Is supporting smallholder farmers enough?

A thought-provoking piece from Lion’s Head, a UK-based investment group, calls for more donor support for commercial agriculture in Africa. An exclusive focus on smallholder farmers, say the authors, risks leaving countries dependent on food imports.

Lion's Head also want to see private investors doing more to tackle start-up agribusinesses and invest growth equity. The closed end private equity fund model – which seeks large financial payoffs within 5-7 years – does not match the long-term nature of agriculture. New and more patient approaches are needed, which may require blending public and commercial finance.

Since the food crisis of 2008, donors and governments have shown more willingness to engage with the private sector as a partner to promote agricultural development. The Grow Africa initiative of the Africa Union and the World Economic Forum is an example. But in recent months, campaign groups have turned up the heat highlighting “land grabs” and stoking fears of a corporate take-over of African agriculture.

Lion’s Head is concerned that, in the face of criticism, the main donor agencies are falling back on traditional approaches that prioritise support to smallholder farmers, instead of seeking creative solutions to promote responsible investment in commercial agriculture.

At AgDevCo we invest in both smallholder and commercial agriculture. Our ECA business in Mozambique shows what can be achieved when smallholder farmers are given access to better inputs (quality seed and a little fertiliser) and linked to reliable markets.  ECA is already benefitting over 2,200 farmers and will expand to 5,000 this year. Farmer incomes have doubled or tripled as a result.

Is ECA enough? We don’t think so. For a country like Mozambique to achieve its potential and become self-sufficient in major food crops like maize, soya and rice it needs mechanised farming and large-scale irrigation schemes (plus modern logistics and marketing) alongside smallholder and emergent farmer outgrower systems.

As Lion’s Head says, while the concerns of campaigners should not be dismissed, they should not be allowed to crowd-out the debate. Donors need to have the courage of their convictions to support responsible private investment in commercial agriculture. And investors need to take a longer-term approach, recognising the agriculture opportunity remains attractive but there are no easy wins. 

As argued previously on this blog, an informed and pragmatic approach bringing together the public and private sectors has the best chance of solving the food security challenge.

UK invests £50 million in AgDevCo to support smallholder farmers and tackle malnutrition

The UK Government will provide £50 million to help the Agricultural Development Company (AgDevCo) set up a new fund which will invest in agricultural SMEs, smallholder farms and new agribusiness ventures. This will benefit 650,000 people across Africa with jobs and better incomes, as well as help smallholder farmers grow more food to combat food shortages and malnutrition.

A non-profit social impact investor, AgDevCo specialises in investing in African agricultural companies that are at their earliest stages, turning them into commercially-viable businesses that can then find support through private investors and ploughing its profits back into future investments. The UK’s funding will be redeployable, allowing AgDevCo to reinvest in new opportunities as its investments mature and develop.

Investments made over the next five years are predicted to attract over £7 in private sector investment for every £1 invested by AgDevCo.

Africa has more unexploited potential for food production than anywhere else in the world, holding 50% of the world’s uncultivated fertile land, yet its commercial agriculture sector attracts relatively little investment. The new UK-backed fund will:

 - Develop or expand 45 agribusinesses, 30 of which will be SMEs. AgDevCo predict this could increase the turnover in these countries by £60 million by 2018
- Create 27,000 additional jobs and help 90,000 people to benefit from an average additional income of over $1000 per year over the next decade.
- Improve irrigation and processing for commercial agribusiness for 49,000 farmers. By 2018, up to 30,000 additional hectares will be under irrigation.

Three new AgDevCo SMEs Catalytic Funds in Malawi, Zambia and Ghana will receive £10 million each from the Department for International Development (DFID), while £20 million will be invested into a new Regional Innovation Investment Fund to boost production and cross-border trade across Africa.

International Development Secretary Justine Greening said:
“Part of the solution to hunger in Africa is for Africa's farmers and agricultural sector to be able to produce the food it needs for itself.

“Smart UK investment like this will help thousands of farmers develop their businesses to grow food for millions, whilst generating revenues that can be reinvested back into Africa's agricultural sector.
“This sort of innovative, self-sustaining, job-creating investment which generates a return that can be itself reinvested will become an increasingly important part of DFID’s development approach.”

Dr Keith Palmer OBE, AgDevCo Chairman and founder, said:

“Investment in agriculture is the most effective way of stimulating inclusive economic growth, reducing poverty and tackling malnutrition. With UK government support, AgDevCo will support many more African SME agribusinesses and link thousands of smallholder farmers with markets”. 

Examples of businesses AgDevCo is already investing in include:

So Soja – a Mozambican SME soy milk and yoghurt processing business which supplies hospitals and primary schools with highly nutritious milk drinks and yoghurts throughout the country. AgDevCo’s investment will allow So Soja to build a modern processing facility, scaling up its production and helping it to meet international food safety standards. 
 
