Development of Agro-industries and Agribusiness as an Alternative to Large Scale Leasing of Land 1

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1 Development of Agro-industries and Agribusiness as an Alternative to Large Scale Leasing of Land 1 Introduction Nuhu Hatibu 2 ; Noble Banadda; Filda Ayaa; and Henry Mawanda 1. This paper is calling for increased attention to the development of post-harvest agriculture through enhanced agro-industries and trade to enable the EAC region to supply the global demand for food (especially the perishables) without having to allow the leasing of large chunks of land. Developing countries such as Indonesia, Brazil, Turkey, Chile, Argentina, Vietnam, Malaysia and Thailand are dominating global food trade because of the high level of value addition processing of the food commodities they trade in the world market. 2. A framework is urgently needed in which investment in agricultural development would be directed equally to all components of integrated value chains and trade, in ways which increase the ability to exploit comparative advantages and economies of scale. Markets are a major constraint facing farmers, leading to low investment in proven innovations. Interventions are therefore required in developing trading and marketing linkages at local, national and regional levels. 3. At policy level, this will require national governments to move away from strategies to achieve food self-sufficiency at household, district, or even national level because this is counterproductive as it stifles commercialization and trade, which in turn limits the exploitation of comparative advantages. Therefore, particular attention should be paid to increasing the purchasing power in the rural areas by supporting the development of off-farm sub-sectors and to deliberately support a section of the rural population to move out of direct production of food staples. 4. With respect to agricultural for development, we need a change of gear from supporting the production end of value chains, to more support towards value-adding processing. Apart from adding or preserving value, agro-processing can play a significant role in creating decent offfarm employment in the rural areas. 5. Therefore, strategic public sector funding is required to build trade-supporting infrastructure and provide capital for the creation of value-adding enterprises in the rural areas. Agricultural research, education and extension should also be diversified to generate technologies, build capacities, and support entrepreneurs with post-harvest handling, value-adding processing, business development/management, and off-farm rural activities. 1 Paper Presented at the Regional Policy Dialogue on FDI in Agriculture in Eastern Africa organized by EALA and FES in Nairobi - October 20-23, , Princess Anne Drive, Bugolobi, Box 7178, Kampala, Uganda; nuhu.hatibu@kilimo.co.ug KILIMO TRUST: regional solutions to local problems Page 1

2 Land Leasing to Assure Ones Food Security is Part of Human Nature 6. There is a nearly universal policy of the rich and the poor alike, to be as independent of food imports as possible. Not only that, most of the push for bio-fuels in the developed world is driven by the desire for independence from imported oil. Up to the very recent past when some tentative liberalization started, most of the OECD countries operated farm subsidies that made farming look like a privileged civil service. 7. For example, it has been estimated that, in the 10 years to 2008, subsidies paid to farmers in the European Union, could have bought outright 40 % of the EU farms (land, buildings, machinery, livestock the lot) 3. However, it must be emphasized that bad as they are, these farm subsidies were to some extent responsible for providing the incentives for investment and innovation in agriculture, and they proved the point that: significant positive price ratios for farmers make the most important factor in driving agricultural innovation and growth In short, each country wants free markets and trade for its food exports, but control and command for its food supply either through self sufficiency or controlled imports such as through land leases. It is because of this sovereignty approach to food security that even matured trading countries import less than 30 % of their main food staples (Figure 1). Figure 1: Percentage contribution of food imports by class to total food consumption. (Source: FAOSTAT, 2009) 9. Therefore, there is no political will to accept and to vigorously work towards a globally interlinked food supply system. This means only one thing, national and regional markets are the most important markets with respect agriculture for development and wealth creation. 3 Jack Thurston A Permanent Bailout: fifty years of EU farm aid ought to make us fear too much state intervention. The Wall Street Journal, Europe. November 24, Niek Koning Should Africa Protect its Farmers to Revitalize its Economy? iied Gatekeepers Series No ISSN International Institute for Environment and Development, London KILIMO TRUST: regional solutions to local problems Page 2

