Seven trends likely to shape African agriculture in the coming years

In a recent report titled African Agriculture: This other Eden (available on subscription) Renaissance Capital has identified a number of factors that are likely to influence African agriculture in the years ahead. Femi Adewumni posted this helpful sumary on the How We Made it in Africa blog:

1. Increasing demand from China and other emerging markets
China’s annual per capita meat consumption has increased significantly, from 43kg in 2001 to 54kg by 2011. More meat consumption has led to a rising demand for soya beans – a popular source of feed for livestock. Domestic consumption of soyabean has skyrocketed from 28.3 million tonnes in 2001 to 71.6 million tonnes in 2011. This higher demand has been met through imports.

In addition to soya beans, China’s ability to be self-sufficient in the production of other crops is also likely to be reversed in a dramatic fashion over the next few years. Renaissance says that the same situation as what happened with soya beans could play itself out in other grains, such as maize, wheat and rice.

It is not only China that will import more grains. Similar dietary changes are underway in a number of other emerging economies. Renaissance says this is a good opportunity for Africa, which has significant farming potential, to increase its exports of agricultural commodities such as maize, palm oil and other crops.

2. Achieving global food security requires investment in Africa
The UN Food and Agriculture Organisation (FAO) believes that 70 million hectares of additional farmland is required to feed the world’s 9 billion people by 2050. The Americas could most likely fulfil this need alone with Canada, the US, Brazil and Argentina providing the bulk of additional supply. However, in common with the oil & gas industry, there comes a point where an over-reliance on too few suppliers for a country’s energy needs makes it hunt out alternative sources of energy. A similar need to diversify supply will likely arise in agriculture, and this represents a major opportunity for Africa to provide the world with food security.

3. Resource nationalism in agriculutre
Although resource nationalism is often associated with the extractive industries, Renaissance expects the issue to also come to the fore in African agriculture. Resource nationalism is not always entirely driven by anti-foreign sentiment. High prices help, too. The electoral success of Evo Morales in Bolivia, Hugo Chávez in Venezuela and the recently elected Sata government in Zambia might never have materialised had it not been for the prevailing high prices of oil, gas and copper over the past decade.
High prices for agricultural goods, the need to secure alternative food supplies and the sensitivities of access to and ownership of land, all suggest resource nationalism in agriculture is likely to become a more prominent theme in the years ahead.

4. Will urbanisation lead to farm mechanisation?
It estimated that 60% (currently 40%) of the continent’s population will live in cities by 2050. As more and more workers flood into urban environments and readily available pool of cheap workers disappear from the countryside, farmers are forced into a straightforward labour-capital shift. In short, farms must mechanise if they are to maintain their competitive position.

Smallholder farmers, too, must make a decision: if they dedicate their supply of labour to generating urban-derived income, what do they do with their land? Another way to look at this conundrum takes the form of a question: is the rise of the superfarm inevitable?

5. Superfarms
The rise of the superfarm is a relatively modern phenomenon. There are possibly fewer than 100 industrial groups that own, lease or operate farms of over 100,000 ha.

Do economies of scale exist in agriculture? The purchasing power on inputs or selling power on output that comes with a 100,000 ha farm is likely to be no greater than a 1,000 ha farm. This is accentuated by two factors: first, managing 100,000 ha under a single corporate umbrella is more likely to result in managerial dis-economies of scale; and second: 100 farmers managing 1,000 ha plots each can easily form a co-operative, which will provide them with all the purchasing benefits of the superfarm and none of the dis-economies of scale. However, many superfarms exist because they act as channels for investment capital. In short, while managerial or operating economies of scale might not exist, financial economies do.

How does one create a conduit for capital for investment in agriculture? Can smallholders provide that conduit? If so, it would be reasonable to assume they had a future in this most strategic of industries. However, the volatility of food prices, the rapid urbanisation that characterises large parts of our planet, the relative undercapitalisation of the sector and the sheer variability of the agricultural labour force in its current form, all suggest that in creating those conduits for capital, superfarms are likely to play a hugely important role in attracting investment to the sector.

