Whether for profit or social motives - and often both - an increasing number of investors are targeting opportunities in African agriculture. At the same time innovative approaches for deploying aid to support farming businesses linked to smallholders are emerging. This blog provides a snapshot of who is doing what, where and how.

15 June 2015

LAFCo agri-loan facility now open for business

CAPE TOWN (June 3, 2015) — KfW, the German Development Bank on behalf of the German Ministry of Economic Cooperation and Development (BMZ), along with AgDevCo and Root Capital, today announced the launch of the Lending for African Farming Company (LAFCo). The company will finance agricultural enterprises throughout sub-Saharan Africa to enhance local food security and stimulate inclusive economic growth in the region.

Announced at the 2015 Grow Africa Investment Forum during the World Economic Forum on Africa, LAFCo aims to increase smallholder farmer productivity and incomes through better integration in local and regional agricultural value chains, and improved access to formal markets. With an anchor commitment from KfW, using funds from the German government, and additional investment by AgDevCo, which initiated the project with the support of UKAid, LAFCo will accommodate the working capital needs of agricultural enterprises. It will be managed by Root Capital and will provide lines of credit and other flexible debt products in amounts of up to $4 million, denominated in both U.S. dollars and local currencies.

Presenting the investment, Jenny Scharrer, senior project manager of KfW, commented: “The barriers to improving food security and alleviating poverty are numerous and complex. By investing in LAFCo and supporting the businesses that work with smallholder farmers, KfW is seeking to demonstrate new and innovative approaches to development finance. Guided by the shared values and impact philosophies of its sponsors and manager, LAFCo will help fill a critical financing gap and support the equitable and inclusive growth of this sector.”

The new collaboration comes at a time when the need for capital is increasing for agricultural businesses throughout the region. However, many of these enterprises are unable to access sufficient financing from commercial banks or other financial institutions. Beginning immediately, LAFCo will provide debt financing to a wide range of agricultural enterprises, including cooperatives and private businesses. Lending activities will take place across sub-Saharan Africa, with a particular focus on Ghana, Kenya, Malawi, Senegal, Tanzania, Uganda and Zambia.

“The potential of Africa’s agricultural sector has attracted significant interest from equity investors, but the day-to-day financing needs of businesses are often overlooked,” explained Chris Isaac, director of investments at AgDevCo. “We’re delighted to partner with KfW and Root Capital to help African entrepreneurs and farmers access the capital they need to grow profitable businesses. Investment in agriculture means higher incomes, more jobs and increased food security.”

According to the Alliance for a Green Revolution in Africa, sub-Saharan Africa is home to 60 percent of the world’s uncultivated arable land. Despite its production potential, Africa’s crop yields are between one-third and one-half of the global average, and more than 200 million individuals are chronically undernourished, the majority of them living in rural areas. To help address these challenges, LAFCo will finance agricultural enterprises that purchase crops from smallholder farmers, or that provide them with yield-enhancing products, such as seeds and fertilizers, and related services.

“If Africa is to meet the challenge of sustainably feeding a rapidly growing population in ways that also contribute to poverty alleviation, reliable access to finance is essential,” said Nate Schaffran, senior vice president of lending at Root Capital. “With 15 years of experience in lending to agricultural enterprises, Root Capital is honored to manage LAFCo and help catalyze a broader financial market to benefit Africa’s smallholder farmers.”

Beginning with a first close of $15 million in committed funds, LAFCo aims to become a leading provider of capital for businesses operating in Africa’s local and regional agricultural value chains. The innovative “blended finance” structure of LAFCo, which combines public and philanthropic funding with private capital, will allow it to serve parts of the market that are generally not being served by commercial banks or other financial institutions.

LAFCo was developed with the support of Dalberg Global Development Advisors and in collaboration with the Grow Africa Finance Working Group. Founded jointly in 2011 by the African Union, The New Partnership for Africa's Development (NEPAD) and the World Economic Forum, Grow Africa works to increase private-sector investment in agriculture and accelerate the execution and impact of investment commitments.

