To unlock “the wealth of nations” agriculture must move beyond subsistence farming. The Africa Report looks at schemes large and small to get productive investment into the sector
Financing the farmers
As a young doctor in western Nigeria, Doctor Temitope Aroge recalls seeing cassava farms that stretched as far as the eye could see. And yet, his patients were still poor, still badly fed and without the money to send their children to school. “I could see the plants. But I could not understand why these crops were not being turned into wealth,” Aroge says. His question burned to the point where Aroge, then only three years out of medical school, became a cassava farmer and processor. His company, Arog Bio Allied Agro Services, has made him rich, but has also enabled many of Ekiti’s subsistence farmers to improve their businesses and standard of living – and therefore the health of themselves and their families. Financing farmers to get beyond subsistence agriculture is a crucial challenge in Africa’s development. Get it right, and you unlock what African Development Bank (AFDB) president Akinwumi Adesina calls “the secret of the wealth of nations”. That includes a broad-based improvement in livelihoods, a rise in employment and a reduction of the large food import bills that are weighing down African treasuries. “There is no reason
Africa should be a net food importing region, spending [in aggregate] $35bn annually on food imports”, says Adesina. For many countries, most recently the giants of Asia, agriculture is the foundation on which industrialisation is built. And given the growth of domestic demand in Africa – which for agricultural produce should hit $100bn by 2025, according to a recent AFDB report – the opportunity is such that major investors should be interested. Before all that, though, you still need to find finance for the farmers. And here, barriers are legion and the landscape is studded with the failures of both market and state. Not only do most governments appear unable to fix the problem, but very few are meeting a shared commitment known as the Maputo Declaration to spend 10% of their national budgets on on agriculture.
TOO RISKY FOR BANKS
In South Africa, for instance, “there has been a massive shrinkage in employment in agriculture over the past 15 years,” says Paul Boynton of Old Mutual Investment. “Government support for agriculture has been quite diffident in a way, especially if you compare it to somewhere like Europe, where the support for agriculture is much more fundamental.” To make matters worse, commercial banks are also largely uninterested in financing small-scale farmers. That is “because of the perceived risk of lending to farmers”, says Atsuko Toda, the director for agricultural finance and rural development at the AFDB. Her appointment in December 2016 marked a new agricultural push at the organisation. “[Small-scale farmers] are often in remote locations, quite dispersed, so it makes the transaction costs [of banking them] quite heavy, with climate risks compounding that.”
So how to get tender to the tillers? One option is to focus right at the very base of the pyramid. Giving cash to the very poorest farmers allows them to then transfer savings into more productive areas, such as improved seeds or fertilisers. That was the intention behind Brazil’s successful conditional cash transfer scheme – and Nigeria recently announced it is launching a pilot version of a similar programme.
Cash transfers have already proved their worth in Africa. In 2010, a study in Gokwe North District in Zimbabwe by Trinity College, Dublin, showed that each dollar in cash injected into rural areas travelled around the local economy 2.59 times, compared to a dollar’s worth of food aid that was simply consumed. To kickstart agro-based industrialisation, serious agribusiness ventures will be required, too. And getting farmers to the next step of the ladder will require bank accounts. That is still a tough nut to crack, even with all the mobile phone technology in the world. The reason is simple: while you can easily own a telephone to transfer or receive cash, to get an actual bank account requires a bank to wade through complex ‘know your customer’ regulations – and the associated charges are often too high for the poorest to meet. But there are solutions here, too. India’ s Prime Minister Narendra Modi decided to hand out millions of free bank accounts and roll out a biometric ID system to address the situation of the nearly 500 million Indians suffering from what he calls “financial untouchability”. In the Americas, Mexico has pursued a twotiered approach to pull more people into the formal financial sector. It is easy to get a low-functioning account with limited deposit and credit facilities. And when a person is wealthy enough to transition, they provide more rigorous identification and get a fuller bank account. Once a farmer has a bank account, interesting things can start to happen. Governments can easily reach them for input subsidy schemes, for example. S ome of these can be focused on fixing the big infrastructure challenges faced by farmers, namely the lack of power and lack of water. India’s company Rotosol has created water pumps linked to solar panels, a neat invention that solves both problems at a stroke. The pumps are flying off the shelves in India because “it makes a farmer water-secure,” says Raghav Agarwal, a
senoir adviser at Rotosol. “Then that farmer will look for nearby land to irrigate. Once he does that, he not only feeds himself and his family, but he gets surplus produce, which he sells into the market.” While that may well be correct, another reason they are flying off the shelves is the generous subsidy involved. Though the kit costs $1,500, the federal government in India pays half and the state governments a third, leaving the farmer with a bill of a few hundred dollars. The price is still steep for many, but if the farmer becomes more productive, it becomes easier to recoup the costs. Subsidies are also common for inputs. In Nigeria, more than 10 million farmers are signed up to a fertiliser distribution scheme that has been in part responsible for the rice production boom of recent years. Unmilled rice production was 7.9m tonnes in 2016, up from 4.5m tonnes in 2010 – nearly doubling output. In a sign of the positive feedback loops that these policies can create, the new farmers entering the rice sector have helped to develop more interest from much bigger fish – Africa’s biggest, in fact. Aliko Dangote, the richest man on the continent, announced that his company will build a rice mill that will produce 225,000tn of parboiled rice annually. And Singaporean agribusiness giant Olam, which already has more than 4,000ha under rice cultivation in Nigeria, plans to increase that to 6,000ha over the next few years.
