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.

18 December 2012

Beira Agricultural Growth Corridor (BAGC) launches Mozambique’s first ever index-based weather microinsurance product

AgDevCo, manager of the BAGC Catalytic Fund, announced today the launch of Mozambique’s first ever index-based weather microinsurance product for farmers in the Chimoio region of Manica Province, Mozambique.

The insurance supports a partnership between a local agricultural training college, Instituto Superior Politecnica de Manica (ISPM) and the Beira Agricultural Growth Corridor (BAGC) under which five young Mozambican farmer trainees have been allocated five hectares of land each by the college. Under the programme, the farmers receive inputs and access to mechanised services (land reparation, planting, harvesting etc.). The farmers also receive technical support from a local commercial farmer and have a guaranteed market for their production of maize, soya, beans and sesame. The weather insurance is linked to the farmer’s input financing and is intended to provide protection against “midseason” drought.

The impetus for insurance in this region is strong especially considering the rains stopped in the middle of the last growing season. Farmers in the Chimoio region of Manica Province saw their yields drastically reduced as a result. This type of midseason drought is an increasingly common feature of changing weather patterns affecting Mozambique and other countries in the Southern Africa region. For the first time in Mozambique, a small number of farmers will this season have some protection against such a drought.

With good rains the farmers can expect to make profits of more than $400 per hectare. In the event of a severe mid-season drought, the farmers will receive a pay-out to help prevent them from running up debts. A payout is triggered in the event that rainfall falls below a minimum stipulated level, as measured by satellite systems which are accurate enough to monitor precipitation in 10km2 blocks.

The cost of weather index insurance remains a challenge, due to the high risks. For this pilot, farmers can afford the weather insurance premium because they pay no interest on the finance for the inputs and other services. Scaling up the drought insurance programme will depend largely on finding innovative ways to reduce the cost of coverage.

The weather index insurance product was developed by Guy Carpenter & Company, LLC unit GC Micro Risk Solutions® alongside RMS affiliate Asia Risk Centre, Inc. with a grant from the International Finance Corporation’s Global Index Insurance Facility (GIIF). The weather product is underwritten by Hollard Moçambique Companhia de Seguros. Finance for farmer inputs and extension services was provided by the BAGC Catalytic Fund, which is managed by AgDevCo, with support from the social lender Kiva.

26 November 2012

Food security challenges are "complex, immense, frightening and urgent"

In an opinion piece in the Financial Times Paul Polman of Unilever reminds us that, due to a rising population and changing consumption habits, we will need to produce the same amount of food in the next 40 years as we did in the past 8,000.

He calls for increased investment in African agriculture; and for developing country governments need to create long-term partnerships with the private sector, donors and civil society, to stimulate investment in commercial agriculture.

He references the Copenhagen Consensus, which concluded that an investment in fighting malnutrition would benefit people more than any other type of investment – with a return of $30 for every $1 invested.

23 November 2012

With AgDevCo support, smallholder farming undergoes a transformation in Mozambique

Only two years since its launch, the innovative Empreza de Comercialização Agricola Lda (ECA), a social enterprise in Mozambique, is already helping to transform smallholder farming for the better. An independent evaluation conducted by AEMA Development Consultants in 2012 concluded that the business had immense potential.
In the 2011/12 season ECA worked with 900 smallholder farmers in the Barue district of Manica Province, central Mozambique. It organised them into small groups, facilitated access to improved inputs and credit, and provided extension advice and a guaranteed market at fair prices. ECA achieved a 100% recovery on input credit and has expanded its farmer base to 2,200 for the 2012/13 season.
ECA is supported by the Beira Agricultural Growth Corridor (BAGC) initiative, a public-private partnership backed by the Government of Mozambique and international funding partners. ECA received debt and equity investment through the BAGC Catalytic Fund, which is managed by AgDevCo.

The independent evaluation found that: 
  • Maize production for ECA farmers who received the complete input package of improved seeds and fertilisers increased by 104%, from 2.4MT during the baseline period to 4.92MT this year. Other ECA farmers on a lower cost package saw yield average increases of 46%. 
  • ECA farmer household cash incomes increased by an average of 35% for the complete input package and 17% on the basic package. That compares to a slight reduction in incomes of local farmers who were not linked to the ECA programme (likely due to lower rainfall compared to the previous year).
  • Conservation agriculture - minimum tillage to maintain soil quality - was extensively adopted by both ECA beneficiaries and non-beneficiaries within the same communities.
  • Extension services provide by ECA to its 900 farmers during 2011/12 were assessed as “very effective” by over 75% of beneficiaries. Over 98% of farmers rated the extension services as “effective” or better. Before the ECA programme farmers produced using whatever farming practices they chose. Contact with extension staff was totally non-existent or at a bare minimum.
  • Farmers benefited from opportunities for economies of scale because of bulk buying, group marketing and the subsequent reduction in unit transaction costs.
  • The ECA programme has ushered in a new marketing channel for growers’ maize and sesame produce, including a contract to sell some maize to a local brewery.