6. Sustainability
One of the overriding issues for humanity is that every civilisation with an urban heartland has been built upon the availability of food and water. In fact, it is the existence of those food and water resources, which has allowed urban societies to flourish. However, over time, every single one of those civilisations, societies and states has collapsed because its depleted and exhausted hinterlands could not supply its cities with their food and water needs.

The collapse of food-supply systems that support urban societies has been a permanent issue since urban centres were founded. Renaissance anticipates a great deal of new thinking on sustainability in agriculture, and expects Africa to lead much of that new thinking.

7. The future of aid
African food aid will likely be transformed, too. Renaissance says that many aid agencies operating on the continent are setting agendas that hamper commercial development. The idea that some aid agencies are seeking to transform themselves into commercial enterprises highlights the new thinking that abounds in Africa. Traditional methods of delivering aid are likely to become redundant in the decades ahead

The need for catalytic finance for African agriculture

The EMRC Agribusiness Forum in Johannesburg last week brought together private companies, investors and development agencies who all share a vision of a profitable African agriculture sector which delivers wide benefits to rural populations. I spoke about the role of public private partnerships (PPPs) in making this happen.

In AgDevCo’s view PPPs in the agriculture sector are most likely to be successful if they are backed up by public private finance – we call it “catalytic finance”. So what is catalytic finance and how can it be most effectively delivered?

It is concessional funding made available by governments, donor agencies and philanthropic organisations that can be invested in early-stage agriculture businesses to reduce the costs and risks of future entry by commercial investors. It is catalytic because each dollar of public capital can expect to leverage at least 5 dollars of commercial capital into agriculture businesses which would not otherwise have been able to tap the private capital markets.

Two types of catalytic finance are: i) "Social Venture Capital" for start-up businesses, expecting a return of 5% - 15%; and ii) "Patient Capital" to invest in agriculture-supporting infrastructure including irrigation, with a coupon of c. 5% over 15-20 years. Here are specific examples:

• A new seeds company in central Mozambique needs $300,000 as “social venture capital” to cover the costs of registering new germ plasm, introduce irrigation and buy seed cleaning and packaging machinery. Local bank debt is unavailable at less than 25% interest or for more than 12 months tenor. Once operational the company can supply improved, locally-adapted and lower costs seeds to over 100,000 smallholder farmers.

• An irrigated soya and barley farm which plans to incorporate large and small farmers on 2,500 hectares needs $5 million of “patient capital” to invest in feeder roads, small dams and electricity connections. The remaining finance requirement of $20 million - for land preparation, farm machineryand buildings and working capital - will come from private debt and equity providers.

The rationale for catalytic finance is the existence of mulitple market failures in early-stage African agriculture which in most situations is still at an infant industry stage of development. The lack of economies of scale and cluster effects, under-developed capital markets, weak infrastructure, and a shortage of trained and experienced management and workforce (“learning by doing”) means that pioneer investors in African agriculture – and indeed subsistence smallholder farmers themselves – face high costs in doing business which competitors in other parts of the world do not. High inputs costs, high transport costs, high personnel and training costs and high infrastructure costs typically far outweigh the benefits of relatively inexpensive land.

Catalytic finance needs to be carefully targeted. The challenge is to identify genuine situations where there is good potential for profitability once the initial market failures/ barriers to entry have been overcome. This calls for management by professional investment teams within a strict set of operating policies and procedures designed to protect the public interest.

What are the benefits of catalytic finance? If properly deployed it can be the key to unlock large volumes of new private investment in African agriculture. Numerous private equity and debt funds are being raised for African agriculture but there remains a severe shortage of “investment ready” opportunities. As argued elsewhere on this blog, the risk is that much of this money does not get deployed, or the price of the few bankable projects gets bid up to unsustainable levels. Catalytic finance helps avoid this situation by supplying a pipeline of investments that are ready to take commercial debt and equity and can offer reasonable financial returns.

Another major benefit of catalytic finance is that it can be used as a tool to influence private investor behaviour. It comes with strings attached which ensure that agriculture businesses operate in a socially responsible way and build meaningful links to smallholder and emergent farmers. Again, professional management of catalytic finance is important to ensure disciplined monitoring of private sector behaviour and the design of robust contractual arrangements which can lock in development benefits for the long-term.

