IIMA August 2019 Issue 1 by LCM Capital

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AUGUST 2019 ISSUE 1

BOTSWANA CLIMATE SMART AGRICULTURE

BOTSWANA NEW WEALTH CREATORS

DE-RISKING AGRICULTURE

Milllennials and Generation Z are re-imagining

Introducing Commodities Exchange will not

agriculture and creating multiple streams of income and

only de-risk agriculture but attract Investment

creating jobs. Agriculture holds the key to job and wealth

to the sector. Climate Smart solutions key to

creation.

increasing yield.

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Page of Contents Introduction

Culture Shift

Regulation & Policy

Emerging Companies

De-Risking Agriculture

ESG Insights

Climate Finance

Climate Change Champions

Agr ic ult ure E volut ion Agriculture continues to be a dormant sector with untapped opportunities that can alleviate economic and development challenges in many African States. This underutilized sector is finally receiving the attention from young people who have been forced to think unconventionally due to lack of jobs available in the market place. Historically farmers only had one business model, grow and sell products locally or for export. Now there is an emerging trend, farmers have started to connect the dots across different players in the value chain.

I n t r o d u c t i o n | Pa g e 2

The produce is now going from the farm to the processing plant and to the retailer. Young agripreneurs have given agriculture a facelift with the integration of technology to speed up access to information and to give farmers more bargaining power in price. However, there is still a lot of work that needs to be done to enable this sector to thrive and contribute to food security and job creation. The more prominent risks facing this sector are the availability of affordable finance, climate change and structured finance products.

Agro-Processing

Value Addition

Export

Botswana is well renowed for her prime beef not byproducts along the value chain. Leather processing is still an untapped opportunity.

The pot of gold lies along the value chain not the growing of crops. Value addition exploration will diversify the sector and increase ROI.

The products produced along the value chain will position Botswana as an export hub that will cater to 1.2 billion people under AfCFTA.

MOAHI PRODUCTS

Phone:(267) 74919539 e:moahiproducts@gmail.com

Th e New Face of Agr ic ult ure

Cu l t u r e S h i f t | Pa g e 3

1TN GROWTH BY 2030

At the 2018 Africa Investment Forum, African Development Bank predicted that Africa’s agribusiness sector will reach US$1 trillion by 2030. The Bank told Investment Forum participants that agri-business will become the ‘new oil” on the continent fueling the motor of inclusive growth. A booming agriculture sector will replace US$110 billion worth of imports resulting in the continent becoming a net exporter of agricultural commodities which will spur the growth in intra-African trade. Founder & CEO LCM Capital

Paradigm Shift It has taken many decades for the agriculture sector to shake off the stereotype of a poor man profession and a retirement getaway for subsistence farming for pensioners. Youth unemployment rate of more than 20% in Botswana has catalyzed an agriculture revolution and mindset shift as more young people seek alternative streams of income and are sensitized about various opportunities available in the agribusiness industry.

Millennials Re-Imaging Agriculture The millennials and Generatin Z are reimagining agriculture from a part time hobby to a commercial venture that not only creates wealth for themselves but also provide a plethora of solutions that link different players on one platform, eradicate poverty in their communities, create jobs and enhance food security.

Straight from the Farm to Processing The opportunity cost for exporting raw agriculture goods is massive. Therefore, there is now exploration in transforming raw materials to other products along the value chain. Opportunities available in the agribusiness industry are agro-processing, aqua fisheries, agri-mobile applications, fertilizers and chemicals, horticulture, dairy farms, consultancy services, seeds and feeds.

Local Brands Collaborating to Promote a Healthy Lifestyle

Food & Beverage

Health Generation

Phone : (267) 318 1510 e-mail:healthgenerationbw@gmail.com

R e gu l a t i o n & P o l i c y | Pa g e 4

L I N K I N G U N S U S TA I N A B L E D E V E L O P M E N T G O A L S T O NATIONAL BUDGET Compliance to United Nations Sustainable Development Goals and Regional regulatory requirements will ensure that the agriculture sector is given high priority in national budget agendas to leverage the current trends of youth interest that will result in high contribution of the sector to national GDPs and reduction of youth unemployment. Currently, the sector remains low on the national budget agenda for most African countries due to the inherent risks such as low return on investments due to climate change and price volatility.