13 October 2012

McKinsey: Investment in agriculture the best bet to create jobs in Africa

By 2035 Africa is expected to have a larger working age population than China or India. The number of 15 – 64 year-olds on the continent will be three times higher than Europe and five times higher than North America. The McKinsey Global Institute’s report, Africa at work: Job creation and inclusive growth, calls for targeted investment to accelerate the creation of stable employment opportunities, especially in the agriculture sector.

The McKinsey report notes:
  • Africa has shown impressive growth since 2000, outpaced only by the East Asia region, with the natural resources sector (oil, gas, mining) being the single largest contributor.
  • Natural resource sectors make crucial contributions to Africa’s GDP, government revenue and export earnings but they employ less than 1% of Africa’s workforce.
  • Africa will add 122 million people to its labour force by 2020 – more than any other region. By 2040 it will have a larger working age population than India or China.
  • Economic growth reaches most people through employment income so Africa’s challenge is to ensure that economic growth translates into more stable wage-paying jobs.
  • If large numbers of stable jobs can be created Africa could benefit from a demographic dividend at a time when Europe and China have declining working age population. If not, the risks of growing inequality leading and social unrest are clear.
  • As countries develop both the share and number of jobs in agriculture typically decline. But countries with rich natural endowments of arable land and favourable climates – like many countries in Africa – can defy this trend. Thailand is an example. It grew the number of stable agricultural jobs from 519,000 in 1960 to almost three million by 2008.
  • McKinsey estimates that 14 million stable wage paying jobs could be created in agriculture by 2020, if development of the sector was accelerated.
  • Furthermore, of the potential 15 million additional jobs that could be created in the manufacturing sector, a large proportion are likely to be agriculture related. Agriculture today accounts for about half of all manufacturing jobs in Africa.

5 October 2012

The missing middle of African agriculture

A good article: Spotlight on African Agriculture by Lion’s Head Global Partners which goes beyond the often sterile debate of mega farms versus smallholders.

The article focuses on the “missing middle” – i.e. medium sized farming businesses of a few hundred hectares, which are starved of capital. Those farms can be the engine of growth for primary agriculture helping address food security and stimulating job creation throughout the agricultural value chain.

The authors, who have first-hand experience of investing in a seed potato farm in Tanzania, wonder why development finance institutions (DFIs) are not doing more in the sector:

“Yet so many DFIs find this sector too risky. . . A DFI setting out to promote African agriculture should find the blended return between financial and development payback very compelling. If DFIs don’t give extra weight to development outcomes, then they are no different than other institutional investors.”

Exactly right.

29 September 2012

The African agriculture investment paradox

African agriculture is an investment paradox. The world needs more food. Africa has the potential to boost agricultural productivity to feed itself and become a major exporter. There is plenty of private investment capital – domestic and international – looking for opportunities in the sector. So why is so little capital actually hitting the ground?

An article in this month's AgProfessional magazine provides an answer: most farms and companies are simply too small to absorb the cash or provide attractive returns. The USD 5 million plus-sized deals that investment funds and commercial banks are seeking are rare. AgProfessional quotes Peter Baird, Standard Chartered's head of private equity for Africa:

"The targets are either too small or too early in their development, and are grappling with price and weather risks, making deals scarce. It's hard to either acquire existing assets or to cobble together investible opportunities."

That rings true with AgDevCo's experience. In places like Mozambique, Ghana and Tanzania most commercial farming and agri-processing enterprises are at an early stage. As a result they typically lack the three key attributes investors look for:

i) a management team with a track record;
ii) a reasonably healthy balance sheet to provide collateral; and
iii) some certainty over future cash flows (e.g. off-take agreements from large buyers).

The investment paradox means that billions of dollars of potential investment in African agriculture remain idle because of a shortage of investment-ready projects. That is a major missed opportunity to improve food security and boost the continent’s economic growth.

Are there ways to solve the problem? Two important steps can be taken. Firstly, incubation of SMEs. By providing a combination of equity finance and hands-on business development support, a professionally-managed incubator can help new agriculture businesses get through the risky early years. That is the role played by the Catalytic Fund in Mozambique.

Secondly, development finance institutions should make available a lot more patient capital (i.e. low-cost, long-term debt) to part-fund investments in ‘last mile’ agricultural infrastructure such as feeder roads, power connections and irrigation. AgDevCo is raising a patient capital fund to support socially responsible farming investments.

Together, incubation facilities and patient capital offer a way of building a pipeline of investment-ready deals which can attract private capital. That will help with the USD83 billion a year agricultural funding which, according to the Food and Agriculture Organisation (FAO), is needed if there is to be enough food to feed a world population of 9 billion in 2050.

5 September 2012

Investing in agriculture is an efficient use of aid

Unless more is done to improve food security in poor countries, recent progress against millennium development goals (MDGs) for health and education will count for little. By Chris Isaac, AgDevCo.

Despite many successes against the MDGs, advances in the fight against poverty and hunger have begun to slow or even reverse as a result of the global economic and food crises. According to the United Nations one in four children in the developing world is underweight. Almost a billion people do not have enough to eat.