Sao Hill – A Tanzanian production and processing firm producing seed maize, soya and horticulture. AgDevCo’s investment will help it to raise incomes, reduce poverty-levels and improve nutrition for 3,200 farmer households.

Eastern Province Farmers – a groundnuts farming and processing operation in Zambia which is already working with 3,500 smallholder farmers to eliminate aflatoxin, a mould and a poison, from the food chain. This will have health benefits for consumers in local and regional markets and allow smallholder farmers to sell premium grade nuts into higher value export markets. 

AgDevCo highlighted in Grow Africa progress report

The Grow Africa partnership aims to accelerate private-sector investment for sustainable growth in African agriculture.  Seven countries joined the initiative when it was launched in 2011 - Burkina Faso, Ethiopia, Ghana, Kenya, Mozambique, Rwanda and Tanzania. Malawi has since joined.

To date these countries have attracted investment commitments from 62 companies including 39 based in Africa. The Grow Africa report highlights AgDevCo's work building profitable and sustainable agriculture businesses in Mozambique and Ghana:

• development of three irrigated farming blocks in Ghana aimed at generating income transformation and food security for large numbers of farmers 
• management of a $20 million catalytic fund in Mozambique which has invested in 14 farming and agriprocessing businesses to date, including ECA which works with smallholder farmers to supply maize to a local brewery and other customers

One of the main conclusions of the Grow Africa forum meetings in Cape Town in May 2013 was that agricultural finance can be unlocked by impact investors providing medium-sized investment in SMEs.

Don’t beat up the banks, they can’t fix African agri-finance on their own

I have attended countless conferences and workshops on African agriculture – in South Africa, Mozambique, Ghana, Tanzania, Ethiopia, Europe and the US. There’s always a panel session on access to finance. The discussion usually follows a similar script.

Farmers and entrepreneurs complain about the high cost of finance. “We cannot afford 25% interest rates”, they say. Governments insist banks should lend more to the agriculture sector. The banks say there are too few investment opportunities; and they are forced to charge high interest rates because of macroeconomic fundamentals and the unavoidable fact that agriculture is risky.

“A quarter of our clients’ fields were under water” a Mozambican banker told a conference in Maputo earlier this month (the result of recent floods in the Limpopo Valley). “We are not making money on our agriculture loan book”.

In the discussion that follows there’s often a lot of scepticism. Surely the banks could try harder to find good investments? They should get out into the field, learn more about agricultural economics and develop affordable loan products that meet farmers’ needs.

In AgDevCo’s view, criticising the banks misses the point. Most agribusiness opportunities in Sub-Saharan Africa are greenfield or early-stage, without a strong balance sheet or management track record. Yields and markets are uncertain. The weather is always a factor. Commercial banks are just not set up to provide finance to that type of client.

Banks are – at least they should be – conservative institutions which seek to protect their depositors’ capital by taking manageable risks and earning a steady return. Would you be happy if your bank was investing your savings in unproven agriculture businesses?

What the African agriculture sector needs is risk capital in the form of equity and long-term loans. There is a strong case for subsidising risk capital for African agriculture because, while agriculture will never deliver spectacular financial returns, it can have a hugely positive impact on employment creation, rural economic growth and food security.

Where will the risk capital come from? There are private equity firms targeting African agriculture but they are looking for large deals (typically $5 million +) which are in short supply. The development finance institutions, such as the IFC and CDC group, are slowly getting back into agriculture but they also seek large deals because of high transaction costs.

Social impact investment funds like AgDevCo, Root Capital and Acumen can play a role. Unlike traditional venture capital, they raise money from a combination of charitable, government and commercial sources which allows them to take (a little) more risk and accept a (slightly) lower financial return in order to achieve high social impact.

Social impact investors can fill the agri-financing gap by investing a few hundred thousand dollars or more – bundled with professional, hands-on management support – to help SMEs grow into the commercial debt and equity markets. As with any venture capital investment there will be failures as well as successes. However, those successes could help kick-start a profitable agriculture sector.

So go easy on the banks, they are supposed to be (!) boring, conservative investors. What African agriculture needs is capital with more risk appetite - and plenty of patience.  

Unlocking the Potential of Agribusiness

A new World Bank report titled Growing Africa explores the  role of agribusiness in creating jobs and reducing poverty in Sub Saharan Africa.

