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Investment bankingSeptember 1 2009

Funding Africa's agrarian revolution

Five decades of neglect left Africa's agricultural sector in a parlous state, but last year's food crisis galvanised global opinion that something must be done - and soon - to transform the continent's vast potential into reality. Financing small farmers is the first step. Writer Charlie Corbett
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Funding Africa's agrarian revolution

Last year's global food crisis made two facts startlingly apparent: first, the desperate need for Africa's agricultural sector to fulfil its huge potential, in order to become a breadbasket for the world. And second, quite how far from reality this ambition was. While the rest of the world struggled with the high cost of staple foods, in Africa many millions already living a hand-to-mouth existence starved.

As things stand, Africa cannot feed itself, let alone the rest of the world. Famine is an all-too-common occurrence throughout the continent and one-third of the population lives with chronic hunger. As the developing countries of Asia went through a post-war green revolution, modernising their food production techniques and transforming their infrastructure, Africa stood still. In the past four decades, food production in sub-Saharan Africa has actually declined, failing completely to keep up with population growth. This is despite agriculture being the largest economic sector on the continent. According to figures from emerging markets specialist Standard Chartered, the sector employs three-quarters of Africa's inhabitants and generates 20% of total gross domestic product. Too often, African governments have poured investment into more immediately profitable sectors such as mining, while neglecting their farmers. As a result, the agricultural sector has a chronically low level of mechanisation, limited access to seeds and fertiliser, poor soil quality due to backward farming techniques, and crucially, almost non-existent access to finance and credit.

According to Sean De Cleene, vice-president of public affairs at Yara International, a Norwegian-based agricultural development firm that has had operations in Africa for 25 years, the food crisis brought home the urgency of transforming Africa's potential into a tangible reality. "In terms of the growth agenda for Africa, agriculture is going to be critical and outside of mining it is the biggest driver of economies on the continent," he says. "There is a growing awareness that agriculture in itself can be an economic driver of economies, not just a solution to food security. The question is: how do you harness that potential?"

Chicken and egg

It is a question that many generations of African leaders and international development agencies have agonised over. One of the biggest problems with transforming Africa's agricultural sector, according to Mr De Cleene, is that it is a highly complex value chain. Whereas with mining it is possible to concentrate investment around one particular mine or project and therefore create a public-private partnership relatively simply using one company, in agriculture there is a much greater number of players in the value chain. "These players need somehow to be aggregated to a level of scale that makes agriculture competitively viable for Africa," he says.

In many ways it is a 'chicken and egg' dilemma. African smallholder farmers need financing in order to buy the necessary seeds and fertiliser to produce higher yields and compete internationally, but at the same time potential investors need proven steady incomes and collateral before they can lend. Given the seasonal nature of farming, combined with the innumerable potential natural disasters that threaten smallholders across the continent, it has in the past been almost impossible to fund African farmers without taking huge risks.

This financing dilemma lies at the heart of why African farming has remained practically in the dark ages for most of the past five decades.

According to Dr Akinwumi Adesina, vice-president of the Alliance for a Green Revolution in Africa (AGRA), the real damage was done in the 1980s with the structural adjustments brought about by the Washington Consensus. "By the 1970s, with government support, agriculture in a number of African countries was on a strong development track. Farmers were getting access to the good seeds and fertilisers they needed," he told an audience at the annual United Nations Conference on Trade and Development in June this year. "It was cut short by the structural adjustment policies of the 1980s. These policies called for liberalisation of markets, privatisation of government parastatals, drastic reduction of the role of government in agriculture, cancellation of subsidies for farmers and cuts in public expenditures - including for agricultural research and development," he said.

Mr Adesina conceded in his speech that the agricultural reforms of the 1980s removed some of the worst distortions in the agricultural sector, but that they also resulted in the abandonment of support for smallholder farmers. "These policies assumed that the private sector and market forces would rise to fill the gaps. But reality intervened. The private sector was too weak to fill in and smallholders suddenly found themselves deserted. African farmers were abandoned - by their governments and the world," he said.

Funding a revolution

Without reliable government support, most agree that the private sector will be critical to developing Africa's agricultural sector. Yet providing the necessary finance has time and again proved a fundamental stumbling block. This could be changing. Many banks, both inside and outside Africa, are coming up with innovative forms of financing to help develop the sector.

In east Africa, Equity Bank Kenya has led the way in finding new ways to fund farmers. It has introduced mobile rural banking services, post-harvest warehouse receipting schemes and widespread agro-dealer financing facilities. All of these innovations are aimed at binding farmers into the financial network so that they can buy the necessary inputs to increase yields.

Such techniques are undoubtedly providing the bedrock on which to build a solid foundation for growth, but they simply cannot solve the problem of scale. In order for African farmers to be profitable and make an impact on international markets, agriculture needs to be mobilised on a scale hitherto unimagined on the continent. This does not mean creating huge, often foreign-run, commercial farms that will undoubtedly damage fragile ecosystems. What it does mean, however, is aggregation of the many millions of smallholders across Africa.

Standard Chartered Bank is one institution that is developing financing techniques that aim not only to bypass the fragmented nature of African agriculture, but to solve the problem of lending to impoverished smallholders with little or no collateral. It uses independent contract managers that operate across hundreds of thousands of hectares of land. These contractors act as middlemen between the bank and the farmers and create the necessary scale to make investment potentially profitable.