There is very limited catalytic finance available in the international aid system today. For a long time the aid mindset has been: provide grants directly to governments and charities; or invest on commercial terms through the development finance institutions such as the International Finance Corporation. But increasingly it is being recognised that the development of the agriculture sector does not lend itself to this model. There simply are not many opportunities to make commercial returns given the early-stage of most African agriculture. Catalytic finance is a vital bridge to long-term viability.

It is encouraging to see the traditional mindset is beginning to change. The likes of DFID, USAID and the World Bank Group are now talking the language of catalytic finance in the agriculture sector. There is broad support, for example, for the agricultural growth corridors approach. There seems to be a recognition that for private public partnerships to deliver on their potential they need to be backed up by innovative financing mechanisms. AgDevCo will continue making the case for catalytic finance for African agriculture.

Postscript: The EMRC Agribusiness Forum Johannesburg Declaration calls for "increased public investment in agriculture-supporting infrastructure" and for development partners to "increase support for catalytic financing mechanisms and matching grant facilities to promote inclusive business models".

AgDevCo and Small Foundation agree strategic collaboration to reduce poverty in rural Africa

AgDevCo has been awarded a grant of Euro 2.5 million by Small Foundation to promote socially responsible investment in the African agriculture sector. The funding will help AgDevCo expand its capacity to create a portfolio of investments in early-stage agricultural enterprises in Africa, with the aim of relieving rural poverty and promoting economic growth.

The private sector is the engine of long-term, sustainable development in Africa”, said Dr. Keith Palmer, AgDevCo’s Chairman. “AgDevCo believes that profitable agriculture with strong links to markets is the best route out of poverty for the majority of Africa’s rural poor. This grant from Small Foundation will enable us to reach many more African farmers”.

To date AgDevCo has raised more than Euro 15 million to invest in African agriculture. It is rolling out pioneering investments in farming and agri-processing businesses in Mozambique, Tanzania, Ghana and Zambia. “Our distinctive approach focuses on creation of profitable farm enterprises which also generate substantial benefits for smallholder farmers and local communities” said Chris Isaac, who heads AgDevCo’s office in Mozambique.

Tim Brosnan, Chairman of Small Foundation said “AgDevCo has a highly innovative approach to building socially responsible farming businesses at scale. We look forward to working with them to achieve our mutual goal of sharply reducing poverty in rural Africa.”

About AgDevCo
AgDevCo’s mission is to relieve poverty directly and indirectly by raising agricultural productivity and incomes for the benefit of rural communities as a whole in low and low-middle income developing countries. It aims to develop commercially viable agriculture and agribusiness ventures along entire value chains (including farm operations, infrastructure leasing businesses, storage and processing) and attract private sector capital to invest in them. It aims to ensure that substantial benefits accrue to the local communities including directly raising productivity and incomes of smallholder farmers. By taking a hands-on project development role and investing in early-stage agribusinesses, AgDevCo helps remove barriers to entry by private investors and structures ventures to achieve permanent benefits for smallholder farmers. AgDevCo’s goal is to demonstrate a scalable and sustainable approach to elimination of rural poverty by leveraging-in significant amounts of private capital in ways which generate transformational benefits for rural communities.

AgDevCo was established as a UK-headquartered not-for-profit-distribution company in 2009. Its funders including the UK government, the Norwegian Government, The Hewlett Foundation and the Rockefeller Foundation.

About Small Foundation
The vision of Small Foundation is an Africa free from the threat of famine within one generation. Its mission is to help provide opportunities to food-insecure rural African families that enable them to gain economic independence through income generation. Its goal is to support scaling up processes for opening up access to knowledge, finance, technology and markets to food-insecure rural African families and communities. Small Foundation aims to do this by, inter alia, helping to encourage the emergence of business-based systems for spreading the opportunity-creating process.

Small Foundation (www.smallfoundation.ie) was incorporated in Ireland in 2007 as a company limited by guarantee and a registered charity.

