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Thinkpieces

Food first: Fixing food insecurity in Kenya

“A hungry man is an angry man”, my primary school teacher told me. I would add: a hungry woman is an angry woman. When a nation is not well fed, when harvests swing every season and the prices of staple foods rise year-in year-out, a nation begins to become annoyed. If the situation persist, the nation starts to become agitated. Talks of labour unrest becomes common. Salaries and wages must be raised, as more money is needed to pay for increasingly expensive food. Inflation rises. The government steps in, a subsidy program here, another one there. But this is temporary respite. If the rain does not fall as ‘planned’, or if the harvest is not stored in the right way, or if the rain does fall but the crop is plagued by army worms or other pests, the problem continues. If this cycle persists, even if the best roads are built, a sense of displeasure remains. You see, it’s hard to be happy when you’re hungry. A young nation lacking proper nutrition is like a large army without sufficient boots. You may be well equipped, but you will not march far.

Kenya has long suffered general food insecurity. The stocks and prices of staple foods have been so unstable for so long that it is not unusual for the nation to be facing several food crises every year. Yet we are blessed with natural endowments that should make Kenya a net exporter of food. We have plenty of arable land, our soils are fertile, the weather is fair, we enjoy plenty of rainfall and are blessed with fresh-water lakes and rivers, and even underground aquifers. Furthermore, we have plenty of unemployed hands needing jobs and a heritage of farming, so getting Kenyans to farm would not be particularly difficult. No Kenyan, really, should be going hungry.

While the Big Four are noble and ambitious objectives, with a relentless focus on this singular mission, Kenya can become food secure within the next 5 years. The Galana/Kulalu irrigation project presents the President with a wonderful opportunity to ensure that Kenya becomes food secure, while creating a worthwhile legacy for his presidency.

Every other year, the country reels from the effects of a shortage of some major component of the national diet: maize and sugar tend to be the common ones. In 2017 for instance, Kenya suffered from a shortage of maize meal so serious that the matter nearly took hold as a political slogan, and the government spent billions importing maize and subsidizing market prices. And this was on top of a sugar shortage. If the harvests and stocks of maize and other major foods can be raised and kept within a predictable range, their final prices on supermarket shelves would most likely: reduce as supply is increased, and stabilise as the supply is kept within a narrow range. Who would disagree that cheap food would be good for the economy? As it stands, Kenyans typically spend up to half of household budgets on food. If this could reduce by even a fifth (to around 35%), you can imagine the stimulating effect this seemingly modest move would have on aggregate savings and investment, and consumption of other goods and services.

Kenya consumed about 30 million 90-kilogram bags of maize in 2016. Given a harvest rate of 35 bags per acre, that’s just over 850,000 acres of land. Given that the Galana/Kulalu ranch spans 1.78 million acres of which 1.2 million acres is suitable for irrigated agriculture, putting 20% of this arable land (240,000 acres) under maize could produce up to 840,000 additional 90-kilogram bags of maize. This is equivalent to 28% of the maize consumed in 2016. Such stocks, properly stored, would alleviate any shortages that could arise from the traditional sources of maize, reduce the see-sawing of prices, and ideally result in cheaper consumer prices.

The man power required to ready 240,000 acres of land for crop farming would be massive. Army-like. Even with mechanisation, it would require tens of thousands of people to fence, till the land, lay water reticulation infrastructure, apply manure and fertilisers, and sow the seeds. It would require thousands of people to take care of the growing crop. Thousands of people to harvest. Hundreds or thousands more to man the grain storage and reserve silos, and more to work the processing plants. Hundreds or thousands to take care of the farm infrastructure – fencing and security; movement to and within the farm, and post-harvest transportation; water services and reticulation within the farm; housing, food, education, healthcare and other services that would be required by the on-site labour; farm management and administration, etc. If the full 1.2 million acres could be activated, this one project could directly hire hundreds of thousands of people, and maybe close to a million overall. Given Kenya’s sky-high rate of unemployment among the youth, this one project could make a significant dent in the unemployment numbers within a short time (~5 years).

With hundreds of thousands of people working (and consequently living) within proximity of the Galana/Kulalu farm, it would be natural that capitalists would flock to the area to serve their needs. Builders would rush to build houses, educationists would establish schools, traders would set up shops, and so on. Furthermore, given the sheer supply of stock, a few uniquely enterprising individuals would consider ventures either processing the principal product. In the case of maize, these could be millers. Some would innovate new products, such as supermarket roasted maize in the style of roasted peanuts (I personally think such a product would be incredible!) or instant mahindi boilo (just microwave it for 5 minutes). A few would surely get involved in processing the bio-waste, maybe creating briquettes from the maize stalks and selling them as fuel for jikos as a substitute for charcoal. Such entrepreneurs, creating additional value from the direct farm produce, would create many more jobs and potentially earn massive payoffs for themselves.

After establishing sufficient reserves of the crops, the surplus could be sold to other countries, earning much-needed foreign exchange. Depending on the volume of exports, this could grow into a major forex earner for the country. And if we pleased, we could use these proceeds to set up a national food security fund. The fund could be used to subsidise farmers, it could pay for expanded production of other major crops, or any other use that Kenyans may find viable.