3 The EAC Common Market is an Under-utilized Instrument for Poverty Reduction 10. The East African Community is one of the leading producers of commodities such as bananas, sweet potatoes, peas, millet, and dry beans. Most of these commodities are highly perishable and are grown by smallholder farmers, making it difficult to put products on the market. This is one of the reasons behind the leasing of large chunks by developed but food deficit countries, as a way to control the supply of commodities that are not widely traded. 11. Therefore, it is important that the EAC common market is made the main instrument for food security in the region. However, local and regional trade in food can only be expanded by increasing the purchasing power of the majority, which requires policies to increase non-farm employment in the agricultural and rural sectors. To achieve this, we must discard two misconceptions currently influencing thinking in agriculture for development: a) That farming has limitless capacity to lift a high proportion of the poor from poverty; and b) That, to provide food to the poor at the prices they can afford, then all of them have to be helped to grow the food they need. 12. This is important because, although the green revolution was a success in Asia, South Asia remains the part of the world with the highest concentration of poor and hungry people. Why? Because farming, no matter how efficient, cannot provide decent employment for everybody. This limit must be recognized and strategies pursued so as to solve three problems together; namely: (i) create employment, (ii) improve market access, and (iii) create genuine local food market by increasing local purchasing power. This will require: a) Investment for a well balanced development agenda that encompass all economic sectors, such as light manufacturing, commerce, and transportation and other services; b) Progress (within the agricultural sector itself) beyond on-farm productivity, by directing more efforts and funds into value-addition activities in the rural areas and nearby urban centers to create producers-driven hubs for the supply of value-added differentiated products in the final form desired by consumers (whether in the local or export markets); and c) Enhanced investment in the development of last-mile 5 infrastructure to leverage more benefits from existing major infrastructure. 13. Otherwise, we shall continue with the fallacy of composition where agriculture employs majority of the population in East Africa region but contributes less than 50 % to the GDP as shown in Figure 2. 5 See for example FAO and Kilimo Trust Investing in Last Mile Market Oriented Agricultural Infrastructure in Africa. Report of the FAO-Kilimo Trust Roundtable, 8 th 10 th June 2009, Kampala,Uganda. FAO, Rome. In transportation, "last-mile" infrastructure is what we normally call feeder roads. In most of Sub-Saharan Africa this kind of infrastructure is largely missing and a very high % of the agricultural transportation of produce and inputs is done on the heads of women and children. In power supply, "last-mile" investment concerns the electrical powered equipment and the necessary connections to allow rural areas to exploit the national grid. In water systems, "last-mile" infrastructure is the down-stream and tail-end structures that enable farmers to exploit major water storage dams. For example, in Mozambique there are more than 10 large dams with a total storage capacity of over 50 billion cu.m but only 9 percent of the stored water is utilized for irrigation. KILIMO TRUST: regional solutions to local problems Page 3

4 Figure 2: contribution of agriculture to GDP and employment in East Africa Alternatives to Land Leasing A: Exploiting National and Regional Markets 14. The global export market is very competitive, specialized, quality driven and demands sustainable supplies. As such, it is extremely difficult for the EAC to compete favourably with other major exporters. The key in promoting value addition is to focus on the EAC common market and neighbouring regions for brand development, and the building of capacity for quality control and assurance. The recently completed EAC standards for agricultural commodities will further guarantee quality supply of goods and services. 15. To achieve this, attention should be directed to: a) Achieving fully harmonized and/or regional standards for agro-processed products; b) Operating a robust Market Information System; c) Eliminating NTBs - with agro-processing itself making a contribution; d) Supporting development of vibrant advocacy for agro-industries and regional value chains; e) Supporting skills development to agro-industries needs and growth; f) Developing technological innovations and innovators for agro-industries development; g) Supporting the development of regional commodity exchange; h) Supporting infrastructure development for agro-industries; and i) Supporting SME producers to organize so as to: Guarantee high and consistent volumes to processors and markets, Consolidate, bulk, and exploit economies of scale to reduce transaction costs, Build strong negotiation positions to extract best deals from value chain partners, and Share the capital cost for appropriate technology for value addition processing. KILIMO TRUST: regional solutions to local problems Page 4