By 2030 the world will need 50% more food for a growing population which is consuming more meat and dairy products. With the increasing frequency of food supply shocks - and the risk of export restrictions by large producer countries - a major increase in agricultural productivity is needed in geographies where demand is growing rapidly. In particular that means Africa, where today's population of 1 billion is expected to increase by another 500 million within twenty years.

Smallholder farmers need to be a focus of attention, certainly. Yields in many parts of Africa are less than a tenth of farms in the Americas (North and South). A doubling or tripling of yields is achievable if farmers could get access to better seeds and fertiliser. Jeffrey Sachs makes the point that moving farmers from average yields of 1 to 2 tonnes per hectare would eliminate Africa’s food deficit.

But an exclusive focus on smallholder farmers is unlikely to be sufficient. Firstly it is not easy to pull off. Coordinating interventions to reach hundreds of thousands of small farmers is difficult and costly even with new mobile technologies. Secondly, it is unlikely to stimulate broader, long-term investment along the agricultural value chain where there is most potential for job creation. That sort of investment will only happen at scale when there is a stronger commercial farming base.

AgDevCo is a social impact investor which supports medium-sized commercial farming enterprises in Sub-Saharan Africa. The farms acts as "hubs" sharing the benefits of economies of scale – bulk purchasing power, logistics, processing and storage facilities – with large numbers of local smallholder farmers. The infrastructure for the hub farm (e.g. irrigation and power connections) can be extended to smallholder farmers in the vicinity at low marginal cost, transforming productivity.

Much more concessional funding should be directed to supporting investment in small and medium sized agricultural enterprises, as is happening through the AgDevCo-managed Catalytic Fund in Mozambique, to nurture companies thorough the risky early years when private capital is unavailable. And much more public spending is needed for infrastructure on which a successful agricultural sector depends – roads, power lines and water storage.

This type of patient capital should come with strings attached: agricultural entrepreneurs accessing concessional funds must demonstrate that benefits are flowing to local farmers and communities while maintaining high environmental standards. Projects should be independently monitored and funds withheld (or collateral called) if they go off-track.

Investing in agriculture can be a highly efficient use of aid. If directed wisely it should earn a financial return that can be recycled into more projects, making taxpayers’ donations work harder. It also points towards a credible exit strategy for aid by stimulating private investment that boosts agricultural productivity, jobs and incomes.

What better way for Justine Greening, DFID’s new International Development Secretary, to demonstrate the UK government’s long-term vision for moving countries beyond aid than by putting investment in agriculture at the top of the agenda?

19 July 2012

Mining drives agricultural development in Mozambique

The Government of Mozambique, the British Government, Rio Tinto and AgDevCo have teamed up to assist thousands of small farmers who live in the vicinity of mines in Moatize, central Mozambique, to boost their crop yields for commercial food production.

The first of its kind in Mozambique, the new agreement will bring access to private investment for smallholder farmers who would otherwise struggle to get the investment they need to thrive.

Eric Finlayson (Rio Tinto), Andrew Mitchell (Secretary of State, DFID), Keith Palmer (Chairman, AgDevCo) and Daniel Clemente (PS Agriculture, Govt Mozambique)
 Investment in the mining sector is resulting in new infrastructure links – roads, rail and ports – being built and an increase in the local population. This provides an opportunity for small farmers in terms of a larger local market for their produce and improved transport links opening up new potential markets. However many small farmers lack the access to affordable capital to develop their farms despite being highly suitable for a wide range of crops and livestock.
Andrew Mitchell, Britain’s International Development Secretary, said: “Mozambique is at a crossroads. For the first time, its enormous natural resources could give it the chance to escape poverty for good. Britain will help harness the skills and resources of the private sector to ensure the poorest benefit from the country’s phenomenal potential. This partnership is proving that investing in development is good for business, as well as good for the poor.”

Eric Finlayson, CEO of Rio Tinto Coal Mozambique, said: “This initiative, which is part of our wider commitment to support broad-based economic development in Mozambique, will provide a practical boost to farmers and can help the development of Mozambique’s agricultural sector”.

Chris Isaac, Director of Business Development at AgDevCo said: “By working in partnership with the mining sector, we can invest to help local farmers access rapidly growing domestic markets and, from there, expand their businesses to take advantage of export opportunities in the Middle East and Asia”

The memorandum of understanding signed in Tete today, co-signed by Mozambique’s Ministry of Agriculture, involves initial investments of up to US$500,000 to link local farmers and businesses into the mine’s supply chain by:

• Investing in local businesses and buying local produce: Rio Tinto, AgDevCo and the Ministry of Agriculture will explore how promising small and medium agricultural businesses can supply food to communities living in the Tete mining area. This could result in Rio Tinto offering long-term contracts to local farmers to supply locally grown produce to its mine, helping them to expand and create more jobs. Currently, international firms rely on imported food as very few domestic suppliers are capable of growing enough quality food at a competitive price.

• Irrigating land: Develop sustainable irrigated agriculture and improve livestock and fish farming to increase harvests across Tete province. Support will be targeted towards helping farmers who are resettled as the mine expands.