Food is a very big deal for most Kenyans, with the price and availability of food impacting most of us. The Galana/Kulalu project is already underway, with around 5,000 acres under crop. If this one project could be successfully delivered within President Kenyatta’s second term, this alone, would be a worthy legacy. Not only would it address the problem of food insecurity, it could create hundreds of thousands of jobs and tens of billions in new wealth: all good things. Focus on this big one, food security, Mr. President, and your legacy will be secured. The ‘army’, well fed, will be rearing to march.

 

Categories
Investing

Stock Market Investing

A few months ago I wrote down my analysis of Safaricom Limited. Safaricom: Past, Present & Future evaluated the business operations of Kenya’s biggest telco, it’s past financial performance and my thoughts on its future prospects. I started with an analysis of its history from the price-war days with Kencell and YU Mobile, and the initial public offering of its shares in 2008. I considered the present, where Safaricom and M-PESA are leading brands in Kenya, the company enjoys 65% market share in terms of subscriber numbers, and sustains nearly 200,000 direct and indirect jobs. As of the latest full-year earnings report (link), total assets exceed borrowings nearly 10 times, and if revenues were to reduce by 10% and the total expenses increased by 10%, revenues would still exceed expenses by more than 20%. Even in the absence of significant leverage, the company’s return on equity is at a stratospheric high of 45%, continuing a trend it has been on for the last 6 years. I also wrote down what I forsee in Safaricom’s future, in particular, that the company will (continue to) benefit from Kenya’s demographics and that its ISP business (fixed and mobile data service) will be the most important area for growth:

(i) Most of Kenya’s population is under the age of 40. It is quite likely that a large number of Safaricom’s customers are, by extension, under the age of 40. I do not think that the over-40’s are likely to spend say 10% more on calls and SMS over the next few years, while I do think that the under-40’s are likely to spend at least 10% more on mobile data services going forward. This youthful (“millennial”) subscriber base is tech-savvy and plugged in, requiring bytes of data for every retweet and Instagram like.

(ii) With smartphones becoming cheaper by the day, more and more people have access and are buying these devices. Cheaper and more interactive, I think messaging applications such as WhatsApp and Telegram are likely to steal away growth from SMS and voice minutes, increasing the revenue spent on mobile data. H1 2017 financial results seem to support this, with revenue from outgoing voice calls up 1.9% YOY, messaging revenue up 8.1% YOY and revenue from mobile data up 46.3% in the same period.

But it’s not all rosy; there are several areas of concern.

  • The runaway growth that the company has enjoyed is likely to slow down (“With 65% of mobile phone subscribers already on the network, and the firm enjoying 77%, 93% and 63% market share in the voice calls, SMS and mobile data segments, there really isn’t much growth to be expected from acquiring much more market share”);
  • Competition is likely to increase (“An increasing number of players in the data and mobile money sub-sectors could result in increasing price pressure, that may have a gravitational pull on revenues. In addition, the company may have to invest in its infrastructure (4G, fibre, cyber security) to sustain its competitive advantages”);
  • And, maybe most importantly, the company will have to be wary of complacency (“…we know all too well of companies that dominated entire industries a decade ago and today are merely fractions of what they once were, if they exist at all (remember Nokia?)” and now Nakumatt?).

[Read the full article here]

At the end of the article I proclaimed: “I would not be surprised if Safaricom became Kenya’s first trillion-shilling company by market capitalisation in the not-too-distant future” (Safaricom shares are trading at over KES 25, valuing the entire business at more than KES 1 trillion [link]) with the caveat that I was evaluating Safaricom merely as an operating business and not as a potential investment. Following the article, the question I have received most is precisely that: having analysed the company, do I think Safaricom is a good investment?

The most important part of this question is the adjective good. What is a good investment? The truth is, it depends. Good to me, may be poor for you, and great for another person. To evaluate goodness, one must, at the very least, have thought through their investment philosophy. Why are you investing? What are you looking for? What level of risk are you comfortable with? What’s your time horizon? Do you need to receive a dividend every year? Are you an active investor or a passive one? With a well-defined investment philosophy, you will be able to assess goodness for you.

To help you do think through an investment philosophy and refine your decision-making, I have put together 4 resources I consider useful:

1. Please read “The Superinvestors of Graham-and-Doddsville“, written by Warren Buffett in 1984. He runs Berkshire Hathaway (ranked 8th in Fortune magazine’s list of the 500 biggest companies in the world by revenue – US$ 223 billion in 2016), and with a personal net worth of US$ 80 billion, he is the second richest man in the world. The article eloquently makes the case for long-term value investing, and his own performance as an investor clearly proves that the approach works.

2. If the 👆 article struck a chord with you, go ahead and get yourself a copy of “The Intelligent Investor” by Benjamin Graham. First written in 1949, the book is a treatise on investing, and is –I think– required reading for anyone who wants to be a successful investor. Warren Buffett highlights chapters 8 and 20 of the book as essential, so you may want to pay special attention to those. You can get a free PDF copy of the book by clicking on the image below.

The Intelligent Investor

3. Read this article on the brilliant Farnam Street blog about how to make intelligent decisions.

4. Finally, I have prepared a tool that will help you make your investing decisions. It’s an excel spreadsheet that will help you run a simple cash-flow valuation on a company, assess the balance sheet and help you decide whether or not you should BUY. Being a spreadsheet, you are free to enter your own data and to tweak it as you like. You can change the time horizon, the risk-free rate, your margin of safety, and other parameters that go into doing such an assessment. I hope it, and the 3 reading recommendations, help you refine your thinking and make better decisions about your investments.

Download the investment decision-making tool here