5 B: Role of Agro-industries for Processing and Value Addition 16. Most food commodities such as milk, beef and cassava have a short shelf life if not processed as shown in Figure 3. In the EAC Region, more than 40 % of the food losses occur at post harvest and processing levels 6. Only 28 % 7 of the agricultural produce in the EAC is processed. However, as illustrated in Figure 3, the shelf life of many so called perishable commodities can be increased to several years through processing enabling them to be traded widely in space and time. 17. Processing commodities can also assist to overcome non-tariff and tariff barriers to trade. For instance, current standards to export meat products require the region where the animal is farmed to be disease free. However, processed products do not carry infections for example; cow milk does not contain infectious quantities of the prion protein that causes BSE (mad cow disease) even if obtained from infected cows. Matured and deboned beef from which major lymph nodes have been removed presents minimal risk of transmitting foot and mouth disease, BSE and many other infections. Therefore, animal products can be safely traded if processing methods are effectively regulated. 18. In certain cases, processing of commodities can also lead to decrease on import tariffs imposed e.g. coffee (not roasted, not decaffeinated) exported from Uganda or Kenya to Germany, a major importer, is charged a tariff of 25 % in comparison to 10 % charged on coffee extracts, essences and concentrates. 19. Therefore, Agro-processing is vital because of the tremendous backward and forward linkages and multiplier effects with respect to: Increased access to markets that are distant in space and time; Extension of the reach of food, also in space and time; Creation of non-farm employment and income generation opportunities; Retention of high proportion of the value; Elimination of seasonality effects Reduction of postharvest losses; and Improvement of food quality and safety. 20. Going forward, efforts to increase production should therefore go hand in hand with investments to increase agro-processing capabilities to reduce post harvest losses. For instance, canned beef requires little expenses to store, while frozen beef requires a processor to keep the temperatures low, further increasing energy bills. This means that EAC may need to consider investing in unit operations such as canning, which extend shelf life while reducing storage costs. 6 FAO, Global food losses and food waste. Extent, causes and prevention. Study conducted for the International Congress. Available at 7 Kilimo Trust, EAC, UNIDO and FAO, Report on regional workshop and policy dialogue. Development of Agro-industries and Agro-Enterprises in the EAC region. KILIMO TRUST: regional solutions to local problems Page 5

6 Figure 3: length of stable shelf life of milk, beef and cassava products. KILIMO TRUST: regional solutions to local problems Page 6

7 Proposed E3ADP 21. The East Africa Agro-industries and Agro-enterprise Development Program (E3ADP) supported by Kilimo Trust and FAO, is a program of the EAC in response to the Abuja 2010 declaration on the African Agribusiness and Agro-Industries Development Initiative (3ADI). 22. The vision of E3ADP is an agriculture sector in the EAC partner states, which supply highvalued and differentiated food, fibre, feed and other agricultural products for local, regional and international markets. 23. The purpose is to expand agro-industries and agri-enterprises in the EAC for value addition processing, preservation and marketing of agricultural commodities and products. 24. Theme 1: Accelerate development of agro-industry in the EAC. This requires investment from both the public and private sector to: a) Support training of experts and technicians; b) Operate business incubations; c) Build centres of excellence for regionally coordinated research and development (R&D) and business development services (BDS); d) Develop regional agricultural value chains; and e) Support agro-industries extension service. 25. Theme 2: Getting markets and trade right. Investment to attain this purpose should be directed towards: a) Establishing harmonized and/or regional standards for agro-processed products; b) Establishing and operating a robust Market Information System: c) Eliminating NTBs in agro-processing products; d) Support development of vibrant advocacy for agro-industries and regional value chains; and e) Support the development of regional commodity exchange. 26. Theme 3: Making existing and planned infrastructure effective in supporting the development of agro-industries and Agri-business. Investment is needed in: a) Last mile infrastructure, by the public sector, to effectively link rural areas to processing facilities for efficient delivery of raw materials to agro-industries; b) Improving the quality and cost of mobile and other telecommunication systems to enhance trade across the region; and c) Improve coordination to ensure greater synergy in the development of infrastructure and agro-industries in the EAC. KILIMO TRUST: regional solutions to local problems Page 7