• Growing new crops: Work with specialist businesses and institutions to create cost-effective and sustainable sources of biodiesel for the mine. As well as providing new sources of income for local farmers, newly irrigated land will boost food production.

Investments will follow the United Nations’ Principles for responsible agricultural investment (PRAI).

9 July 2012

Voxtra invests in Mtanga Farms Limited

The Voxtra East Africa Agribusiness Fund (Voxtra) has completed an investment of US$ 1.5 million in Mtanga Farms Limited (MFL), a commercial farm engaged in seed crops, arable farming and livestock. The investment marks the first of a projected 8 to 10 investments targeting companies with pivotal roles in improving the livelihoods of smallholder farmers. Voxtra’s investment will enable MFL to take its seed potato business to a commercial scale, triple its farmed acreage and significantly ramp up its budding livestock operation.

Mtanga Farms is an integrated agri-business based in Iringa, Tanzania. Its operations extend over 2,600 hectares, previously farmed but long neglected when MFL secured its long-term lease of the land in 2009. MFL has since made significant strides to rehabilitate the land and put in place essential infrastructure to support the further growth of the business. MFL focuses on high value seed crops and the protein value chain. Its seed activities are centred around the establishment of a seed potato operation providing clean seed potatoes to smallholder farmers across Tanzania. The protein business includes the growing of animal feed, a livestock breeding business and downstream processing of meat. The company is run by a dedicated team of farmers and business developers, and is now well-positioned to become the leading integrated farming operation in the Southern Tanzanian Highlands.

Core to the company’s strategy is the provision of improved seed material to local smallholder farmers. In partnership with the Tanzanian government, MFL recently announced the registration of four new potato varieties – the first varieties to be released in Tanzania in 30 years. Whilst potatoes are a major cash and food crop for Tanzanian smallholder farmers, the lack of clean seed material has long been a major impediment to farmers’ productivity. MFL’s clean seed potato will enable a tripling of smallholder farmers’ yields: whereas the national average yield is 5-7 tonnes potatoes per hectare, smallholders have demonstrated yields of 15-20 tonnes per hectare when planting clean seed. By scaling up its production of clean seed potato, MFL could provide a pathway out of poverty for a sector employing an estimated 150,000 smallholder farmers. Voxtra intends to make use of its technical assistance facility – funded by the Norwegian Agency for Development Cooperation (NORAD) – to evaluate, support and increase the social impact made by MFL.

African agriculture needs a green revolution that is powered by an emerging class of sustainable small and medium enterprises (SME). SMEs are best placed to increase local food production and integrate local farmers into value chains and create employment. Through its investment in MFL, Voxtra joins forces with a strong partnership of existing investors comprised of Thirty Degrees East, a Mauritian investment company, UK-based Lion’s Head Global Partners, U.S.-based Calvert Foundation, Nigerian investment firm Heirs Holdings and its philanthropic arm, The Tony Elumelu Foundation, as well as the African Enterprise Challenge Fund.

20 June 2012

Food security: Countries need right kind of investment

In today's Financial Times there is an article titled Food security: Countries need right kind of investment on the contribution commercial agriculture can make to food security and poverty reduction. The article quotes AgDevCo:

“If you can secure the markets for farmers, that puts you in a good place. But you need to do more than that. You need to help farmers become more productive . . . Unless you bring in private investment, technology and skills, it’s going to be very difficult for the agriculture sector to move beyond where it is today".

18 June 2012

African Land Fertile Ground For Crops And Investors

US National Public Radio ran a story last week on agriculture investment in Mozambique, putting the other side of the "land grab" debate to explore how commercial farming can benefit local farmers and communities. AgDevCo gets a brief mention. You can listen to the story and read the accompanying article here.

7 June 2012

More thoughts on patient capital

Farming is a tough business. It is especially tough in Africa where infrastructure is often weak, there is a shortage of experienced (commercial) farm management and the wider agribusiness ecosystem – from the availability of inputs to spare parts for machinery – is underdeveloped or missing.

That makes the costs of doing agribusiness in many parts of Africa high. Combine that with the largely uncontrollable risks common to all farming – weather, pests, market price fluctuations – and it is not surprising that few banks will lend to the sector.

But one needs to put this in the context of long term trends which point towards a massive increase in the demand for food. Farming is likely to be a more profitable activity in the future as the world’s population increases towards nine billion. If African countries can clear the first hurdles and establish a competitive farming base the rewards – financial and social – are potentially very significant.

How to do this? There has to be a recognition that building a competitive agriculture sector takes time and requires a lot of investment in things like roads, power lines and irrigation systems which will not pay a commercial rate of return. That requires 'patient capital' ie long-term low cost finance which can only come from governments or development agencies.

Moreover, AgDevCo believes there is a case for providing patient capital (alongside private capital) to support start-up commercial farming operations as long as they commit to supporting smallholder farmers and local communities. We see enormous potential for public-private partnerships (PPPs) where irrigation infrastructure is shared between commercial and smallholder farmers.