Additional legal and structuring advice was provided by Innpact, Norton Rose Fulbright South Africa Inc. and BLC Chambers

30 May 2015

Blended finance can unlock agriculture potential in Africa

Africa is growing faster than any other continent. It has a middle class which is set to triple in size by 2030. Private equity investment deals reached $8.1 billion last year, with investors betting on financial services, consumer goods and property. Diversification of investment activity from extractives holds promise for higher job creation and broader based growth.

But the agriculture sector lags behind, despite its enormous potential. Food imports are already running at $35 billion annually and could double over the next decade. African farmers’ yields fall well below global averages. Per the latest UN statistics, the number of undernourished people continues to rise (from 175 million in 1992 to over 220 million today).

The need for private investment and expertise to help unlock the potential of agriculture is widely recognised. Farming is a business that requires an entrepreneurial approach and plenty of risk capital, whether at the smallholder level or for large mechanized farms. The sector will not achieve take-off if reliant on public sector support and hand-outs, which has been a tendency in the past.

The problem is that private capital is not reaching the agriculture sector, for three main reasons. Firstly, logistics costs are high, mainly because of weak infrastructure. Secondly, agriculture is inherently risky and requires specialist and locally-adapted knowledge. Thirdly, most agribusiness investment opportunities are small and early-stage, which makes due diligence and transaction costs prohibitive.

So what is to be done? One approach is to wait. The policy environment is improving; roads, telecommunications and power networks are reaching the most remote areas; a highly skilled African diaspora is returning home; capital markets are becoming more sophisticated. The best opportunities should rise to the top and private investors should be able to find them.

However, in AgDevCo’s view, it may take ten years or more before the agriculture sector matures to the point where it can attract sufficient volumes of commercial investment. In that time 122 million young people will have entered the workforce, according to a recent McKinsey study. Without investment in agriculture it is unclear whether Africa can create enough jobs to take advantage of its “demographic dividend”.

Blended finance funds are a possible solution. These hybrid fund structures combine public, philanthropic and private capital. The non-commercial capital acts as a first loss cushion, with the objective of leveraging larger volumes of private finance into markets where risks are high and financial returns uncertain, but there is the possibility of major positive social impact.

These types of funds have an ability to invest with new entrepreneurs and early-stage businesses, allowing them to build a track record, which should help them access later rounds of commercial capital. By making smart investments, blended finance funds aim to demonstrate that the cost and risks of operating in certain markets are not as high as some investors might think.

With agriculture investment in Sub-Saharan Africa estimated as being 11 times more effective in reducing poverty than investment in any other sector, a blended finance fund focused on SME agribusinesses could make a major contribution to food security, economic growth and poverty reduction, while demonstrating that agriculture can be a profitable business.

WATCH THIS SPACE: with international partners AgDevCo will be announcing a new blended financing facility for African agriculture at the World Economic Forum Africa meetings in Cape Town on 3 June 2015. More details will follow soon . . .

1 October 2014

Investing in African Agriculture – More Bang for the Philanthropic Buck

This article written by Chris Isaac of AgDevCo first appeared here on the European Venture Capital Association (EVPA) website on 1st October 2014.

It is a huge opportunity. According to the United Nations’ Food & Agriculture Organisation (FAO), $35 billion worth of agricultural goods is imported into Africa annually. With a growing middle class and a population set to reach two billion by 2050, demand for more and better quality food will continue to rise. There are large areas of arable land and plentiful water resources in many parts of Africa. Surely investors can play a role in reversing the flow of food imports? With the right types of capital and expertise, Africa should be able to feed itself and sell a surplus to the rest of the world.

There’s a strong developmental case for investing in African agriculture, not least to create the job opportunities for a young and rapidly growing workforce. 700 million people are set to enter the workforce in the next 30 years. Per the World Bank, growth in agriculture is 2.5 times more effective in reducing extreme poverty than growth in the rest of the economy.

