Working Capital Solutions for African Agriculture

Close to two-thirds (64%) of the African continent’s labour force is directly or indirectly involved in agriculture. However, this sector accounts, on average, for only 34% of Africa’s gross domestic product (GDP), according to the World Bank. 

The main reasons for this can be attributed to the lack of suitable financing solutions, skills shortage in modern agricultural practices and limited access to modern technology in terms of the development and production of seeds, insecticides, pesticides and fertiliser, of which some has gone a long way to being produced organically. 

Before we address these shortcomings, we should consider how effectively arable land is being used in Africa and how much influence the lack of infrastructure and legal framework over land can have on the agricultural growth and investment potential in Africa. 

To overcome these issues financial institutions, developmental organisations and international fund providers need to find a way to play a more significant role in agricultural development on the continent, taking all of the above factors into account.

The Food and Agricultural Origination unit of the United Nations (FAO) estimates that less than 15% of Africa’s arable land is being applied for agriculture. Furthermore, yields are on the low side mainly due to shortage of modernised technology and lack of skills in the agricultural sector. 

A choice of three options exists to increase agricultural output. You can expand hectares, improve yields or increase crop frequency. The FAO study shows that by 2050, higher yields will account for 69% of the growth in crop production in sub-Saharan Africa, an already booming region that needs extra food to cope with expanding economies and populations. However, these higher field yields will only be achieved with a significant increase in research and development. Merely increasing crop hectares will have to be weighed against other land uses, such as urbanisation, because of population growth and the provision for alternative fuel crops such as biofuels. 

There is also a need to plan in order to keep a fine balance in how best to utilise available arable land. It is clear that there is great potential to increase the utilisation of and deepen the agricultural sector across the African region and there is money to be made in this endeavour.

Lack of Infrastructure and Legal Frameworks

The ‘green revolution’ in Africa has been lagging behind many countries in Asia mainly due to the following reasons: 

  • With the declarations of independence of many former colonial African countries during the 1960s and 1970s the focus of governments in these countries was on industrialisation and urban development.
  • The unique and diverse food crops across the continent made the application of eastern farming methods difficult and impractical. 

This has led to infrastructure in Africa being far more expensive than elsewhere in the world, and this is a result of a lack of competition, which has led to high profit margins. Africa also faces challenges, especially in the form of power shortages. Hence, large premiums are being paid for emergency power sources.

The high costs due to a lack of infrastructure have impacted agricultural output negatively in the last three decades. Take the example of the Ugandan coffee industry. In the 1970s, coffee production was around 200,000 metric tons per year. This figure decreased steadily over the next two decades to around 128,000 metric tonnes per year. The last decade saw some recovery and currently the production is around 175,000 metric tonnes per year, but this quantity is still significantly lower than what it was in the 1970s, and, if extrapolated, what it should be now.

According to the FAO, approximately 90% of land in Africa is not covered by a formal legal framework. This has a further dampening effect on development, as foreign, regional and local investors are averse to investing in land that they cannot hold title over. Those currently utilising the land have little or no investment incentive in this regard. Some of the most fertile soil in Africa is therefore not utilised for either the production of agricultural crops or the development of much-needed infrastructure.

Shortage of Technology, Skills and Finance

Both small-scale and commercial farmers continue to struggle in accessing the finance they require to maintain a sustainable and productive level of output. 

Small-scale farmers, who require loans to procure inputs, such as seeds and fertilisers, are required to borrow against collateral such as real estate, which they simply do not have. As a result, they are unable to fertilise their land and are forced to use seeds held back from the preceding harvest to plant their new crop. These seeds are poor in quality and have degenerated genetically over time. Combined with ineffective fertilisation and application of insecticides, this leads to decreasing yields and poor quality crops. 

Commercial farmers have somewhat different financial constraints. They need financing solutions that will enable them to invest in well-advanced technologies that are suited to large-scale enterprises, as well as those which will facilitate the cross-border trade in their agricultural produce. These solutions are often complex and farmers struggle to find a consolidated solution that fits their particular financial needs.

Traders and processors mainly require short term working capital finance. Traders normally do not have the cash to procure and store a commodity for long periods of time. Owing to this cash flow constraint, traders cannot benefit from securing transactions and commodity at attractive rates. 

Only traders who are able to secure an increasing number of transactions are able to raise finance at attractive rates and increase their market share. From the processors perspective they need to procure a commodity at prices from the traders which can fit in with their procurement strategy. 

The Role of Financial Institutions

It is key for financial institutions to develop more innovative financing structures, which increase benefits to producers and other participants in the agricultural value chain, but at the same time mitigate significant risks, thus opening access to credit for such producers and other value chain participants.

Standard Chartered has developed and tailored financing solutions to assist in building both scale and sustainability in the agricultural sector in Africa for all participants in the value chain. These structures benefit numerous producers, traders and processors in most of the 14 markets that the bank operates in. Some other banks have made similar efforts. 

By entering into partnerships with developmental organisations and non-governmental organisations (NGOs), financial institutions can further enhance the provision of working capital to the agricultural community. Examples of such partnerships are the Agro Africa partnership between Standard Chartered and the Deutsche Investitions- und Entwicklungsgesellschaft mbH (DEG) concluded in 2009/10 , and that of Standard Bank and the Bill Gates Foundation in 2008/9.

 Conclusion

Africa needs to develop a sophisticated agricultural sector, which boasts the skills and mechanisation necessary to keep pace with its own fast-growing population, as well as provide an additional food source for the global population, which is expected to grow from today’s 6.7 billion to more than 9.2 billion in 2050. 

As it currently stands, Africa’s agricultural sector is neither ready nor able to play this global role. By working in partnership with national governments, development organisations and local NGOs, commercial banks can play an integral role in providing food security, both on the continent and beyond.

As the environment for the provision of working capital in Africa becomes more uncertain and demanding, financial institutions will have to be become more and more innovative. The future of innovative financial structures, however, will need to benefit the full agricultural value chain. 

Financial institutions that want to be part of Africa’s expansion in becoming the food basket of the world will have to adopt this way of providing working capital finance, or be left behind in the dust of the leaders. 

  • A version of this article was first published in GTR’s Export Finance Supplement in October 2012, and is reproduced here with updates from Standard Chartered Bank. 

 

 

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