The land grab debate has highlighted cases where investments have gone wrong. There have been situations, including here in Mozambique, where investors have leased large areas of land and made unrealistic promises to their financial backers and to local communities about what can be achieved and how quickly.

But it would be a disaster for Africa, as Professor Calestous Juma of Harvard has written, if concerns about land grabbing led to a moratorium on new investment in African agriculture. The sector badly needs more resources, human, financial and technical to help create jobs, address food insecurity and tackle malnutrition.

There are ways of doing investment right. There is such a thing as a win-win where both the investor and the community benefits. But you have to do things properly and be patient for the returns to come.

18 May 2012

Agribusiness partnership to tackle poverty, Mozambique

At the G8 meetings in Washington D.C. today world leaders committed to lifting 50 million people out of hunger by promoting new partnerships with private companies. AgDevCo, a social impact investment company, is delighted to announce the launch of one such partnership in Mozambique.

Cervejas de Moçambique (CDM), part of the SAB Miller group, has signed a three year purchase agreement to buy maize grown by local smallholder farmers to use in its Chibuku beer. Until now all maize used in CDM’s beers and non-alcoholic beverages has been imported.

The three-year agreement was signed In Maputo on Friday with Empreza de Comercialização Agricola (ECA) Lda, a Mozambican marketing company, which is 45% owned by smallholder farmers. ECA will this month start producing maize grits for delivery to CDM’s factories in Beira and Maputo.

ECA works with its farmers to boost yields by providing access to improved seeds, fertilisers and affordable finance. In its first year many of ECA’s farmers have achieved maize yields of more than four tonnes per hectare.

“Linking our farmers to reliable markets which pay a fair price is central to our business model” said Grant Taylor, ECA’s Managing Director. “By increasing farmer yields 3-4 times we can help ensure families have enough food to eat and can sell their surplus for cash”.

CDM’s Adrian Mitchell, Director of Chibuku, said: “Sourcing raw materials locally is a key objective for us. Doing so makes good business sense and it contributes to the economic development of Mozambique. We are delighted to enter into this partnership with ECA and we see great potential for it to grow.”

One of ECA's farmer members with his family in front of a good maize crop

The first Chibuku beer to come off the factory line using Mozambican maize
Chibuku and other beverages made with Mozambican maize will be on sale from July 2012. ECA will buy maize from at least 750 Mozambican farmers in 2012 increasing to over 2,500 farmers by 2015.

ECA received equity investment and technical support from the Beira Agricultural Growth Corridor Catalytic Fund, which is managed by AgDevCo. A local commercial bank and a microfinance institution provided farmer loans and working capital for crop purchases.

7 May 2012

Let's get down to business: the three Cs of agricultural development

As African political and business leaders gather in Addis Ababa for the World Economic Forum meetings, agriculture will again take centre stage. In fact there’s a new initiative this year – Grow Africa – sponsored by WEF and the Africa Union which aims to broker partnerships between businesses, governments and donors. A full day session on Wednesday 9th May will be attended by three African heads of state, the CEOs of major African companies and top officials from international development organisations.

No doubt, these conferences are helpful in building momentum for change. Since the food crisis of 2008 there has been a remarkable reshaping of the debate around agricultural development with a consensus that the public and private sectors need to work in partnership for maximum impact. Some new models are showing promising results – for example local sourcing of cassava by SAB Miller in Mozambique. But overall there are still not enough examples of words translating into action on the ground.

In Addis this week I will be saying that three things must happen to move from grand plans to transactions which deliver real benefits for farmers:

Firstly, the private sector must come forward with multi-year contracts to source their agricultural raw materials locally. As argued by Zahid Torres-Rahman of Business Action for Africa, companies who source locally derive a whole range of business benefits such as reduced risk, reduced costs and better supply chain management. In the early years companies should be willing to pay a premium over the cost of raw material imports as an investment to achieve these long-term gains.

Secondly, donors must be willing to provide patient capital (i.e. long-term low cost debt or equity) to support investment in primary production. The economics of farming in Africa with high upfront investment needs, especially in irrigation infrastructure, means entrepreneurs cannot access (or afford) fully commercial capital from day one. Patient capital should come with strings attached: recipients must demonstrate they are supporting local smallholder farmers and delivering meaningful benefits for local communities.

Thirdly, there needs to be an entity on the ground responsible for coordination. This involves coordinating demand with supply and developing "hub and spoke" farming models which combine large and small-scale farming systems. This a role being played by AgDevCo which has a presence in four African countries and has the expertise in investment and agribusiness to ensure that deals are commercially viable and socially equitable.

It is not particularly complicated. When all three Cs are in place – contracts, capital and co-ordination – remarkable things can happen quickly. Read for example about the ECA smallholder farmer extension and marketing business in Mozambique, which is partnering with a major brewery. AgDevCo has similar initiatives underway with other large buyers of grains and tropical fruits.

Grow Africa’s success will be measured not by the number of investment plans drawn up or new funding announcements made but by the number of transactions that are executed and make a difference to the lives of farmers on the ground.