But in the short-term the investment case for African agriculture remains unclear. Competing with highly efficient producers in Latin America, Europe and the Far East is not easy, even when you benefit from transport cost advantages. The landed price at African ports of frozen chicken from Brazil, rice from Thailand or palm oil from Indonesia is often lower than the local cost of production. Unpredictable import tariff regimes don’t help.

Production costs are high because African agriculture is still largely an infant industry, which receives little of the support that is taken for granted in developed countries. In Europe, farm subsidies average more than €200 per hectare, which is more than the income most African smallholder farmers earn from crop sales. Public spending on research and development in Africa is a fraction of other regions in the world. Investors face additional challenges of poor roads and power networks, a lack of service providers, complex local bureaucracy and a scarcity of experienced management. If a tractor breaks down it can take days to get spare parts sent via international courier; producing accounts can be a challenge when the nearest qualified accountant is over 1,000km away in the capital city.

http://4.bp.blogspot.com/-a0_2oMOKcKc/TihJA9s9tcI/AAAAAAAAADY/1n8wxMBu-9o/s640/road.jpg
The main access road to the Kilombero Valley, in southern Tanzania, during the wet season.

Investing in agriculture requires a long-term approach. In AgDevCo’s experience, there are no easy returns to be made, especially in primary production (i.e. growing crops). Proper consultation and engagement with local communities – about land rights, jobs and outgrower schemes – is necessary, not only because it is the right thing to do, but because it makes for a more sustainable investment. A full understanding of environmental risks and how to manage them is also essential. It all takes time and money.

Understandably the commercial banks, as guardians of their depositors’ funds, are wary of agriculture given the high risks. There has been a surge of interest in Africa recently by private equity funds, but the majority focus on sectors that offer higher returns such as financial services, healthcare or property. Where PE funds do look at agriculture they shy away from farming, preferring well-established trading or processing businesses, and they tend to invest no less than $10 million at a time.

Within this context, AgDevCo believes that unlocking Africa’s agriculture potential requires a new approach: social venture capital. Social venture capital can step into the gap between aid and fully commercial capital. It brings the discipline of an investment approach with a willingness to take risks in exchange for high social impact. It is prepared to absorb the relatively high transactions costs (due diligence, legal etc.) associated with smaller deal sizes ($500,000 to $5 million) for early-stage businesses. It seeks positive returns but, once transaction and fund management costs are taken into account, is satisfied with capital recovery.


A member of the Phata Coop, an AgDevCo investee in Malawi, tends an irrigated beans crop.

If private foundations, high net worth individuals and family offices could be persuaded to allocate part of their portfolios to African agriculture, through a social venture capital model, it might just be enough over a number of years to kick-start a critical mass of investment, which would catalyse the entry of more investors and service providers, and help the agriculture sector escape the infant industry trap.

For investors with a long-term outlook, who care about the state of the world, there are few better ways of investing with a social purpose than supporting African agriculture. Those who get in early may even find that, when the tipping point comes, they are well-placed to reap the financial rewards. Some social investors might choose to recover their capital, others may decide to recycle it, putting their philanthropic funds to work many times over. That’s real bang for the buck.

23 June 2014

President of Mozambique visits successful agri-processing venture

On Thurdsay 19th June, President Guebuza of Mozambique visited the Empresa de ComercializaĆ§Ć£o Agricola (ECA) maize mill in Catandica, central Mozambique. ECA is a for-profit company working with over 5,000 smallholder farmers, who receive inputs, technical support and a guaranteed market for their produce.
President Guebuza inspects ECA's maize flour products
The company was founded four years ago with seed capital from AgDevCo, which allowed investment into storage and processing and the development of an organised outgrower farmer network. To date AgDevCo has invested about $2 million as long term debt and equity. You can watch a short film about ECA by clicking on the image below.


