Opportunities and Challenges in the Sector
There are major challenges present that, if addressed, could unlock major opportunities for growth within the agriculture sector. First, challenges reside around transportation capabilities and road infrastructure. Nearly 80% of a crop’s selling price is directly related to transportation to Addis Ababa. Right now, major players with sufficient capital are only investing to provide transportation services for their own internal use rather than providing transportation services to their potential rivals. This creates a huge opportunity for third party logistics companies to enter the market and disrupt vertically-integrated monopolies.
Second, numerous challenges exist around storage and warehousing assets. There is a significant need for additional crop storage facilities. Currently, most storage facilities are built, owned, and operated by cooperatives and unions (and financed largely by government subsidies). Proper storage facilities drive reduction in wastage, reduce time-to-market, and provide farmers better price visibility and certainty.
The last challenge and opportunity is related to educating farmers. Farmers don’t always know the costs and benefits of investing in fertilizers and crop protection products. Additionally, they may not understand how to properly utilize irrigation pumps or how much water their crops require. Many farmers do not receive formal education in agriculture from a university. This creates an opportunity for products like the software being developed by the Agricultural Transformation Agency to educate farmers on best practices in addition to providing a “hotline” to inform farmers about irrigation requirements for specific crops.
Tools and Techniques
There are several vehicles, some more formal than others, currently employed to provide private finance in the agricultural sector. Cooperatives are the primary method. Cooperatives leverage the buying power of disaggregated groups of smallholder farmers to purchase critical inputs needed for crop production. The Oromo Cooperative in Ethiopia not only pools resources for inputs, but also provides small loans to individuals. In Tanzania, these groups have created legal entities such as limited partnerships, Agriculture Market Co-ops (AMCos), and Limited Liability Companies (LLCs) to formalize their structure.
Outgrowth schemes are another tool private financiers use in the agricultural sectors of Ethiopia and Tanzania. Companies such as Diageo (Ethiopia) and Unilever (Tanzania) contract with smallholder farmers, usually through co-ops, to produce key crops for their respective end products. An integral part of these agreements is an advance payment and credit extension to the farmers in the form of improved seeds, fertilizer, crop insurance, mechanization, training, and crop rotation. Farmers make good on the agreement by delivering crops and repaying the loan. Through outgrowth schemes, private companies are financing the input and production of crops.
Loan-to-own is a scheme in which technology and infrastructure assets are provided to farmers on loan. Farmers agree to monthly interest and principal payments after which they have full equity in the asset.
Lastly, equity investments, remittances and partnerships within the diaspora of foreign nationals is an interesting investment vehicle for private investment.
Our recommendations around working through cooperatives and outgrowth schemes point to a more generalizable theme, one where the incredibly diverse, geographically dispersed nature of smallholder farmers implies that going through aggregators and partners (B2B2C) provides a leveraged way of solving bottlenecks. Trying to go direct to farmers with infrastructure initiatives, asset-backed business models, or service offerings is too challenging to employ as a sustainable strategy. Similarly, operational leverage is often best achieved when cross-applying an already proven value chain or business model. For example, whereas floriculture has been a resounding success in Ethiopia as public and private actors have concertedly built out this sub-sector, other adjacencies like fresh fruits and vegetables (e.g. strawberries and avocados) have yet to replicate that success or coordinate accordingly across stakeholders.
Finally, there are many ways in which the agricultural sectors in these two countries need not develop exactly as they have in other areas. There are “leapfrog” opportunities to skip an entire generation of assets and practices, just as the prevalence of mobile phones implies that lots of expensive land lines don’t have to be built. For example, a third-party land permitting provider could help avoid the build-out of a big government bureaucracy in this area, or the integration of storage at the cooperative level could avoid farmers having to install lots of sub-scale on-site storage facilities that do not perform to specification. Ideally, a vision of what a farm in Ethiopia or Tanzania might look like within a decade will include text-based weather alerts, distributed power generation without susceptible distribution lines, and similar advances on-par with best practices evident in highly productive economies.