6 May 2012

The Africa Report: How to feed Africa's two billion

AgDevCo is referenced in this month's edition of The Africa Report. The editorial titled How to feed Africa's two billion discusses the global food crisis and how governments and donors have so far failed to live up to their promises to boost funding to the agriculture sector. The article describes innovative private sector partnerships to promote food security, such as the catalytic fund managed by AgDevCo in Mozambique. A lot more investment - public and private - will be needed to grow agricultural production 70% by 2050 to keep up with the world's population. With water scarcity increasing and a rapid shift to meat-based diets in the developing world, the article concludes that even bigger challenges lie ahead.

22 April 2012

SAGCOT: out of the starting blocks?

In a recent blog entry, Porter McConnell of Oxfam America makes a critique of the Southern Agricultural Growth Corridor (SAGCOT) initiative. The post, titled What if we held a private sector initiative and nobody came? points out, correctly, that since the launch of SAGCOT in early 2011 no major new investments have been made in the agriculture sector.

“The lack of investors calls into question the effectiveness of the public money that has been contributed to the partnership”, McConnell writes.

It is an important issue. Private companies should not be entitled to good PR from supporting a development initiative like SAGCOT unless they are willing to contribute meaningful resources. A sprinkling of corporate social responsibility dollars is not enough.

But McConnell lets the public sector off too lightly. The reality is that to date neither the private sector nor the donors have put significant funding into SAGCOT. There have been funding announcements but so far no money has actually flowed from government budgets into infrastructure or new financing mechanisms.

Given this, it is hardly surprising there has been no increase in private investment into agriculture. As the SAGCOT investment blueprint (2011) document says: “Private investment has been low in the past because of the high costs and risks of investing in commercial agriculture at its ‘infant industry’ stage”.

Not much has changed. As argued in the blueprint, private investment will remain low until at least two things happen: firstly, there is a catalytic fund to support investment in early stage agriculture businesses; secondly, there is increased investment by the government and donors in agriculture-supporting infrastructure (e.g. roads and power lines).

SAGCOT still has enormous potential. Understandably it takes time to implement a bold new public-private partnership. Every care must be taken to ensure that public money is used wisely and for the benefit of small farmers and local communties, not large businesses.

But patience with SAGCOT is running out. The donors and the private companies need to demonstrate soon that something is happening on the ground and not just in glitzy conferences. Private and public funding must begin to flow if SAGCOT is to get out of the starting blocks.

19 April 2012

Catalytic Capital: Realising Africa’s Agricultural Potential

Chris Isaac talks about the role of clusters and catalytic capital in making Africa’s agricultural potential a reality. Article reproduced from IFC's quarterly journal on public private partnerships, Handshake: Food and PPPs.

Zacharia Elises’ maize stands tall on his 1.5 hectare plot in Catandica, central Mozambique. He expects to harvest over five tonnes this season, which is more than three times the average yield in the area. He is linked to the innovative extension and marketing company, Empresa de Comercialização Agricola (ECA) which provided him with seeds, fertiliser and planting advice. One third of ECA is owned by local farmers so Elises will share in any profits generated from processing maize and other products for sale to the World Food Programme and a local brewery.

ECA sits at the middle of an economic ‘cluster’ of related agricultural businesses. The seeds were sourced from Phoenix Seeds, a company established in 2011, which aims to provide reliable and locally-adapted seeds at an affordable price. ECA’s milling operations produce maize meal for food consumption, starch for a local brewery, and nutritious bran that is highly sought after by local livestock farmers such as Guita Poultry and Tsetsera Pigs which, in turn, are expanding rapidly to take advantage of growing local demand for high-quality meat products.

All these agricultural businesses have received investment from the Catalytic Fund, the financing arm of a pubic private partnership launched in 2010 called the Beira Agricultural Growth Corridor (BAGC). Supporters of the BAGC include the Mozambican government, local and international agriculture businesses, the United Kingdom’s Department for International Development and the Norwegian and Dutch governments.

The Catalytic Fund, managed by AgDevCo, aims to kick-start clusters of profitable agricultural businesses in central Mozambique, in an area with reasonable infrastructure and rapidly developing new markets (the Tete area nearby has some of the largest coal deposits in the world which have attracted the likes of Rio Tinto and Brazilian mining gain Vale). Other investments made by the fund to date involve bananas, avocadoes, mangoes, sesame, sunflower and honey. AgDevCo is also developing irrigated farm blocks for use by local farmers, taking advantage of Central Mozambique’s ample water resources.

Banks will rarely lend money to start-up or early-stage agriculture businesses. Agriculture accounts for 30% of Africa’s economy but less than 5% of bank lending goes into the sector. The Catalytic Fund steps into the gap, providing ‘social venture capital’ on attractive terms to local entrepreneurs who have a solid business plan and the capacity to execute it effectively. The level of subsidy depends on the extent to which the business guarantees direct benefits for smallholder farmers and local communities. As well as capital, the US$20 million fund provides hands-on management and business support. Where necessary, it can also help mobilise targeted grant funds for small farmer development programmes.

