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WorldJune 3 2013

Cropping up: Opportunities abound in African agriculture

Africa’s agricultural sector may still be underdeveloped, but it is growing as investors increasingly seek to exploit local and regional sources of demand and develop the continent’s processing capacity. A greater provision of banking services is also helping.
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Cropping up: Opportunities abound in African agriculture

Three years ago, Olam International, a Singapore-based commodities trader, signed an agreement with Gabon’s government to invest almost $1bn in oil palm plantations. The ambitious deal, which aims to make the central African country, today a negligible producer of palm oil, the biggest on the continent by 2020, demonstrated the new-found interest from international investors in tapping Africa’s vast agricultural potential.

Rather than looking to sell its produce to Western markets or fast-growing ones in Asia and Latin America, Olam will target consumers in sub-Saharan Africa, where palm oil is part of some local diets and is used for heating and lighting. “All of that palm oil will go to the African market,” says Edward George, head of soft commodities research at pan-African lender Ecobank. “Nobody is talking of exporting it to Europe or Asia.”

The development is demonstrative of how agricultural investment in Africa is increasingly being driven by demand on the continent itself instead of in overseas markets. The trend is further reflected in the growth of cross-border African trade in commodities such as sugar and rice, and even vegetables and fruits. “It’s hard to find numbers for it, but we know it’s happening,” says David Cowan, senior Africa economist at Citi.

Despite this shift, much of Africa’s cash crop production is still focused on foreign markets. Its main exports include coffee, tea, cashew nuts and cocoa. Côte d'Ivoire and Ghana grow about 60% of the world’s cocoa, while Kenya ranks as the third biggest supplier of tea after China and India. Overseas consumers are targeted because, with the exception of Ethiopia, which consumes a considerable amount of coffee, there is almost no African demand for these products.

Shelling shock

One of the effects of Africa’s reliance on foreign markets for its cash crops is that its exports are usually sold raw rather than in processed form. Analysts have long said that countries on the continent would derive far more revenues from their agricultural commodities if they added value to them before they were shipped abroad.

Guinea-Bissau is a case in point. It is one of the world’s 10 largest producers of cashew nuts. But rather than carrying out even basic processes such as removing their shells, virtually all its cashews are exported raw to countries such as India and Brazil, where they are roasted, skinned and graded. As a consequence, African countries are left vulnerable to swings in raw commodity prices, which are notoriously volatile, and have few ways of cushioning the blow when prices fall to low levels.

Mr George of Ecobank argues that growers of crops such as cocoa should not resign themselves to being unable to sell to African consumers. “There needs to be research into what cocoa could be used for in Africa,” he says. “Everyone says: ‘You can’t sell chocolate in Africa.’ But it doesn’t have to be chocolate. There must be many things that cocoa can be turned into that fit African tastes. If they’re going to keep being dependent on the whims of Europeans and Americans, they won’t have anything to fall back on when the markets get tough.”

Sweetening the deal

A lack of agricultural manufacturing in Africa has resulted from a combination of factors. One of them is weak infrastructure. The poor state of transport and logistics networks, as well as a shortage of power supply, render many agribusinesses uncompetitive compared to those in regions with already established processing sectors such as Latin America or south-east Asia.

One solution is for governments to use tax incentives. These worked when Côte d'Ivoire’s government introduced them in the early 2000s. By granting concessions on export taxes to cocoa processors, it helped foster the growth of an industry that today processes about 20% of the Ivorian crop. Analysts say African governments could look towards subsidising agricultural manufacturing for a variety of commodities.

They caution, however, that policy-makers need to have a clear exit plan. A recent announcement in Côte d'Ivoire that the cocoa subsidies would come to an end immediately sparked warnings from processors that they would halt any plans to expand their operations.

“It’s a question of competition,” says Mr George. “The truth is that all processing sectors everywhere in the world are subsidised to some degree. Therefore, there will have to be recognition from governments that, even when they want liberal and open markets, they need some kind of subsidy. But the great difficulty is that subsidies, once introduced, are very hard to remove.”

Room for growth

Africa has plenty of scope to boost its agricultural production. Of the world’s unutilised arable land, half is on the continent, according to Berry Marttin, a board member at Rabobank, a Dutch specialist in food and agri-based financial services.

While Africa’s agricultural sector has expanded in recent years, the pace has not been especially impressive. “Agriculture, compared to other sectors of the African economy, is a laggard generally,” says Citi's Mr Cowan. “If you were to go across a bunch of countries and look at the agricultural part of GDP [gross domestic product] growth, you would find that it lags behind the overall rate of GDP growth.”

Yet some regions have seen rapid progress recently with the production of food crops, most of which are being grown for African consumption. The Nigerian government’s policy of improving food security has led it to impose quotas or higher taxes on imports of commodities such as rice and sugar, and encourage their domestic production. As a result, the country has all but stopped importing refined sugar (it still has to buy it in raw form from abroad, although that should change with plenty of investment being made in sugar plantations) and experienced a surge in rice production.

One of the constraints on further agricultural expansion is a lack of access to financial services for farmers and agribusinesses. Across most of Africa, agricultural lending remains paltry. In Nigeria, it makes up less than 5% of banks’ credit portfolios, despite agriculture accounting for 40% of GDP. Bankers claim the industry is too unproductive and dependent on subsistence farmers for them to lend to it on a large scale.

Supply chain set up

There are, however, more and more examples of agricultural banking on the continent being carried out profitably. Rabobank, which owns minority stakes in banks in Tanzania, Zambia, Rwanda and Mozambique, is just one lender that has made a success of it.

Mr Marttin says that the key is for lenders to focus on establishing a working supply chain from the field where crops are grown to the markets in which they are sold. This requires banks working not only with farmers to ensure they have access to enough inputs, but also with transport, storage and food processing companies.

“People say that financing tomatoes is risky,” says Mr Marttin. “It’s risky if the tomatoes are being sold on the street. But if the tomatoes are going to be sold in a supermarket, then it’s not so risky. The losses in agriculture are in the weakest links of the supply chain. If the weak link is the storage, that’s where the losses will occur. Once the supply chain is established, there’s no loss.”

Global demand 

Global demand will continue to be a powerful force driving investment in African agriculture in the long term. Citi’s Mr Cowan says that rising consumption of food in Asia could have far-reaching consequences for a country such as Zambia, perhaps even allowing it to exploit its agricultural potential to offset any fall in the price of copper, its main export.

Nonetheless, Olam’s palm oil investment in Gabon and the expansion of rice and sugar production in Nigeria are just two examples showing that it is not only external demand for cash crops that is causing money to flow into African agriculture. Investors are seeing the benefits of exploiting local and regional consumers.

Given that this typically involves investment in processing as well as simply farming, the result is likely to be an increasingly sophisticated and vibrant agricultural sector in Africa.

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