridge the gap between investors looking for attractive returns and smallholder farmers looking for capital. Their solutions mostly involve providing farmers’ access to working capital, enhancing farm productivity, and enabling a stronger route-to-market for produce.

Indeed, Cowrywise says, the agricultural crowdfunding model sounded like a good deal as farmers got relatively easier funding compared to the hurdles of securing a bank loan.

Banks have allocated just 6% of their loans to Agriculture, and a bulk of that funding is to MSMEs and large corporates, who are involved mostly in the processing and exporting segment of the value chain.

The CBN has a lot of agricultural intervention schemes, but the size of the sector is much larger than the total funds disbursed. There are also concerns about low repayment rates, and that has affected the scalability of intervention funds.

For Nigerians, the crowdfunding craze flourished for these reasons:

High Returns: Nigerians live in a country with 19.64% inflation, a depreciating naira, severe FX shortage, persistent structural and infrastructural challenges, and insecurity issues. Hence, the need for high returns that can improve or preserve their standard of living.

Traditional investments are not as attractive: Fixed income yields are much lower than pre-2019, no thanks to the CBN’s unorthodox monetary policies and its backdoor financing of the FGN’s budget deficit. The returns in the equity market are currently high, but subject to volatility. Crowdfunding platforms were offering fixed sizable returns.

Greed: The “get rich quick” syndrome is still highly prevalent in Nigeria, and it is a big reason why people invest in assets and schemes, without fully understanding the risk/return tradeoff.

Current reality: A lot of money has been lost

Unfortunately, what looked like a lucrative deal for both retail investors and farmers, has now turned into a sad story, according to Cowrywise.

Multiple agricultural crowdfunding platforms have defaulted and some are still owing people billions of naira. Only few have successfully repaid their debts, and exited the crowdfunding model.

“As a company, we have been asked several times why we did not invest in agriculture, or why we did not offer agricultural products on our platform. We finally share our reasons and thoughts below, and hope investors can learn from it,” Cowrywise said.

The need to fully understand the sector

The agricultural sector in Sub-Saharan Africa remains relatively underdeveloped. According to Agri-Logic, agricultural mechanization in the continent is much lower than the rest of the world, with 70% of our arable land being cultivated by people.

For Nigeria, there is also a severe productivity challenge. Our cereal yields and level of fertilizer consumption are much lower than the global average; agriculture produce makes up an ignorable percentage of our exports; and we are far from achieving domestic food sufficiency.

If we further add the issues of insecurity, bad road networks, inadequate power supply, farmers’ inadequate education, and severe climate conditions – it is clear that agriculture, particularly the early stage of the value chain, is a risky sector.

Having this understanding, we know it is illogical to offer high fixed guaranteed returns on farming projects that can easily fail if farmers have no offtakers, or no access to storage facilities, or suffer from an outbreak of pests.

The investment model and strategy

Companies listed on the stock market publish their financials, companies raising debt funding provide several reports, and mutual funds disclose periodically what assets they invested in as well as their investment performance.

However, private markets and the alternative investments space have a lower level of disclosure. That is why those markets are dominated by institutional investors, who have more knowledge and information.

What are we trying to say? The level of disclosure provided by agricultural crowdfunding platforms was not enough to aid peoples’ investment decision making. The business models were opaque, as well as their risk management plans.

Most platforms commonly said: “Insured by XYZ Insurance”. What exactly is being insured? From our findings, the insurance coverage is taken out on the farms and not investors’ funds.

Furthermore, coverage is on specific events. If insurance covers a pest outbreak, but a flooding destroys crops – no insurance claim can be made, and investors indirectly lose their funds. Another word of advice to retail investors:

An entity continuously refinancing or rolling over its debt, is a red flag. Most of these crowdfunding platforms financed upcoming maturities with new funds.

Follow our chain of thought: (1) Platform A collects N500mn for Potato cultivation for 9 months. (2) The money is due to be repaid in Dec 2022 (3) By Nov 2022, they open up another funding round tagged “Potato 2.0” and receive new funds (4) Use the new funds to pay the maturing debt in Dec 2022.

This is a tactic popularly known as Agri-ponzi. While that is not entirely bad, there is a huge possibility that the potato project generated no cash flows, but investors are unaware because new money has been used to pay off existing debts.

The higher the return, the higher the risk

There is no such thing as free money, and nothing is guaranteed. Investors need to know that if an asset is promising exorbitant returns, it carries high risk and there is a chance of loss.

An investment offering above average returns and positive real returns (higher than inflation) in the current economic climate, requires a lot of scrutiny. As a person looking to build wealth in a safe and sustainable way, there is a need to be curious and vigilant.

Avoid jumping on an opportunity, because this was written on a poster on a BRT bus – “get 60% on agriculture and real estate in 6 months!” If it’s too good to be true, it is!

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