By taking out many of the front-end costs and risks of getting new agriculture business started, the Catalytic Fund aims to unlock large volumes of new private investment. Numerous private equity and debt funds are being raised for African agriculture but there remains a severe shortage of ‘investment ready’ opportunities. Catalytic capital helps create a pipeline of interlinked and highly scalable investments that are ready to take on commercial debt and equity. When the fund sells its stakes in project any profits are recycled into developing new local businesses.

The Catalytic Fund is proving to be catalytic in more than one sense. Frustrated by the slow pace of investment in agriculture, and influenced by what is happening in Mozambique, a number of African countries including Ethiopia, Ghana, Rwanda and Tanzania are now setting up cluster initiatives and launching catalytic funds. The major donor agencies – the World Bank, USAID, DFID and others – have backed calls by African governments to do more to develop the local private sector, which is the backbone of any agricultural economy. A promising new pan-African initiative called ‘Grow Africa’, endorsed by the Africa Union and the World Economic Forum, is supporting the agenda.

For a long time people have talked about Africa’s agricultural potential; too often expectations of a take-off have failed to materialise. Perhaps this time the stars are aligned more favourably. The availability of catalytic capital, the focus on developing profitable clusters of firms in areas with reasonable infrastructure, the renewed investor interest in agriculture – all are necessary conditions for profitable and sustainable agriculture growth. Replicating these types of approaches across Africa will provide more opportunities to entrepreneurs like Elises to become successful commercial farmers.

11 April 2012

AgDevCo features in World Bank's Food & PPPs publication

While the world’s population is on the rise, food production is decreasing, and almost a billion people around the globe don’t have enough to eat. The new issue of Handshake: Food & PPPs examines how public-private partnerships (PPPs) in agriculture can help governments feed generations to come.

Handshake: Food & PPPs offers compelling and original ideas, analysis, and solutions from industry, NGOs, foundations, and across the World Bank Group. Articles and interviews cover these and many other topics:

• Q&A with AgDevCo Executive Chairman Keith Palmer
Catalytic Capital: Powering Africa's agricultural potential, by Chris Isaac
Agricultural clusters in Mozambique and Tanzania
• Innovations in agricultural extension programs: seeding knowledge
• Warehouse financing: receipts that pay
• Storage solutions: solving the problem of plenty
• New technology for agriculture and rural development: online and on time

23 March 2012

Subsidy back in fashion?

For a long time the consensus has been that investment by development finance institutions (DFIs) should be on 'commercial terms'. Low-cost loans risk propping up weak businesses and crowding-out private investment. There is a case for using public money to increase the supply of credit in developing countries, the argument goes, but not for reducing its cost.

When applied to African agriculture this argument is weak. Firstly, many agribusinesses operate in environments where there are market failures – such as underfunded research institutions, poor infrastructure and inexperienced farm management and labour – which makes it difficult to compete with farmers in other parts of the world. In these situations there is a sound economic rationale for public subsidy to help business get established and achieve the economies of scale which allow them to become competitive.

Secondly, the cost of commercial finance in rural Africa – often more than 25% interest for local currency loans – is prohibitive especially for primary agriculture which is generally a low margin business. For smallholder farmers the cost of credit is higher still – often 40-50% or more – which reflects the high transaction costs of making small loans to large numbers of disbursed clients. Insisting the DFIs lend on the same terms as commercial banks will not stimulate more investment in agriculture. Credit lines simply go undrawn.

Thirdly, there is no shortage of commercial capital looking for opportunities in the African agriculture sector. More than $2 billion of dedicated private equity has been raised since 2010. If there were investment opportunities that could give a reliable 25% + return then the private sector would already have taken them up. There is little benefit in increasing further the supply of credit when the problem is not a lack of capital but a lack of “investment-ready” opportunities (i.e. businesses with a solid business plan, quality management on the ground and some sort of track record).

Interestingly, the ideological opposition to subsidies seems to be on the wane. As Europe struggles to escape austerity more attention has been given to the role of the state in stimulating growth and encouraging entrepreneurship. Industrial policy is back in fashion.

A recent report by Demos titled The Entrepreneurial State points out that in many cases states have been the catalyst to develop and invest in new technologies. Many of the most innovative young companies in the USA were funded not by private venture capital but by public grants such as through the Small Business Innovation Research programme ($30 billion disbursed since the 1970s). The algorithm behind Google was funded by a public sector National Science Foundation grant.

AgDevCo’s view is that African agriculture will not develop with commercial finance alone. There are simply too many hurdles for start-up businesses. There is a strong economic rationale for subsidising agribusiness in its early-years, as long as there is an exit strategy. The DFIs should be doing more to catalyse private investment by increasing the supply and reducing the cost of credit for early stage agriculture businesses.

1 March 2012

Why good project development matters in the land grabbing debate

It doesn’t make for exciting headlines, but good project development may be the best way of ensuring that private investment in African agriculture benefits local communities.

Project development is the set of activities required to take a project from the concept stage to the point at which investment has been secured and implementation can begin. Using the language of finance, project development is about making an investment opportunity “bankable”.