Rather than focus on individual farmers' balance sheets and physical assets, Standard Chartered uses the collateral value of the commodity - whether it be maize, wheat or other staples - as security for its loans. Added to this, it makes extensive use of multi-peril insurance that covers unforeseen natural disasters or erratic weather conditions.

South African-based Zhann Meyer, a director of Standard Chartered Bank's agricultural division, says that operating over such a large area makes insurance easier, because natural disasters or bad weather will not affect all of the farmers at the same time. The ultimate aim is to encourage subsistence farmers to become commercial farmers. "The moment the farmer is able to produce more than he can eat, then we've reached our goal," says Mr Meyer. Much emphasis is placed upon encouraging so-called 'precision farming', which makes use of the latest agricultural practices. "This is not just about giving a guy a bag of seed and a bag of fertiliser and praying for him," says Mr Meyer.

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Zhann Meyer, a director of Standard Chartered Bank's agricultural division

Market access denied

As it stands, however, the ability of a farmer in Africa to increase his yields is rendered purely academic because access to international markets is almost non-existent. It is unlikely that the average farmer would know what a commodity exchange was, let alone realise whether he or she was getting a fair price for their grain. "Their only link [to international markets] is usually a guy with a suitcase full of cash arriving in a bashed-up land cruiser at harvest time," says Mr Meyer. "That creates a huge opportunity for exploitation. A farmer needs to know what he is going to get if he produces the crop he is contracted to grow."

Transporting the crop to market is also a severe headache in Africa, not only because of the distance to the nearest ocean for many landlocked nations, but also because of the dire state of the continent's infrastructure. According to AGRA's Mr Adesina, Africa has worse infrastructure today than Asia had in the 1950s. It is a depressing statistic that it costs twice as much to ship a container from Mombasa in Kenya to Kigali in neighbouring Rwanda as it does to ship a container from Mombasa to Singapore or Malaysia.

No amount of financing to smallholders in Africa is going to change this fact. It is a problem that only African governments can put right. There is, however, a potential blueprint for solving the problem of getting goods to market while also providing the necessary scale to make the sector competitive. Yara's Mr De Cleene believes that the future of African agriculture lies in creating specific growth corridors where investment in technology and infrastructure can be clustered together. One such project that is getting under way in the south of the continent is the Beira Agricultural Growth Corridor (BAGC).

A co-ordinated approach

Yara is just one of several private investors, farmer organisations and international agencies that have teamed up with the Mozambican government to boost agricultural productivity in the region. The Beira corridor is one of southern Africa's main transport routes. It is a road and railway network that links large parts of Malawi, Mozambique, Zambia and Zimbabwe to the port of Beira on the Indian Ocean.

The BAGC is committed to boosting agricultural productivity throughout the region through a combination of public and private money. The aim is to establish certain anchor investments, such as the construction of transport links and cold storage facilities, which will specifically benefit agriculture. The heart of the project lies in co-ordinating the many parts of the agricultural value chain so that the sector can finally achieve the scale it needs to compete internationally. It is a long road to travel, and according to the International Food Policy Research Institute, Africa as a whole will need between $32bn and $39bn annually if it is to achieve agricultural transformation.

However, initiatives such as the Beira corridor show at least a wider awareness of the critical importance of harnessing Africa's agricultural potential, not only to benefit Africans, but also the rest of the world. It is a dream that African governments cannot achieve alone. It will involve partnerships between governments and the private sector, both within Africa and globally.

The world appears to have woken up to this need. Investment into African agriculture has soared recently. US president Barack Obama has called upon Congress to double US financial support for agricultural development on the continent and the EU has pledged €1bn towards African agriculture. In Africa itself, NEPAD (New Partnership for Africa's Development) established the Comprehensive Africa Agriculture Development Programme in 2003, which calls for governments in Africa to put 10% of their national budgets into agricultural development, with the aim of achieving 6% annual agricultural sector growth. Perhaps the biggest sign, however, of how seriously the world is now taking Africa's potential as a breadbasket was the recent announcement by the G8 nations that they will double their development assistance for Africa to $25bn a year by 2010.

The future of African agriculture could be bright, but harnessing that potential will not be easy. In the words of Standard Chartered Bank's Mr Meyer: "There is a lot that can be done and there is a lot that is being done. We are working towards [our goals] but it will be a long walk."

Cereal yield by geographical region (Hectograms per hectare) 1961-2006

Cereal yield by geographical region (Hectograms per hectare) 1961-2006

Malawi: A blueprint for success

The government of Malawi, one of Africa's poorest nations, is showing the world that Africa can not only feed itself, but that it can become a successful exporter too. After a devastating famine in 2004, the Malawian government launched its Agricultural Inputs Subsidy Programme.

Half of Malawi's small farmers were given coupons to buy fertiliser and seed at below market price. The government was careful to target only those farmers that had land of their own and could increase their yields if given the opportunity.

At the same time, the government invested in training programmes, helping farmers to learn about new types of irrigation and management to improve their yields. And once the farmers produced their crops, the Malawian government created funds designed to buy a percentage of the maize to store for future emergencies.

As a result, Malawi has exported more than $160m-worth of maize to its neighbours and it gave 10,000 tonnes as food aid to Lesotho and Botswana when the countries were in the midst of a drought.

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