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.
29 September 2012
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?
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?
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