According to Statistics Botswana agriculture annual percentage change in real GDP was 2.9% in Q4 of 2018 as shown below.

Annual Percentage Change in Real GDP 4 3 2 1 0 -1 2014

2015

2016

2017

2018

Real GDP

Agriculture has contributed less than 5% to the GDP over the past 5 years. Concerted effort required to increase the contribution to at least 6% to GDP per CAADP requirements.

Food Security In Botswana out of the P46.99 billion recurrent ministerial budget only 2.8% or P1.34 billion was allocated to the Ministry of Agricultural Development and Food Security. The 2.8% allocation to agriculture is below the target set by the Comprehensive Africa Agriculture Development Programme (CAADP) of at least 10% to the national budget and 6% annual growth in agricultural GDP. CAADP is Africa’s policy framework for agricultural transformation, wealth creation, food security and nutrition and economic growth.

Job Creation

38%

Youth Unemployment Rate

Agriculture has massive potential to create thousands of jobs that are needed to reduce the youth unemployment rate to less than 10%. According to the World Youth Report and the Agenda for Sustainable Development 0.2% of Gross National Income should be allocated for official development assistance.

B A T S WA N A A G R I - P R E N E U R S

E m e r g i n g C o m p a n i es | Pa g e 5

Despite the miniscule resources allocated towards the agriculture sector, there are a few emerging success stories from young Batswana agri-preneurs who are changing the narrative of agriculture as a poor man venture to a lucrative profession that can change the luck of many unemployed youth in Botswana and create a rippling effect in economic development. These young people are incorporating advanced technology in their business models proving that agriculture is a viable venture with high return on investment and on average a shorter payback period of less than 3 years.

Chabana Farms

mAgri

2018 Tony ElumeluÂ Most Impactful Entrepreneur

MR Martin Stimela Co-Founder mAgri

Martin Stimela is another outstanding agribusiness entrepreneur from Botswana who cofounded mAgri, a USSD mobile application that allows all farmers including the underserved in remote villages to market their products and services across the country.

Mavis Nduchwa Founder of Chabana Farms is on a mission to make agriculture cool to the youth. She is the recipient of 2018 most impactful entrepreneur award and current judge on BBC The Food Chain Global Champion Award and exports honey products to Lesotho and Namibia.

Arona Natural Foods Phone: (267) 79524276 e-mail:http://www.aronanaturalfoods.co.bw

Agri-Business Investor Readiness

D e - R i s k i n g A g r i c u l t u r e | Pa g e 6

Affordable Funding Botswana has designated commercial and agro processing special economic zones in the Northwest and Southern part of the country. A total of 221 farmers signed up for contract farming during the 2017/2018 financial year according to Botswana Agricultural Marketing Board (BAMB). BAMB is the custodian of food security for the nation, entrusted with managing Strategic Grain Reserve at the required level of 70,000 Mt comprising of 30,000 Mt of Sorghum, 30,000 Mt of Maize and 10,000 Mt of beans. Yet, Agricutulre continues to be a very expensive venture due to many traditional lenders risk aversion in the sector due to it's perennial losses over the years. The National Development Bank, a quasi-government institution is the dominant player and financier in the agri-business space and has over the years failed to recoup an attractive return on investments due to the already mentioned factors inherent in this sector. How do we then make agri-business investor ready so that entrepreneurs can have access to competitive cost of capital and well deserved love from financiers and investors. Introduce Commodity Exchange How can we de-risk agriculture for affordable funding and promote it to the many unemployed youth as a viable option to self-sufficiency and economic emancipation? The answer lies in linking agriculture commodities to capital markets for price transparency, risk mitigation solutions to hedge against price volatility and production yield. Introducing climate smart technology to mitigate against climate change factors.

Generic 1st 'C' Future C 1: COM (US$) 440 430 420 410 400 390 380 370 360 350 Sept

Nov

Jan

Mar

May

Price of Corn

Derivatives:Structured Finance Products The closing trading price at the time of reporting of a December 2019 C1:COM Generic 1st C Future contract for corn was 441.25 USD/bu. Derivatives instruments like future contracts, options, forward currency contracts and interest rate swaps are not highly used in Botswana as hedging instruments to mitigate risk or loss. These sophisticated structured products should be introduced in the market if agriculture is to contribute a high percentage in GDP. A separate local commodities exchange can be developed to create a linkage for key stakeholders and promote transparency and wealth creation.