Project development is important because it reduces the upfront risks of greenfield agriculture projects. If done properly it demonstrates to potential investors that a project can deliver a stable financial return (e.g. by proving that good crop yields can be achieved and there is a reliable market).

Good project development should also involve structuring deals such that benefits are equitably shared between investors, the local community and the host country government. Failure to get this right will undermine a project's long-term sustainability. Managing environmental impact is also key.

There are no short-cuts. Project development is expensive – often 10% of the total project cost – and can take 2-3 years or more. It needs to be undertaken by a team with the right mix of agronomic, financial, legal and engineering skills. The unexpected often happens and project developers need to be prepared for a long haul.

Where investors have been accused of “land grabbing” it is often because of bad project development usually involving a failure to properly consult and gain the consent of the local community, who in some cases are sidelined when governments or local authorities allocate land directly to investors.

But in many situations projects do not even get out of the starting blocks. The project development process is seen as too risky and expensive given the complex technical, social and environmental challenges involved. The result is that many potentially viable projects never get beyond the concept stage and Africa’s agricultural potential remains unfulfilled.

AgDevCo believes there is a strong case for public subsidy of project development in the African agriculture sector. Firstly, this would allow more “bankable” projects to be developed in situations where private capital was unwilling to take the first step. Secondly, because public subsidy would come with strings attached, it could be used as a tool to ensure projects were designed to maximise smallholder farmer and community benefits.

The way to address "land grabbing" is not to put a moratorium on all foreign investment into African agriculture, as some campaigning groups have called for. Instead a way must be found of ensuring that project development is done properly and benefits are shared with local communities.

AgDevCo is a project development company operating in the African agriculture sector funded by donor agencies and philanthropic organisations. Acting as principal it invests its capital to develop greenfield and early-stage agriculture businesses. Success for AgDevCo involves attracting private capital into projects (at financial close) that are profitable and guarantee long-term sustainable benefits for smallholder farmers and local communities.

4 February 2012

AgDevCo highlighted in World Economic Forum report on food security

The World Economic Forum has released its latest report on how to meet the global food security challenge. Titled Putting the New Vision for Agriculture into Action: A Transformation Is Happening (11MB file) the report:
  • explains that investment in agriculture in developing countries will have to increase by at least 50%
  • describes an approach which has the potential to deliver increased employment, expanded access to nutritious and affordable food, and sustainable resource use
  • gives examples where agricultural transformation is already happening
A key theme is catalytic finance. As long argued by AgDevCo and in this blog, the report says:

“Effective financing and risk management requires a broad set of innovative catalytic and patient capital financing mechanisms as required by the long-term horizon of agricultural development – from patient capital, donor grants and commercial equity to working capital and concessionary loans.”

The report gives a number of examples of AgDevCo’s work in Ghana, Mozambique, Tanzania and Zambia to develop viable farming enterprises.

31 January 2012

The myths and realities of land grabbing in Mozambique

There has been a lot of misinformation, and some hysteria, in the press coverage of “land grabbing” in Africa. It is refreshing to read a well-researched study, published by the Oakland Institute and written by long-time Mozambique expert Joseph Hanlon, which gives a more balanced account of the realities on the ground.

The 58-page report titled Understanding Land Investment Deals in Africa: Mozambique a Country Study  points out that much commentary on land grabbing is wildly exaggerated (e.g. headlines such as “20 million hectares granted to the Heaven on Earth Development Corporation”). And it recognises that rural poverty in countries like Mozambique will not fall unless there is increased public and private investment in the agriculture sector.

The report gives an insightful account of the debates within the Mozambican government about how best to promote agricultural development, in particular how to modernise the agriculutre sector and attract private investment while protecting the interests of small farmers and local communities.

Hanlon describes some recent high profile agribusiness failures in Mozambique and identifies others where the promised employment benefits never materialised. But he does not go so far as to say that all land deals are bad (indeed there is the suggestion, not fully developed, that “medium scale” commercial farming may be part of the answer). Rather, the evidence Hanlon presents gives lie to the myth that African agriculture is a one way bet for investors.

As shown by recent experience in Mozambique, agriculture is a tough business, prone to failure, and investors should be careful not to make unrealistic promises to governments, local communties or, indeed, to their own financial backers. But it would be disastrous for Africa, as commentators such as Professor Calestous Juma have noted, if governments and policy makers drew the conclusion that all foreign private investment in agriculture should be discouraged.

Hanlon does not go down that path and, while he does not exactly endorse large farm investments, he at least opens a window for a rational discussion about how to attract and regulate responsible foreign investment in the Mozambican agriculture sector.

Investors are unlikely to agree with everything in the  report. For example, the statement “investors are not interested in the poor quality land, which puts them in direct conflict with food production” is hardly justified when large areas of land in Mozmabique are idle (mainly because of missing infrastructure, as reported by the Economist Intelligence Unit). But it is worth reading to get a better understanding of how some of the myths and the realities about farming investments in Africa play out in the public sector.

There is enough common ground in this report for both sides of the polarised "smallholder farmer versus large-scale commercial farming" debate to come together and work out ways of promoting investment models which can genuinely deliver both social and financial returns.