It should be noted that the reason that the bigger industrial players have gravitated to the sector is also as a result of a sustained effort by Nigerian governments to de-risk agriculture for the commercial banks. This includes an insurance scheme for financiers called the Nigeria Incentive-based Risk-sharing System for Agricultural Lending, and a government import ban for rice that has helped imports drop from 4m tonnes to around 700,000tn. This wholesale transformation of Nigeria’s rice sector was achieved by focusing on the ‘value chain’ – from government support to farmers, up through the bigger industrial players and the banks. The AFDB’S Toda explains that the bank is going to work on strengthening 18 key value chains – including rice, cassava, maize, wheat and dairy – but the AFDB estimates this will cost
$315bn-$400bn between 2015 and 2025, something that outstrips public resources and will require serious private-sector investment. Given the limited ability of African states to administer such schemes, what other options are there to bring through a new generation of budding agr ibusinesses? The International Institute of Tropical Agriculture (IITA), based in Ibadan, Nigeria, embodies a hybrid state and market approach. It hopes to answer the question.
Leafy green, with beautiful lawns, the IITA was once a sleepy but dignified intellectual bastion of agricultural research. But over the past decade it has transformed itself into a powerhouse of entrepreneurial activity. “We have these demands for impact placed on us”, says IITA director general Nteranya Sanginga, “so we launched the business incubator platform.” One of its successes is the development and commercialisation of anti-fungal product Aflasafe, with a factory being built on the IITA site. But the real development has been in training youth. “While recruiting for staff doing odd jobs at the centre, we realised some of them already had degrees in biotechnology, agriculture or were lawyers”, says Sanginga. Taking an initial cohort of 50, the IITA gave training, finance and equipment, launching the Agripreneur initiative (see case study boxes). More than 30 African countries have applied for loans to replicate the programme in their countries. The commercial agribusiness sector with its outgrower schemes – contractual partnerships betweens growers and producers – has a clear role to play, too. Here, larger companies can finance the purchase of inputs for a farmer who pays back the balance at harvest time. These schemes can come unstuck if not properly regulated. In Zimbabwe in 2016, The Africa Report met with farmers who had burnt their tobacco-curing barns as a reminder never to re-enter into a relationship with Chinese tobacco giant Tian Ze. Despite droughts hitting the crop, the company pursued the farmers relentlessly for the debts incurred. For Dr Aroge, part of the success of his own outgrower scheme is down to the fact that his cassava processing factor y is based right in the middle of cassava country. “It cuts down on travel costs for everyone,” he says. The factory plans to expand its capacity to process 30,000tn of cassava per annum, which would require 1,500ha of cassava farms. “In terms of impact, it’s massive,” says the doctor. But mostly, he says, the challenge is in organising farmers into mini-cooperatives. Today, he has helped structure 20 of these, each with around 10 farmers. With Aroge helping establish them as businesses and enabling them to access improved seeds and finance, both the factory and the farmers are reaping the benefits of higher productivity. “And because they surround the factory, they have some sense of belonging in the enterprise,” says Aroge. “We will be producing 6,000tn of cassava chips. And some people still think I was mad to drop out of medicine.”
MANY FARMERS USE MOBILE MONEY TO TRANSFER AND RECEIVE CASH, BUT CANNOT AFFORD A BANK ACCOUNT