ESG Priorities & Management

LCM CAPITAL: Executive Director of ESG & Sustainability – Lindiwe Modise The potential to achieve environmental sustainability and food security is challenged by the world population in 2050 which is expected to increase by 2.4 billion. This increase will put more pressure on the world’s agricultural systems, fuelling the demand for food production, fuel availability and the manufacture of fibre. Countries experiencing an immerse release of greenhouse gas emissions and current tillage practices face a greater challenge for feeding their rapidly increasing populations against the changing climate, degradation of air-soil-water ecosystems and growing demand of resources. Climate Smart Agriculture (CSA) was developed by Food and Agriculture Organisation (FAO) of the United Nations in 2015 as an approach to tackle climate change challenges. CSA is an approach for transforming and rehabilitating agricultural knowledge products (KPs) and systems under the new realities of climate change. Productivity, adaptation and mitigation are identified as the three elements necessary for achieving the CSA goal.

E n v i r o n m e n ta l , S o c i a l & G o v e r n a n c e I n s i g h ts | Pa g e 7 CSA practices are developed and implemented in a way that builds upon the principles of sustainable agriculture but surpass the narrow sectorial approaches that result in unplanned and competing land usage to incorporate planning and management. CSA characteristics, address climate change by systematically implementing climate change into planning and development of sustainable agricultural information, communications, knowledge and management (ICKM) products and systems that are available to young conventional and small-holder farmers. The CSA practices result in increased productivity for local farmers, improved resilience and reduced greenhouse gas emissions. CSA approaches must involve women and vulnerable populations, such as, the innovative youth and less fortunate smallholder farmers living on deteriorated lands which experience drought and floods, to achieve food security goals and enhance resilience. Encouraging stakeholders to allocate more land and resources to women could assist develop their adaptive capacity to cope with natural disasters like drought and floods

CSA Impact on Botswana Botswana is known for its inconsistent ecological environment and arid climate which result in the reoccurrence of floods and drought. Agricultural production sector is of importance to Botswana’s sustainable development goal. Survival and profits are the major drivers for existing agricultural and food systems in Botswana. Smallholder farmers who practice subsistence agriculture as a way of life and survival constitute over 90% of the farmers. Commercial farming, driven by profits, constitutes less than 5% of the farmers and produce more than 80% locally produced cereals. The government of Botswana developed a “Botswana Climate-Smart Agriculture Program 2015-2030” to tackle the climate change challenges and incorporation of CSA practices through collaboration between the Ministry of Agricultural Development and Food Security, Ministry of Environment Wildlife and Tourism and with technical and financial aid from The Common Market for East and Southern Africa (COMESA), Southern African Development Community (SADC), CGIAR Research Program on Climate Change and, Agriculture and Food Security (CCAFS) engaged on developing the Botswana’s CSA 2015-2030 program.

E n v i r o n m e n ta l , S o c i a l & G o v e r n a n c e I n s i g h ts | Pa g e 8 The potential focus of integrating indigenous practices and CSA into crop and livestock production systems in Botswana as a poverty eradication strategy, should differentiate between the different agro-ecological zones and take advantage of zones which are best suited for the production of specific agricultural commodities. Sorghum yields are relatively high (3 - 4 tons/ha) in the Chobe area where average annual rainfall exceeds 600mm and moderate (1.5 – 2 tons) in the eastern part of the country where annual rainfall is in the region of 500mm.

Average Annual Rainfall 600mm Northwest 500mm Eastern

Agriculture Zones The monitoring and management of crops needs to change to suit the constantly changing climatic conditions. Botswana is faced with a challenge of smallholder farmers still using traditional management practices not suited to climate change. There is need for a clear policy direction by the government to guide and formulate the transition to CSA to guide all the stakeholders in agriculture.

E n v i r o n m e n ta l , S o c i a l & G o v e r n a n c e I n s i g h ts | Pa g e 9

"Potential stakeholders for this initiative are policy makers, agricultural research institutions, financial institutions, farm machinery suppliers, farmers and organised commodity markets to purchase the agricultural produce. Lack of funds and appropriate technology remain a major challenge to researchers, extension officers and farmers. The clear policy to guide the implementation and machinery, working parallel with researchers and extension farmers to support the smallholder farmers would potentially lead to a successful use of CSA poverty eradication practices, revenue generation through the implementation and monitoring of Environmental, Social Governance (ESG) and Sustainability in Botswana."