8 27. Theme 4: Policy and institutional framework to create a positive business environment. Accelerated effort is required towards: a) A consolidated regional strategy specific for agro-industry development; b) Regionally supported manufacturing of agro-processing equipment; and c) Mechanism for strong coordination among government ministries and EAC departments. 28. Theme 5: Attracting finance and investment. Incentives and resources to make agricultural finance more accessible are necessary for attracting finance and investment in agro-industries. Public sector interventions are required to establish strong regulatory frameworks in the financial markets to build risk taking confidence among investors and financial institutions. The private sector, especially banks, equity investors and other financial institutions, can provide risk insurance on investments and develop diversified financing products that work for agro-industries and agri-enterprises. It Can Be Done: lessons from other developing countries 29. By investing heavily in agro-industries and trade links, the UAE, a country covered by desert, with zero agricultural potential, is now ranked as one of the leading exporters of processed agricultural products. An estimated 70% of the U.A.E's agricultural imports are re-exported after significant value addition processing to highly differentiated tertiary products. The evidence for this can be found in our local supermarkets in East Africa. 30. The explosion of exports in palm oil by Malaysia 8 shows the impacts of dedication to commodity processing and trade. At independence in 1957, Malaysia had the same per capita GDP as Ghana, US$ 350, and did not grow oil palm. In the late 1960s it borrowed oil palm seedlings from the Congo or Nigeria and started to develop varieties to produce oil for specific markets and by early 1980s it had replaced Nigeria as the leading exporter of palm oil in the world. The rest is history as they say. 31. Chile s global dominance in the export of Salmon fish has resulted from unwavering focus on products demanded by the market 9. In the mid 1980s, Chile researched markets for several products and concluded that it had natural competitive advantages in commercial salmon farming. The key was that Chile had abundant freshwater lakes and saltwater fjords along the country s 6,435-kilometer Pacific coast which did not freeze during the winter, which means the salmon grow faster, reaching market weight at least six months earlier than they do in the world s biggest producer, Norway. A decision was taken to exploit this opportunity and now the country exports more than $2 billion of salmon per year, and is now the world s second biggest supplier of the fish. 8 NAP 3 Malaysian National Agricultural Policy ( ) 9 Fundación Chile Staff (2005) 29 years Fostering Innovative Business Development in Key Chilean Clusters. World Bank Satiago Chile KILIMO TRUST: regional solutions to local problems Page 8

9 Recommendations A. The EAC (taken to mean Secretariat, EALA and the Governments of Partner States) should make a deliberate policy and develop strategies to supply the global market for food and other agricultural products without having to lease large chunks of land to investors. One such strategy is to direct FDIs towards playing a bigger role in the development of world-class agro-industries, and create an attractive environment to facilitate such investment. B. The key element of the required attractive environment is the assurance of high quality raw materials for agro-industries. This requires three major interventions through agriculture for development: a) Improvement of last mile infrastructure especially warehouse/cold storage, power supply and roads which are the most critical to agro-processing. This is because high transaction costs related to lack of such infrastructure is the largest contributor to low capacity utilization and efficiency of even the existing low agro-processing capacities. Therefore, solving these problems should be priority number one for public sector investment aimed at facilitating the development of agro-industries in the region. b) Development of highly business-oriented SME producers who can use their endowment in land resources as well as production skills to: Guarantee high and consistent volumes to processors and markets; Consolidate, bulk, and exploit economies of scale to reduce transaction costs; Build strong negotiation positions to extract best deals from value chain partners; and Share the capital cost for appropriate technology for post-harvest handling. c) Expand pool of skilled entrepreneurs and labor by expanding vocational training deliberately focusing on agro-industries, to produce technician skilled to operate and maintain agro-processing plants and equipment. KILIMO TRUST: regional solutions to local problems Page 9

10 References Ann-Christin Gerlach and Pascal Liu, September Resource-seeking Foreign Direct Investment in African Agriculture. A review of country case studies. FAO commodity and trade policy research working paper No. 31 Cotula, L., Vermeulen, S., Leonard, R. and Keeley, J., Land grab or development opportunity Agricultural investment and International land deals in Africa, IIED/FAO/IFAD, London/Rome. ISBN: DFID, A commodity-based trade approach for livestock products. How new and improved international standards could help farmers in developing countries trade their way out of poverty IFAD, Smallholder Agriculture and Food Security in the 21st Century. Proceedings of the Governing Council Round Tables in Conjunction with the Thirty-second Session of IFAD s Governing Council, February Available at ITC Trade map, Available at Joachim von Braun and Ruth Meinzen-Dick, April Land Grabbing by Foreign Investors in Developing Countries: Risks and Opportunities. IFPRI Policy Brief 13 S. Haralambous, H. Liversage and M. Romano, The Growing Demand for Land Risks and Opportunities for Smallholder Farmers Discussion Paper prepared for the Round Table organized during the Thirty-second session of IFAD's Governing Council, 18 February Available at United Nations, Jan Foreign land purchases for agriculture: what impact on sustainable development? Sustainable development innovations briefs. Issue 8. World Trade Organization, Trade profiles. Available at KILIMO TRUST: regional solutions to local problems Page 10