Further details contact: Rosanne Whalley rwhalley@agdevco.com Tel: +44 (0)20 7841 2821

The farm at the end of the long dirt road

This recent photo from the Kilombero Valley in Tanzania illustrates how poor infrastructure makes agriculture a tough business in many parts of Africa. Carter Coleman, Managing Director of Agrica Ltd, a company which has commercial rice operations in Tanzania, spells out the challenges in this interesting interview - Farming at the End of a Long Dirt Road.

What are the realities of farming in sub-Saharan Africa?

There is enormous agricultural potential in many parts of Africa. There is no reason why Africa cannot be a major producer of agricultural products on a scale equal to South America. But it will take heavy investment by the private sector to realise the potential.

Why has there been so little private investment in agriculture to date? It is certainly not a lack of finance. There is more international interest in investing in Africa now than ever before.

The real problem is a lack of sufficient profitable opportunities. Agriculture in Africa is an infant industry. It faces high start-up costs and lacks supporting infrastructure. In contrast, international markets are highly competitive and benefit from economies of scale.

The challenge is how to get things started. How to deploy public sector resources to overcome barriers to entry and stimulate rapid growth of profitable and socially-responsible commercial agriculture?

At the Agriculture Investment Summit 2001 (London 21-23 June), Chris Isaac, Business Director of AgDevCo, a social investor and project development company, will describe approaches which are helping “kick start” investment in African agriculture:

• Agricultural Growth Corridors in Tanzania and Mozambique
• A Public-Private Capital Fund to stimulate profitable investment in early stage agriculture

AgDevCo has a strong portfolio of investment opportunities which can achieve major social impact and deliver good financial returns. The presentation will be available on the AgDevCo website soon.

Is Small always Beautiful in agriculture?

Oxfam’s report Growing a Better Future brings urgency to the debate about food security and poverty. It shows how a billion people worldwide are going hungry, more than at any time in human history.

With climate change, population growth and rising food prices the situation is likely to get worse. Against this background of human misery, the report points out the inequity in a global food system which contributes to unprecedented levels of obesity and food waste in wealthy countries.

So what is to be done? Oxfam calls for massive, government-led investment in smallholder farming and supporting infrastructure. While warning against large-scale “land grabs”, Oxfam also recognises the private sector has a role to play in linking smallholder farmers to international markets.

The report is an important call to action backed up by sound analysis. But one section of the report does not ring true: the claim that smallholder farming is typically more efficient than large-scale farming. Big is not beautiful in agriculture, the authors say. “Surveys often find that, when the focus is shifted from yields to total productivity, small farms are more efficient”.

Is that correct? The research is not clear cut. Professor Paul Collier of Oxford University disputes the view in his paper African Agriculture in Fifty Years. He writes: “The evidence is far more mixed than the exclusive emphasis upon the smallholder approach would lead us to believe. Indeed, much of the focus on smallholders may actually hinder large scale poverty reduction.”

In AgDevCo’s experience smallholder farmers in Africa with access to modern inputs can achieve yields equal or greater to commercial farms, for certain types of crops. But the cost of labour is usually not factored into productivity calculations, or is given a very low value. Furthermore for some crops, such as barley and wheat, mechanisation is essential if African farmers are to become internationally competitive.

We need to move beyond the simplistic debate about small versus large-scale farming. Both can and should co-exist in ways that benefit local communities. The agricultural growth corridors in Tanzania and Mozambique, for example, are an attempt to promote balanced and sustainable agricultural development.That message may have less public appeal than the Bill & Melinda Gates Foundation's new campaign Smallholder Farmers are the Answer, but it is closer to reality.

As E.F. Schumacher, author of Small is Beautiful, and my grandfather, said what matters is finding the appropriate scale when tackling a given problem. Writing in the early 1970s he observed “an almost universal idolatry of giantism” and wished to correct the balance. He continued: “If there were a prevailing idolatry of smallness, irrespective of subject or purpose, one would have to try and exercise influence in the opposite direction.”

The need to invest in smallholder farming is indeed urgent. It requires smart combinations of government spending, overseas aid and private investment. But let’s not to dismiss the role of larger farming enterprises – where appropriate – in addressing global food security. With the stakes so high we should be careful to avoid an idolatory of smallness.