How Nigeria can make agriculture blossom

Dec 04, 2011 12:00 AM

by Malachy Agbo

Following the recent release by the National Population Commission that Nigeria has over 167 mm people to feed daily, with an expansive landmass covering 923.771 sq km, an estimated arable land mass of about 68 mm hectares, abundance of natural forest and rangeland covering 37 mm hectares, Nigeria is expected to be the food basket of sub-Saharan Africa.
In addition, Nigeria is blessed with an agriculture friendly climate, coastal and marine resources of over 960 km of shoreline, expansive rivers and lakes covering 120,000 sq km and a large consumer market. But despite her rich natural resource endowment, there has been a gradual decline in the contribution of the agriculture sector to the nation's economy.

In the 1960s, agriculture accounted for 65-70 % of total exports; it fell to about 40 % in the 1970s, and crashed to less than two % in the late 1990s. Today, not much has changed, as Nigeria remains a net importer of food and in substantial quantities running into billions of naira annually from Asian countries and other parts of the globe.
Many have blamed the discovery of oil and gas in the early 50s which has inadvertently encouraged all tiers of government to wait for federal allocations, thus making all tiers of governments wait for the spoils of oil instead of harnessing their agricultural potential. What is even more worrisome is that the private sector finds it less attractive.

In the recent past, some blue chip companies like NB, Nestle and a host of others have tried setting up farms but have all failed.
And of those that still exist, many of the farmsteads are struggling.

Why agric projects fail
According to a recent report by Renaissance Capital, titled 'This Other Eden', over-ambition and the lack of an integrated approach to investment are the two main causes of the untimely death of agriculture projects in Africa generally.
“Over-ambition is obvious: we can pick out a dozen projects that have stalled because the original plans to develop several hundred thousand hectares of land ran out of money, experts in palm oil find out that triple-cropping of oilseeds and grains is outside their sphere of expertise, money is dissipated in the multiple unforeseen events which the original business plan had not forecasted, etc. Aggregating land is easy -- everything else is difficult,” it said.

Rencap further stated that the lack of an integrated approach to investment is less obvious.
“We have already noted how much investor focus is on the availability of a single resource (i.e. land mostly) and questions surrounding all the other essential constituent parts of an industrial farming apparatus are ignored. In short, parties invest in a land bank and, within the early periods of the project, they begin to understand that the lack of roads, elevator facilities, a skilled labour pool which understands how to harvest, conveniently positioned processing facilities and so on, are all likely to contribute to the failure of the project.”

“Put it another way: the soil in some country might be outstanding for agriculture but if you don't have a paved road and the nearest place you can purchase a bag of fertiliser is 200 km away, then the land isn't worth a cent. Throw in a whole range of social factors, and many African projects, as they stand, will struggle,” it said.
The report also identified operational risk as part of the problem, as it said the operational risk of establishing an agricultural supply chain is so complex that large sums of capital can swiftly become small sums of capital. Another problem it identified is the wariness of some organisations in taking large sums of cash from investors and applying it to agriculture projects and what it called middle management crisis.

“How does one address the crisis of middle management? When we say middle management, we are identifying what we see as a key bottleneck across the sector. The nature of strategic programmes as initiated by the likes of the SWFs, the Gates Foundation, AGRA, assorted development agencies, national governments and so on, might involve millions of hectares of land and grand development schemes. At the other end of the spectrum is a readily available pool of cheap labour.”
“Yet, in the middle there is a significant lack of skilled labour that can manage 200-1,000 ha projects, i.e., the approximate size of operation where proper industrial agriculture begins and smallholding/labour-intensive farming ends.”

“In short, agriculture is one of the few industries in the world where there is a dearth of middle managers.”
“In effect, what we are asserting here is that one of the principal bottlenecks lies in the lack of a talent pool, which can take on large-scale projects and execute them successfully,” it said.

Opportunities for investment
According to Rencap's report, the lack of a functioning infrastructure on one side, coupled with the lack of an integrated approach to investment on the other, means corporations that provide something approaching an integrated value chain and have a deep knowledge of farming in difficult African environments are likely to have a natural advantage over competing organisations.
The report further stated that the fact is that African agriculture, including Nigeria, is likely to require considerable amounts of investment if its potential is to be realised.

“That suggests to us that IPOs or private-equity fundraisings in the range of $ 30-100 mm may be necessary stages for the development of the sector in the years ahead, but will prove insufficient in addressing the scale of opportunity.”
“One model we might see adapted to the specific needs of African agriculture is the Chinese asset injection scheme, which gained prominence in the mid to late 1990s. It is worth highlighting how this model addressed a particularly acute bottleneck for funding between China and Hong Kong.”

“After the experiments of the Shanghai and Shenzhen B-share markets, which permitted foreigners to invest in Chinese equities, Chinese SOEs began to list in Hong Kong. These so-called B-shares became increasingly prominent and soon many of China's large-scale industrial enterprises in the oil, banking and telecoms sectors followed,” said the report.
According to Rencap, few of these IPOs were straightforward listings. Instead, unlisted and state-owned parent companies based in China listed some of the assets in Hong Kong and eventually began to inject other parts of the group into the listed entity.