Today ECA has commercial relationships with SAB Miller, Cargill and Buhler all of which are helping the company to scale up its operations and expand the number of farmers it is working with.

10 June 2014

Irrigated sugar scheme proves a sweet investment for Malawian farmers

In mid-2013, AgDevCo provided a loan of USD0.5 million to the Phata Sugarcane Cooperative, a smallholder farmers’ cooperative in southern Malawi, as part of a project to install a modern irrigation system on 300 hectares of land.

The Coop members are guaranteed a market for their sugarcane at fair prices under a long-term sales contract with Illovo Malawi, a subsidiary of Associated British Foods (ABF). A Malawian farm management services company, Agricane, has been contracted by the Coop to manage the commercial farming operations.

The irrigation scheme includes 10 ha for food crops, allowing farmers to grow maize, beans and vegetables all-year-round. The community is also experimenting with fish farming and rice paddies. Previously farmers in this part of Malawi had to rely on a single, unpredictable rainy season lasting only 3-4 months.
Phata Coop member tending irrigated food crops

AgDevCo is partnering with the Coop to build strong governance and financial management systems; and to help manage the relationships with Illovo and Agricane. There is potential for a second phase expansion of the scheme by a further 450 ha.

A €2.4m grant from the European Union (EU) helped fund the initial construction of the irrigation system. AgDevCo’s loan was used as working capital for the first growing season. The results of the harvest were impressive, with sugarcane yields of 106 tonnes/ha. The Coop believes it can improve productivity by a further 10% next season.

The project provides a reliable and secured income for the Coop’s 378 members. Total revenue in the first year of production was USD1.27m, which returned a net profit to the Coop of $450,000. Profits will be partly reinvested in the Coop’s activities and partly distributed to members.

Chris Isaac, AgDevCo’s Director responsible for Malawi said:

“The impressive early results of this investment show what can be achieved when farmers have irrigation and are linked to markets. Grant funding was needed to kick-start the project, but now the Phata Coop is a commercially-viable business, which we expect to go from strength to strength”.  

6 June 2014

AgDevCo $1.5m investment in Rungwe Avocado Company, Tanzania


AgDevCo is delighted to announce a USD1.5 million investment into Rungwe Avocado Company (RAC), an avocado growing and export business based in Tukuyu, in the Rungwe region of southwest Tanzania.

RAC is a pioneer in the development of Tanzania’s horticulture industry. In 2009, it was the first ever farming business to trial avocado exports by air freight to European markets. Today RAC is establishing refrigerated sea shipment routes to Europe and beyond – another important breakthrough for the industry.

The business is helping to improve the living standards of local farmers. RAC engages over 3,000 smallholders as part of its outgrower network. Farmers receive inputs and training as well as a fair price for their production. By 2018, over 75% of the avocados sold by RAC are expected to be grown by local farmers, resulting in some USD0.8m being paid annually into the local community.

RAC is set to receive a USD1.2m loan from AgDevCo with another USD0.3m invested in the form of equity. The investment will support the installation of a micro jet irrigation system on the commercial farm to boost yield performance. It will also fund ongoing operations, including management of the outgrower scheme.

AgDevCo is supporting a range of horticulture projects in Sub-Saharan Africa. We believe that by helping socially-responsible businesses like RAC to access international markets we can contribute to the modernisation of the agriculture sector and help deliver better incomes for thousands of smallholder farmers.

6 May 2014

Financing smallholder farmers - the working capital challenge


AgDevCo invests patient capital in small and medium sized agriculture businesses in Africa. We work with companies that are too small to attract private equity but have outgrown microfinance. They typically need long-term investment of between $250k and $5 million to expand their farming or agri-processing operations. Our investment is used to install irrigation equipment, build storage facilities and factories and buy machinery. We expect to have to wait 5 – 10 years before we see a return on our investments.

