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.

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?