It said that China Mobile began life as two listed provincial wireless networks in Hong Kong and eventually consisted of operations in all 31 Chinese provinces and municipalities within three to four years and several rounds of asset injections.
“Major users of this model were the municipal authorities themselves -- the most notable being Beijing Enterprises and Shanghai Industrial, which would acquire listed shells in Hong Kong for this purpose and then inject illiquid local assets (e.g. property portfolios) into these listed shells.”

It further added that the key point for the SOE or province/municipality was to inject the assets into the listed vehicle at an attractive discount to ensure investor interest while simultaneously owning a majority of the stock, which benefitted from the investor interest.
“Thus a vicious circle was created and the model, when it worked properly, was a great success in promoting investment into mainland entities. It should be added that the scheme could be subject to speculative abuse and did have obvious conflicts of interest.”

“You might well ask how this is applicable to African agriculture. As we've outlined, the need for enormous sums of capital to develop the agriculture sector is at odds with the relative illiquidity of the vehicles as they stand. Moreover, national governments are desperate to develop their own domestic agribusiness industries. Finally, the need for an integrated approach to investment is essential to a successful investment.”
“The answer to these conundrums and conflicts could be to list national development projects. Not only could they be liquid investment vehicles, they could be diversified not just in terms of vertical integration but also in terms of crops.”

“After all, a lack of crop correlation is something of an agricultural holy grail, has still not been achieved by most agribusinesses and is likely to materialise either in Africa or Brazil.”
“Above all, government could take a sizeable stake to ensure that the interests of taxpayers are aligned with those of investors. They could also promote the development of local capital markets,” it said.

Another investment strategy Rencap suggested is the emergence of local food processing/consumer companies, investing in agriculture across the continent.
“Consider that the agricultural investment success stories in Eastern Europe and the CIS are, more often than not, the integrated agriculture groups such as RusAgro, Cherkizovo, MHP, Kernel and Astarta. A decade ago, most of these companies focused on food processing and consumer branding and did not have interests in primary production.”

“Now, most of them are among the biggest farmers in Russia or Ukraine. A major investment attraction of these integrated enterprises is not so much the fact that they secured supply; instead it is the fact that they control a large part of the value chain and also have an internal natural hedge against swings in soft commodity prices. In many cases, food-processing groups are relatively liquid investments compared to the pure primary producers,” it said.
The report stated that given the scale of the opportunity and the relative ease with which food-processing groups can raise capital, it might be the case that many emerging African consumer brands will begin to invest in primary production. This, it said, has happened in Brazil, it took place in Russia and Ukraine -- something broadly similar might take place in Africa in the years ahead.

“Most likely it will emerge as an intermediate model in our view, but equally, it could endure for many years. We have private-equity investments, we have hedge fund investments, we have a multitude of small, slightly illiquid, pioneering listed enterprises and on the sidelines we have SWFs, national governments, aid agencies with commercial ambitions and deep commitments to change Africa.”
“Then there are the food-processing groups, the old South African trading businesses and the vehicles, which we have only begun to consider. This is a world of infinite possibility and possibly infinite outcomes,” it asserted.

Unlocking the potential
Rencap in the report said that unlocking the potential of African agriculture is likely to emerge as one of the great geostrategic themes of the next two decades.
Again, in a world laden with ironies and paradoxes, the availability of fertile land, abundant water supply and a vast, inexpensive pool labour, have not transformed Africa into an agricultural powerhouse. Instead, Africa remains a net importer of food and in substantial quantities -- as a $ 28 bn annual food deficit suggests.

To get an idea of Africa's potential, consider land.
“According to the FAO, sub-Saharan Africa consists of 2.3 bn hectares of land. Nearly 1 bn hectares is suitable for rain-fed crop production. Of this 1 bn hectares, some 421 mm hectares is described as very suitable for crop production. In this context, very suitable means that the attainable yield in these lands is 80-100 % of the maximum theoretical yield. To put this into perspective, in 2005 the total arable land in use in sub-Saharan Africa amounted to 236 mm hectares, or only about 24 % of the total suitable area. Obviously, not all of this land in use would fall into the very suitable category. But even if we go with that extreme assumption, the land in use would still only be just over half the potential very suitable land,” it stated.

The report further stated that land is only one part of the supply equation, as adequate water supply is also essential to ensure that the land can fulfil its potential.
“Again, mirroring the availability of land, Africa is also endowed with sufficient water resources -- both renewable and precipitation. Of the available water, only around 2 % is used for irrigation, leaving sufficient scope for expansion,” it said.

Food security
The focus of Rencap's report is food availability -- a global issue, in contrast with the national-level issues of food access and food use.
“Arguments of food security can typically be distilled into two opposing views: how can government intervention prevent a tragedy; or how can free markets resolve the issues. While we agree the planet faces serious challenges in feeding itself, we believe the difficulties will most likely be created by errors of human intervention. We accept the endless (and consistently unlearned) lesson of history that every urbanised society eventually struggles to feed itself.”

