Sunny Verghese is Co-Founder, Group Managing Director and CEO of Olam International, one of the world’s biggest agricultural commodity trading companies.  Verghese co-founded Olam in 1989 and has alongside his team built the business to more than $17.1 billion dollars in sales revenue. The company now operates in 65 countries, delivering 44 products to more than 11,600 customers in 70 destinations markets and employs 17,000 people worldwide. In this interview, Verghese discusses the company’s strategy. 

WHAT are the biggest challenges to vertical integration in Africa’s agricultural sector?

Farmers face several challenges in the upstream part of the value chain, including lack of credit and knowledge, logistics constraints and adequate access to markets. The lack of credit to smallholders has resulted in long periods of underinvestment in farms. However, given that private entities (notably, local commercial banks) are starting to provide microfinance, this situation is improving.

In processing and distribution, the challenges essentially boil down to one problem: preserving product quality given the lack of infrastructure for storage and transport. In Nigeria, even though peanuts are a key crop, the country is unable to export them; the lack of warehousing means that the peanuts are left too long in the fields, resulting in the growth of Alfa toxin, which prime export markets like the US do not accept.

Overall, the most significant bottleneck lies in the logistics part of the African supply chain, including road, rail and port access. Agribusinesses can invest in storage, but ports are a different matter; they are highly congested, generally inefficient and costly. Addressing these issues would not only facilitate trade, but help to reduce food lost through spoilage, which in turn aids global food security. The Nigerian government is already making moves to tackle the issue but more needs to be done across the continent.

In the last seven years there has been a huge issue made of these large land deals in Africa. And many of them have failed. Going forward, how do you think this land acquisition process will evolve?

Many people made the mistake of believing that the [central] government confers the land to you. The government can transfer legal title to you, but in our view customary rights are more important. If a person’s forefather has cultivated that piece of land, then—according to human rights convention—that has precedence over any legal right. A lot of people come from overseas to invest there, they don’t understand this. They feel the government has given them the title and therefore the title is clear.

To what extent can West Africa replicate the success of agricultural processing in Asian countries?

Africa can replicate and even exceed the success of Asia in agricultural cultivation and processing, but a few elements need to be taken into consideration. Proper land use, planning and management are essential, whether it is for a new plantation or a new processing plant. Indeed, clarity on land rights overall remains a major issue across Africa. Equally, countries need to make use of what is already available. Gabon, for example, is currently reviewing its land use policy to ensure sustainable agricultural development. If governments can help to kick start the rejuvenation of the neglected plantations through low interest loans and the creation of agricultural hubs, it would help to accelerate on production.

Additionally, the spread of knowledge is crucial. Many expert organizations have been sharing best practices with smallholders and with governments. Yet, the key is to being able to scale-up and replicate initiatives through multi-stakeholder collaboration. Furthermore, encouraging sustainable development is fundamental, not just for biodiversity and local communities, but for the long-term viability of the business.

Finally, governments need to facilitate foreign investment for in-country processing. Encouraging foreign investment with tax incentives that account for social and infrastructure investment is a case in point, as is ensuring that legislation is fit for purpose.

Being vertically integrated in commodities from sourcing to branded products, why did you decide to fully integrate from being just a trader of commodities.Going up and down the value chain?

The way we look at where to participate in the value chain is that we do profitability analysis as to where the profit resides. Is it upstream of the grower/planter? Is it mid-stream at the processor? Then we ask ourselves how we can attract a slice of the profit. If it is distributed upstream, do we have ability? Can we really enter upstream and successfully capture the production economics in terms of farming and plantation management skills?

If we believe that it’s doable, then we want to invest there. It is very nuanced, so there is no strategic orthodoxy as to where we will similarly invest. We only invest when we know that we have a competitive cost to production, both capital cost of production and cash cost of production. That will allow us a cost position below the marginal cost producer’s cost of production.

What sort of obstacles do investors face in terms of acquiring land in West and Central Africa?

There are many challenges. Chief among them are the general absence of national land use plans – detailed information about soil types or topographical maps. These can be overcome by ensuring that the firm has long-term lease conventions with the national government, and by ensuring that the local authorities have the same understanding. Clear agreements are needed with the local government within the framework of the legislation, as well as ensuring compliance with the existing regulatory process.

However, care must be taken that communities grant the social license to operate and that ongoing dialogue is maintained. Once the concession land is allocated, a thorough assessment of its suitability must be undertaken. Given that detailed land plans are lacking in many countries, plots can be mistakenly allocated (such as land with a high conservation value). Therefore, it is imperative that Environmental and Social Impact Assessments are undertaken by independent third parties.

Let us look at comparative advantage. You know China and India can be looking at consolidating farm holdings, and being self-sufficient in food. But sub-Saharan Africa has a comparative production advantage for key food commodities. So, how do you think Africa plays a role in supplying the food needs of India and China?

Well, 55% to 60% of the world’s arable land is in Africa, but considerable investment needs to go in to build that infrastructure to make that arable land fully productive. You need to make long-term bets in farming; because it’s not something you can pull out and abandon a year after you invest it. You need the certainty of being able to make agriculture investments—whether it is governance or good infrastructure. For Africa to realize the potential is a long way off. And there have to be significant private/public partnerships to really exploit the potential.

Which countries in Africa -please name your top three preferences – are better producers compared to others in the next five years?

Typically we look at a few factors. One is we want countries with low population density where land is not a big issue. So Gabon is a good example. It has 1.6 million people, a lot of land and not too much cultivation. So, one factor is population density, availability of land.

Second is labor, cost of labor and the trajectory of wage/price inflation. If you’re feeling wages are going to go up very fast in this country because of the developing economy, then you might be priced out. So, you need to understand not only what current wage costs are, but you also need to have a point of view on wage/price inflation. Also, what is the capital cost of production? What does land cost? How are land prices increasing? Is the focus of government policies pro-business and pro-investment? Can you look at the communities and be equal partners to manage your supply chains? Because you will need them to support it. If they are against you, you have no hope of establishing assistance long term.

I know you mentioned Gabon, but what are the two other countries?

We have farm plantations in Nigeria. We’ve got a couple of [oil palm] plantations in Ghana and Liberia. We’ve got rice farming in Nigeria. We have forestry interest in Congo and Gabon.

Based on your experience in African countries, what would be your message to the regulators or policy makers?

Clearly they have to make agriculture the priority sector and they have to ensure an environment that allows planning for long-term investments. It should not be ad hoc, but the law, a law of parliament so that investors have predictability when they are investing. It should not be the case that in four or five years, the government changes and a new administration might reverse all these policies. Foreign investors need the security of policy lasting for the lifetime of the project. That has to be through an act of parliament. It should not be politically partisan; it should be consensual and broad-based.