Executive Director of ESG & Sustainability LCM Capital

C l i m a t e F i n a n c e | Pa g e 1 0

SDG 13 Climate Action

Botswana Agriculture Sector GHG Emission Inventory CO2 eq (Gg) 10,000

5,000

0 1990

1994

2000

2011

Enteric Fermentation & Manure Management (CH4)

Animal Waste Management Systems (N2O)

Indirect Emissions from Leaching (N2O)

Biomass Burning (crop waste)

Figure 1 Source: Statistics Botswana Climate change continues to be high priority and risk on the risk register of most Fund Managers. Southern Africa region had a fair share of cyclones early this year that rampaged three countries, Mozambique, Zimbabwe and Malawi leaving thousands of people homeless and a trail of destruction to their businesses and properties. Botswana had a lucky escape from the effects of cyclones but was not lucky from low rainfall in certain parts of the country which affected production yield. The agriculture sector in Botswana is dominantly driven by animal and crop production primarily in livestock production. 2011 statistics from figure 1, show that animal waste was the biggest contributor of Green House Gases (GHG) compared to other inventory. Against this backdrop how can semi-arid countries like Botswana that are largely affected by El Niño and La Niña phases raise finance to combat climate change? According to the United Nations Inter-agency Task Force on Financing for Development 2019 Report climate change mitigation and adaptation policies, and disaster risk reduction, can be supported by incentives in the fiscal system.

Environmental taxation Environmental taxation together with subsidies can be used as a sweetener to motivate and encourage organizations and companies to adopt sustainability policies and strategies in their business model to transition to a low-carbon economy. Climate Funds CFI Database CLIMATE FUNDS

INVENTORY

The Climate Fund Inventory (CFI) database is a qualitative database of bilateral and multilateral public climate funds. This CFI initiative support countries with their climate change mitigation and adaptation actions, as well as readiness activities. Climate Funds (CF) are gaining popularity on the African Continent due to the dire need for solutions to mitigate climate change. Africa Global Funds reported that $850 million was raised by Climate Investor One’s Stichting Development Fund and Coöperatief Construction Equity Fund at the beginning of H2.

Green Bonds for Climate Action

As demand for green and sustainable investments grow on the African Continent more CF will emerge to seize the opportunities and spear head Foreign Direct Investment to bridge funding gaps. There is yet to be a CF in Botswana to take advantage of opportunities in climate change mitigation, climate change adaptation, natural resource conservation, biodiversity conservation and pollution prevention and control to de-risk Agriculture sector and make it investor friendly. Green Bonds Another vehicle to raise funds for impact is through the issuance of Green Bonds (GB). GB are yet to gain momentum in Africa with only Nigeria and South Africa currently operating in this space. This is consistent with their uptake on renewable energy projects and mature Renewable Energy Independent Power Producer Programme market. The International Capital Market Association (ICMA) defines a Green Bond as any type of bond instrument where the proceeds will be exclusively applied to finance or re-finance, in part or in full, new and/or existing eligible Green Projects and which are aligned with the four core component of the Green Bond Principles (GBP) listed below. Four Core Components 1. Use of Proceeds 2. Process for Project Evaluation & Selection 3. Management of Proceeds 4. Reporting A clear distinction should be made between Sustainability Bonds and GB. Sustainability bonds combine both green and social elements.

C l i m a t e F i n a n c e | Pa g e 1 1 The list of eligible projects supported by the GB market is exhaustive according to ICMA, however the below projects are aligned with the discussion covered. Renewable Energy-including production, transmission, appliances and products. Environmentally Sustainable Management of Living Natural Resources and Land Useincluding environmentally sustainable agriculture; environmentally sustainable husbandry, climate smart farm inputs such as biological crop protection or drip irrigation, environmentally sustainable fishery and aquaculture; environmentally sustainable forestry, and preservation or restoration of natural landscapes. Pollution Prevention and Control-reduction of air emissions, greenhouse gas control, soil remediation, waste prevention, waste reduction, waste recycling and energy/emission-efficient waste to energy. To attract investors it is highly recommended that the issuer of the GB clearly communicate the environmental sustainability objectives and material environmental and social risks associated with the project. Moody's estimates that GB market will grow to $200 Billion in 2019. Botswana is yet to aggressively adopt a renewable energy program due to the capital intensity of the projects. A GB is yet to be issued in the country which present a great opportunity for companies and organizations with an ESG agenda. GB offers access to a pool of international investors, diversification of risk, transparency and robust corporate governance.