“Stretched supply lines, weather disruptions, wrecked soils, over-fertilisation, vast swathes of monocultures, mutating pests and so on all suggest a day of reckoning ahead, unless questions are answered about how we produce, store, distribute and consume food; and how we organise the structures of the agriculture and food industries in the future,” it said.
On the effects of climate change on food security, the report said thus: “We think it is appropriate to consider the effects of climate change on agriculture. Agriculture is highly vulnerable to climate change. The failure of many societies throughout history has been driven by the impact of climate change. Seasonal changes in temperature and rainfall can affect yields, pests, weeds, growing seasons, planting and harvesting schedules and land suitability.”

Another issue the report considered is urbanisation in relation to food security.
“The notion of a society's ability to feed itself has been around since urban settlements arose in the Sumerian valley. Ultimately, societies have been able to bring other factors into play (chemical fertilisers, insecticides, new seed strains, mechanisation, new planted areas, and so on) and these have allowed humans to multiply in both number and wealth.”

Concerns arise that rural migration leads to a decline in small-scale food producers and this may undermine food security given that most urban dwellers are net food buyers.
“And this time, along with the familiar demons of overpopulation and resource depletion, we had new ones such as climate change and the rise of biofuels. Population growth is a sufficient catalyst in increasing the overall demand for food. However, a major driving force behind food consumption is increasing urbanisation,” said the report.

The increase in Africa's urban population and market over time is especially visible in northern Nigeria. Between 1952 and 1991, Kano State's urban population increased by about 8 % per year, while the rural increase was closer to 1.6 % per year. This strong urban growth explains why Kano will be one of Africa's 10 most populous cities by 2025.
To provide for the urban areas, Rencap stated that each rural household needed to supply 10 times as much grain to urban markets, on average, in 1991, compared with 1952. However, the lack of investment in Nigeria (and much of SSA) has meant that local supply has not kept pace with demand and imports have resulted in significant food deficits.

In northern Nigeria, the most efficient farms were concentrated in high-density areas with access to good market facilities, which highlight the importance of public infrastructure. Large-scale farms around Kano increased significantly in the late 1990s but they only make up about 5 % of total agricultural production.
“So, the issues are clear: an urbanising Africa is positive for agricultural growth. We could be negative and say that rising food deficits indicate the agriculture sector has fallen behind in terms of productivity. However, we believe this simply indicates the scale of the opportunity. Over the long term, a growing population, greater urbanisation, an existing structural food deficit, and growing international food needs are four factors which we think -- if addressed with appropriate public policy responses and the clever application of private capital -- could turn African agriculture into one of the great investment themes of the next few decades,” it forecasted.

Between family farms and superfarms
According to the report, the debate over the optimum size of farms is not a new one. The central argument is the extent to which large-scale farms can achieve economies of scale over their small-scale peers. This debate, the reports noted, has in recent years become more prominent with the emergence of the so-called superfarm.
“Agricultural production is shifting to larger farms. In Europe and North America, farm sizes have been increasing, on average, since 1950. In Africa, Asia and Latin America, by contrast, farm sizes declined in the late 20th century (although for reasons more connected with land redistribution). For centuries, family farms have been the most efficient way to organise agricultural production.”

“Farm sizes continue to vary widely, but a significant 60-70 % of the world's current agricultural production comes from farms of under 2 hectares in size. In fact almost 85 % of the world's farms in absolute terms are under 2 hectares in size. According to one study by Zimmer, Deblitz and Isermeyer, however, the median area of wheat grown in the US, for example, more than doubled from 162 hectares to 364 hectares between 1987 and 2007.”
“Second, success is very often tied to the efficacy and timing of specific tasks. Optimal timing of input applications is critical. These can change subtly with the weather and workloads vary significantly throughout the year. These variables, many of which are weather dependent and often cannot be controlled, therefore mean that agriculture does not lend itself easily to standard operating procedures.”

“A recent study by MacDonald seemed to confirm that the family-based owner-operator enterprise produces a more efficient reward and incentive system than large-scale enterprises. This may or may not be true but until now, the incentive systems implemented on large-scale enterprises have been ineffective, weak and have certainly not rewarded individuals that can make a real difference to the timeliness and quality of operations,” the report observed.
Rencap added, however, that there is some evidence that the position may be changing. “In some cases this means systems are actually being introduced (i.e. from scratch) and in other cases systems are being changed so they become relevant and have the intended effect of incentivising management and staff to make and take the right decisions. This could make a material difference if incentives can be re-aligned.”

“However, it is likely to be a step change in the use of technology that will drive the efficiencies of large-scale enterprises. Indeed, it is possible that scale-related technological innovations could, in principal, be so large that the management advantages held by family farms is swiftly rendered redundant. Areas and innovations, which can standardise operating procedures, and remove the human effect have the potential to reverse these managerial diseconomies of scale.”
“Clearly, family farms will also have similar access to management innovations but it is more likely that, in the medium term, larger-scale enterprises will receive a greater return on these investments for the simple reason that they will have the necessary access to capital in order to be able to pay for them,” it stated.

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