What we are finding is that all of our investees – and many other companies we come across – are starved of short-term working capital finance. They need finance to invest in their own seasonal production, to provide inputs to networks of outgrowers, and to buy crops from smallholder farmers for processing. Even for relatively small businesses those working capital needs can run into the millions of dollars annually.

Some banks are lending in this part of the market but it is high risk activity, which is reflected by high interest rates. For many small and medium sized agribusinesses which do not have a long track-record or the ability to provide collateral, there is simply no availability of credit. The lack of finance for SMEs makes it very difficult for smallholder farmers to access loans. The African Green Revolution Forum estimates that only 10% of farmers have access to the credit they need to increase their productivity and incomes.

The result is a low-productivity trap for millions of smallholder farmers. Without credit there is limited availability of improved seeds and fertilisers. That constrains yields and quality, making it more challenging for smallholders to access formal markets. Low and unpredictable incomes make it difficult for farmers to invest in their land. And without being able to demonstrate a track record of steady income farmers find it almost impossible to access loans…and the cycle continues.

One way of breaking out of the low productivity trap is to link smallholder farmers to formal markets through a trusted aggregator business. The aggregator can be a Cooperative or a for-profit SME.

Its role is to manage a network of smallholder farmer producers, providing them with finance, inputs and technical support through an equitable contractual arrangement which guarantees a fair price for their production at the end of the season. It then stores and/ or processes the crop and arranges logistics. The aggregator may be able to negotiate long-term sales agreements with commercial buyers – who might be Grow Africa partner companies – for example breweries, food companies or trading groups. Management must understand the market’s requirements on quality and volumes and be able to deliver consistently.

These aggregator businesses are vital to link farmers to markets. They need long-term patient capital investment; but they also need short-term working capital finance to extend loans to small farmers and to have the ability to buy the crop at the end of the season.

A success story in Mozambique is ECA, a smallholder farmer commercialisation business that started three years ago with AgDevCo’s support. AgDevCo invested equity to allow ECA to build its collection and storage infrastructure and buy vehicles. Later AgDevCo finance a Buhler maize mill for on-site processing. ECA management negotiated a three-year offtake agreement with a local brewery, part of the SAB Miller group, to sell maize grits for use in Chibuku beer. It also sells maize flour and bran for consumption in local markets.

ECA provides a full package of finance, agricultural inputs and extension support to its farmers, many of whom have seen their yields and incomes increase by 3-4 times as a result. Last season ECA purchased maize and soya from more than 4,000 farmers and this year it plans to scale up to 10,000 farmers.
In the first two years AgDevCo had to provide the short-term working capital to allow ECA to buy the smallholder production. Last year however, after two successful seasons when there had been 100% recovery of smallholder credit and ECA had repaid its seasonal loans, a local commercial bank was willing to lend to buy the crop. This year ECA is able to borrow at affordable rates both for the smallholder input finance and for the crop purchases.

The lesson of ECA is that it is possible to build commercially viable and scalable agri-businesses that benefit large numbers of smallholder farmers. But those businesses will not be able to attract commercial finance in the early years before the business model is proven.

We believe there is a role for a publicly-back working capital facility to give businesses like ECA the kick start they need.

Working with Grow Africa partners, AgDevCo is raising a pilot working capital facility of $25 million to allow SMEs to work with tens of thousands of smallholder farmers, boosting their productivity and incomes and linking them to profitable markets.

The facility needs a mix of commercial loans and grants to enable it to take the risks of lending to early-stage businesses. Grants and equity will act as a first-loss cushion which could absorb foreign exchange losses, and other risks. A separate technical assistance fund will make available grants to help establish and monitor smallholder farmer outreach schemes, like the ECA model in Mozambique. The facility will focus, but not exclusively, on food crops for local and regional markets.

In time the facility can be increased to $100m or more, with the target of linking 1 million farmers to profitable markets. By proving that smallholder farming can be profitable and commercially viable, the working capital facility aims to leverage in a lot more commercial debt and equity into the sector, helping agriculture thrive as a business, with benefits for all.