Land acquisition in Africa for agricultural purposes : the case of sugar cane plantation and sugar mill in Ethiopia

Land acquisition in Africa has dramatically increased recently and many land deals have been signed. A real option (RO) model is developed to examine the profitability of land investment in Africa for the agricultural purposes. In this model, the factors that can affect the willingness of private corporations abroad to lease land and then implement the agricultural projects are taken into account. A land lease contract, signed between Hunan Dafengyuan Agriculture Co., LTD and the Ministry of Agriculture of the Federal Democratic Republic of Ethiopia, for sugar cane plantation and sugar processing in Ethiopia is chosen for the case study. This land investment project is evaluated as a series of compound real options using the binomial model and the project value is compared with the evaluation result under the net present value (NPV) approach. In the empirical study, the project value under NPV approach is 1.832 billion 2008ETB, while the value under RO approach is 43.174 billion 2008ETB. The results indicate that this project is worth investing in and the real options embedded in this project are considerably valuable. Furthermore, the project value is subject to the value of some exogenous variables, including the current sugar price, the average yield of sugar cane, the volatility of sugar price, annual land rent and the discount rate. The sensitivity tests illustrate how the exogenous parameters affect the decision of investors