20%

Yo u r G r e e n C o n s c i e n c e B l o g

Topoyame Mabophiwa

I was awarded Botswana government full scholarship to study Chemical Engineering at the University of Sheffield in the United Kingdom. My top grades resulted from modules and research projects focused on renewable energy, greenhouse emissions and climate change mitigation. Post-graduation, I joined Rand Merchant Bank through the graduate program; being the only female and engineer among the selected few. Switching from Engineering to Corporate and Investment Banking (CIB) has proven to be the best move and evidence of my flexibility, learning agility and adaptability. CIB has forced me out of my comfort zone and gave a different viewpoint of the world. My role in client relationship management requires continued research into clients’ sectors; giving insights on key economic drivers and threats; climate change has since been the root cause of these threats. Through all these, my interest in climate change related issues sprouted. My country, Botswana and other middle to low income countries are short of climate change expertise, seeing that climate change is a problem that affects all sectors of the economy from consulting, energy, manufacturing, mining, food industry, services etc. Action needs to be taken to address the associated risks and take advantage of the opportunities that arise from it. Developing countries are highly vulnerable to climate change effects; we need to understand how exceeding the set global warming limit will affect us not just health-wise but economically as well given the development shortfall against developed countries. Research shows that a surge in global temperature will result in extreme local effects, steering in intense and lengthy droughts and heatwaves.

Y o u t h C l i m a t e C ha n g e C ha m p i o n s | Pa g e 1 2 Changes in rainfall are also expected to shift; when rain does fall, it is projected to be heavier, heightening the risk of floods within the general drying climate. Heated ocean surfaces will also bring life threatening cyclones like we have seen lately in Malawi, Zimbabwe and Mozambique killing masses and yielding climate refugees - see picture below. There is a pressing need for us to prepare and adapt to hasty global warming effects. Botswana is one of the 175 signatories in the 2016 Paris Agreement under the United Nations Framework Convention on Climate Change (UNFCCC) targeting at restraining global warming well below 2°C and limit annual net global greenhouse gases to zero by end of the century. However, we have no dedicated policy to respond to climate change but scattered efforts to address climate change via different organisations. Most of these efforts are centred around implementing green technologies, but then again, these initiatives are stunted by lack of funding and poor political support for solving climate change issues. The big debate is; Fossil fuels have been the most cost effective tool for poverty elevation for over 150 years. Developed countries have contributed the most to anthropological greenhouse emissions during these years. How do we now expect low income economy countries to grow their economies on more expensive alternative energy sources when they have an abundance low cost fuels i.e. coal, oil and gas? How do we bring everyone to the party whereas simultaneously closing development gap between developed and developing countries? These questions are at the centre of my interest in Climate Finance*.

LCM CAPITAL FINANCIAL SERVICES

Phone : (267) 77629055 e-mail:enquieries@lcmcapital.co.bw

Future Trends There is a high appetite and demand for agriculture investments for impact investing from Institutional Investors, Local Fund Managers and International Private Equity Funds. What is missing? A culture paradigm shift of integrating technology and linking agriculture commodities to capital markets for high yield, transparency and real time access to information to hedge against price volatility and climate change. Advanced technological infrastructure development is needed in Botswana and the rest of the region to tap into agro-processing and export products to other African countries which will increase intraAfrican trade.

Ou t l o o k | Pa g e 1 2

With the youth rebranding Agriculture and bringing new products and services to the market and region, the sector is poised to be a formidable force in job and wealth creation. We predict that Agriculture contribution to the National Gross Domestic Product will surge from 2.9% to 20% in the next 5 years.Â A combination of CSA and CF will ensure risk adjusted returns and yields for investors and farmers.Â Commodities play a vital role in the economic diversification, therefore implementation of a local Commodity Exchange that can be an interface for stakeholders is long overdue. The local capital market is in need of structured products bespoke for the sector. Â

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