The agricultural sector in sub-Saharan Africa is impeded by numerous constraints: production weaknesses, the difficulty of accessing finance, infrastructure conditions and the impact of the regulatory environment. Yet governments are introducing incentives and targeted support, investments are being made, trading methods are evolving. Responding to this context, LDC has developed a strategy with five core components.
The global food crisis shook governments in many African countries, and world food prices remain highly volatile. The fear of “food riots” has caused increasing government interventions, including food commodity export bans in countries with surpluses, panic buying and “land grabs”, making the markets much more difficult to read. Yields have remained stagnant, and a non-conducive business environment has dissuaded investors from converting virgin lands into productive ones. Consequently, Africa is heavily and increasingly dependent on food imports – over the last decade, the import share of total grains, sugar and vegetable oil supplies was respectively 20, 45 and 55% of consumption, compared with 8%, 18% and 9% in 1970 (USDA, 2010). Sub-Saharan Africa’s urban population is expected to reach 62% by 2050 (UN Habitat, 2010). Urban populations are particularly vulnerable to food price hikes. These populations are generally poor – between 30 to 55% of sub-Saharan Africa’s 320 million urban dwellers live below the poverty line -, and unlike rural populations, they have limited or no possibility of growing their own food (UN, 2010). This has given rise to serious concern about Africa’s capacity to feed its populations.
However, there are also valid reasons to believe that the situation could be drastically improved this decade. The steady growth of populations and GDPs, improvements in regulatory frameworks, and governments’ efforts to boost domestic production and attract foreign investors should improve access to affordable food.
Market inefficiencies stemming from flawed supply and distribution systems, poor infrastructure, and at times, inadequate regulations have historically made food commodities in Africa very expensive. The following are some of the constraints agribusiness operators in Africa face.
One is production. More than 15% of the world’s arable land is found in Africa, but the continent generates only 5% of global agricultural output. The dearth of local agricultural services, including research and limited access to agricultural inputs impedes domestic production. This is compounded by an absence of efficient producers’ organi-sations enabling cost-effective sourcing of inputs and access to private and sustainable sources of rural finance and technical and marketing services. African farmers use 13 kilograms of fertilizers per hectare per year, compared to 73 and 190 used by North African and East Asian farmers respectively (FAO, 2009). Hence, yields are substandard. Also, difficulties associated with owning and trading agricultural land has impeded farming-related investments.
A second constraint is finance. Access to local finance is an issue for small-scale and commercial farmers alike; this has prevented farming intensification and expansion to virgin arable land. Local working capital is hard to obtain, expensive for merchants and nearly inaccessible for farmers. Crop insurance is rarely available for producers, and the cost of credit insurance is prohibitive for traders. There is no scope for small-scale farmers to forward-sell crops and obtain finance through pledging contracts, whereas this has proven an important tool to boost productivity and combat rural poverty in more developed countries. With limited foreign exchange reserves, any increase in import prices or decline in export earnings forces a decline in food imports, negatively impacting the urban population first.
A third constraint is infrastructure. Rural storage capacity is lacking, leading to major physical losses and very seasonal domestic supplies, as produce is released rapidly after the harvest at depressed prices. Roads are generally derelict, and rail systems in most African countries have not been maintained since the independence period. Many African ports have shallow drafts, preventing large vessels from berthing and resulting in higher ocean freight costs. Ports are also often congested, resulting in importers having to pay demurrage charges to ship owners. As an illustration, a large portion of imported goods for the 30 million people living in western Democratic Republic of the Congo (DRC) transit via Matadi, DRC’s main access to the sea – this port has a draft of 7 meters, which cannot accommodate vessels of more than 20.000 MT.
The regulatory framework is a fourth constraint faced by agribusiness operators in Africa. Though some noticeable improvements have been made, overall, doing business in Africa remains difficult. Government interventions (e.g. bans on exports, parastatal monopolies, physical food reserves) and restricted access to transparent market information, combined with an inability to combat corruption, often represent high barriers to new entrants. The resultant price paid by the end consumer reflects the limited number of market players. In such distorted systems, global price hikes are always passed on to the consumer, while downward price trends are rarely transferred.
The Paradigm is Shifting
In spite of these constraints, most global agribusiness players have set their sights on sub-Saharan Africa and the bounty of growth opportunities it offers. It represents 14% of the world population but only 5% of global consumption, and commodity consumption levels are gradually approaching those of developed economies.
African governments are beginning to promote domestic agriculture, shifting from a “hardware” type of support to a “softer” type of assistance, including research developments and training, and they are calling on private sector operators to share their skills and co-invest. Large-scale investments in farming create demand for equipment and inputs, warrant investments in storage and processing units and are conducive to developing a pool of trained farm managers and technicians. Such developments benefit small-scale farmers and result in a more constant supply to urban areas.