• Africa has a huge challenge to create jobs, especially for the 25 million young people who will enter the labour force each year by 2025.
• Agriculture and agribusiness together are projected to be a US$ 1 trillion industry in Sub-Saharan Africa (SSA) by 2030 compared to US$ 313 billion in 2010.
• Agribusiness can play a critical role in jump-starting economic transformation through the development of agro-based industries that bring much-needed jobs and incomes.
• The attention focused on production agriculture will not achieve its developmental goals in isolation from agribusinesses, ranging from small and medium enterprises to multinational companies.
• The challenge is thus threefold: (1) develop downstream agribusiness activities (such as processing) as well as upstream activities (such as supplying inputs), (2) develop commercial agriculture, and (3) support and link smallholders and small enterprises to productive value chains.
• Private sector interest in African agribusiness is unprecedented. The past decade has witnessed an upsurge in interest from the private sector in African agriculture and agribusiness, including interest from foreign investors and investment funds. The challenge is to harness investors’ interest in ways that generate jobs, provide opportunities for smallholders, respect the rights of local communities, and protect the environment.
• The growth of competitive agribusiness in Africa is severely constrained by the low use of modern inputs and limited access to improved technologies
• Irrigation is critical to increase and stabilize production, reduce risks, and provide the basis for higher-value agriculture. Given the severe constraints on public sector resources and capacity, tapping private capital and management skills will be essential to accelerate investment in irrigation.

The report cites AgDevCo as an example of an innovative financing facility which can help early-stage agribusinessess overcome the challenges of operating in frontier markets.

UK Deputy PM praises AgDevCo's work in Mozambique

UK Deputy Prime Minister Nick Clegg and DFID Minister Lynne Featherstone visited Maputo on Wednesday 13th February, where they spent an afternoon with SME agriculture businesses supported by AgDevCo, as part of the Beira Agricultural Growth Corridor (BAGC) initative.

Nick Clegg  praised the work undertaken by the BAGC in supporting small scale agricultural producers in the central Mozambican provinces of Manica, Sofala and Tete.

Launched in 2010, BAGC is a partnership between the Mozambican government, private companies and donor agencies, including the British Department for international Development (DFID). Clegg, who is on a two day working visit to Mozambique, declared that the initiative will bring substantial and positive changes in the lives of farmers in the areas covered.

DFID Minister Lynne Featherstone welcomed the work AgDevCo was doing saying that small and medium-sized businesses were critical for inclusive growth and job creation in Mozambique. In an article in the Huffington Post she wrote about the potential for mobile money solutions to provide new opportunities for farmers, such as those linked to AgDevCo's ECA smallholder farmer business.

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Opening remarks by Chris Isaac, Director Business Development AgDevCo:

"Small and medium sized enterprises (SMEs) are the engine of economic growth in all countries. Agriculture is the backbone of Mozambique’s economy engaging over 80% of the workforce. More investment in Mozambican agricultural SMEs is essential to:

• Create jobs
• Ensure economic growth is broad based
• Provide opportunities for small entrepreneurs and farmers, many of whom are women

The problem is that it is very difficult for SMEs to access financial capital. Most banks will not provide loans to SMEs due to the high-risks of starting a business – or they will only do so at very high interest rates. And private equity funds typically look for deals of 5 million dollars or more, far too big for most SMEs.

Catalytic Finance is the solution. A Catalytic Fund provides a combination of low-cost capital and “hands on” technical support to help SMEs grow, to the point where they can graduate to access commercial debt and equity. Backed by development agencies like the UK’s Department for International Development (DFID), a catalytic fund can do smaller deals, take a little more risk and accept a slightly lower rate of financial return than a private investor, while insisting on the highest social and environmental standards.

Today you will meet a number of Mozambican SMEs funded by the BAGC Catalytic Fund, which is managed by AgDevCo.

Businesses like So Soja, run by a brilliant entrepreneur Lucas Mujuju, who is bringing nutritious and delicious soy-based products to Mozambique’s schools and hospitals.

Or the Mozambique Honey Company which is creating a market for high quality honey buying from rural beekeepers, run by Anifa Osman, to be distributed throughout the country by Tropigalia.

Or Frutis Lda, owned by the charismatic Sr Issufo Valy who was born on his farm and is now singlehandedly setting about the revival of the fresh fruit industry in the Beira corridor.

You will also meet some of our corporate partners who work with us to link smallholder farmers and SMEs to reliable markets, allowing us to scale up our impact. Like Rio Tinto who are working with us to ensure that every vegetable eaten in the mining canteens of Tete has been grown in Mozambican soil; or Cervejas de Moçambique who are buying fair-trade maize from our small farmer marketing business ECA.

Lastly you will meet some financial services companies like Hollard who is working with us to introduce innovative drought insurance products for the first time in Mozambique, protecting farmers like Mussa Macaliha from the changing climate.

None of this would be possible without funding support from UK Aid. None of this would happen without the dedication and commitment day in and day out of people like Lucas, Anifa, Issufo and Mussa. At a time when all eyes are on the big discoveries of coal and gas in Mozambique, we believe it is small entrepreneurs and farmers like those here today who are the real future of the Mozambican economy."

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.