Investment in large infrastructure projects such as ports, storage, and domestic industries are being launched, often driven by the private sector. Intra-regional trade flows can be established by leveraging the strengths of each sub-region, which can boost export earnings. Organisations such as the SADC in Southern Africa and others elsewhere are strengthening free trade areas, which are stimulating intraregional commodity flows and redefining the standards for efficient trading. Business methods are evolving: regional stock exchanges are being opened, banks are increasing their roles in commodity trades and projects, and people are buying commodities in more sophisticated ways (via premiums, trade finance, etc). The distribution system is also evolving rapidly, with the expansion of retailers’ chains, which are offering more competitive prices, thanks to their procurement power. This illustrates the trend towards integration for Africa’s agribusiness sector.
An Africa-specific strategy
Today, the Louis Drefus Commodities (LDC) network consists of 18 offices that import and export commodities throughout more than 50 countries in the region, making the group one of the top three importers and exporters. Its large and growing footprint in Africa and given it access to prime local business knowledge.
The group’s strategy is driven by the Africa-specific constraints and opportunities it has identified. The following are the five core elements of this strategy.
First, buy either directly from the producer or as close to the producer as possible. LDC is investing in developing logistics assets to originate closer to the farmers. It is also investing in enhancing farming techniques and access to inputs to increase yields and production. LDC believes that such investments will gradually contribute to developing efficient and sustainable producers’ organisations, the absence of which has so far prevented farmers’ access to decent technical, financial and marketing services.
Second, build up a domestic, intra-regional and international multi-commodity trade program (imports, exports, logistics, and sales). In the majority of African countries, market size remains limited and trading one or two commodities is often not viable. In most of its MEA offices, LDC has implemented a multi-commodity approach to optimise overhead costs, reduce price volatility exposure, and maximise transport efficiency. Thanks to this strategy, logistics gains are passed to end-consumers and producers, and price volatility is easier to manage for the trader. LDC also sees an opportunity to leverage African countries’ respective surplus capacities to fill the regional food gap, and has developed substantial intra-regional flows. Finally, LDC’s global sourcing capacity enables it to propose multiple commodity trade flows that match clients’ needs with best in class risk management and trade finance provision, as well as freight solutions. LDC accesses the Group’s integrated flows, e.g. sourcing oilseeds from LDC’s plants in Argentina, grains from US elevators, Black Sea silos, and ports in Latin America and Australia, rice from Pakistan, and sugar and citrus from our large asset network in Brazil, to all African ports. The Group’s logistical expertise, coupled with its global network, has allowed LDC to become the N° 1 Rice importer in MEA, with 30% market share in Africa.
Third, develop distribution logistics. Local warehouses allow for convenient storage and ex-warehouse sales, and distribution centres are being created to store goods for domestic sales, primarily in main urban areas. LDC is planning to build new distribution centres based on experience in Egypt, Kenya, Uganda and South Africa, and the SSI experience. Further down the value chain, LDC is considering entering into branding and distribution to final consumers in collaboration with strategic local partners.
Fourth, invest in transformation assets. LDC’s processing strategy in Africa is to develop the continent’s industrial infrastructure in order to expand the business of the region, as well as the Group’s business within the region.
Fifth, cement long-term partnerships with local leaders. Because the African economy is so diverse, local partnerships are essential to LDC’s understanding of the region and its business success. Such partnerships are occurring at both public and private levels, through engagement with governments and numerous local commercial entities. The Group’s strong regional presence is expanded and strengthened via local partners, who provide a physical presence, local management experience and a network beyond the LDC base.
The food crisis of 2008 was a rude awakening. It made policy makers in sub-Saharan Africa conscious of the need for profound change in order to reduce price and supply volatility, increase domestic production and ease market inefficiencies. Though some major constraints remain, the recent period has brought some noticeable improvements, including the implementation of large public/private transport infrastructure investment programs. A fast-growing middle class, regional banks with a pan-African coverage, efforts by governments to attract private sector investments and skills, and the rapid expansion of a formal retail system all constitute valid reasons for hope. The main challenge of the next decade will be to encourage the transformation of sub-Saharan Africa from an import-dependent region into an industrial player that cultivates its unused arable lands to feed its rural and urban populations and become a regional and world granary. LDC believes that there is a great role to play for innovative players who understand the growing need to fill the production/consumption gap and who can propose solutions to realise farming potential in the region through large-scale farming investments, which will in turn benefit small-scale farmers. For this to occur, it will be essential to reform the land tenure system to enable ownership by private individuals and companies and to make land tradable.
Increasing domestic and intra-regional trade flows are essential instruments forreducing Africa’s exposure to food supply and price volatility and for boosting export earnings. However, these will require additional reforms to reduce government-induced market distortions, and continuous support to inter-regional economic entities. Provided that the region’s governments pursue a path of bold reforms to create a conducive business environment for private operators, LDC believes that its model – based on strong local partnerships coupled with the group’s global experience in implementing agricultural technologies and optimising productivity – will contribute to helping sub-Saharan African countries execute a growth plan as impressive as that of Latin America in the 1980s.
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