Executive Summary: Market Analysis of Potato Value Chain in 3 target countries of East Africa April 26, 216
Potato production in EAC has grown 34% in the last two decades, and average potato consumtpion has nearly kept pace growing about 3% in this period Production and average consumption of potatoes in Kenya, Rwanda and Uganda 7. 6. 5. 4. 3. 2. 1.. 1993 1994 1995 1996 1997 1998 1999 2 21 22 23 24 25 26 27 28 29 21 211 212 213 7,, 6,, 5,, 4,, 3,, 2,, 1,, Production (MT) Average consumption (kg/capita) 2 Source: MaxiTerra Team Analysis, based on PotatoPro figures
Though both production and consumption of potatoes have grown in EAC, farmers are not reaping any benefits Annual potato farmer average net income USD 9 8 7 6 5 4 3 2 1 Kenya Rwanda Uganda Farm gate prices are low at USD.15/kg). The whole supply chain and the markets are highly fragmented and inefficient The cost and margins to bring potatoes from the farm and selling them at the wholesale markets range from 5% to +13%, depending on the variety and market. This is much higher than similar global benchmarks. The average income for farmers in these countries is close to USD 5. The variation in average farmer income across EAC countries is also quite large 3 Source: MaxiTerra Team Analysis, based on PotatoPro and Esoko price data
Productivity per hectare in the three EAC countries is also much lower than global benchmarks. This forces farmers to plant two, and even three, crops per annum Average productivity of potato farms MT/ha 5. 45. 4. 35. 3. 25. 2. 15. 1. 5.. Rwanda Kenya Uganda USA Netherlands Egypt India High farm gate price volatility does not allow farmers to invest into maximizing their productive potential There is an enormous unmet demand of good quality certified and clean seed in all three countries despite low farmer incomes and volatility farm gate prices Providing farmers with risk mitigation mechanisms to reduce their market and production risks will definitely allow them to focus on increasing their productivity 4 Source: MaxiTerra Team Analysis, based on PotatoPro figures
Public Private Partnerships need to come together to develop value chains in an integrated manner Specific interventions in the value chain Support required for the interventions to succeed Cross-cutting initiatives required for creating the right eco-system Research & Development Input distribution and adoption Farming Trading and processing High yield and stress-tolerant seed Local varieties/adaptations Agri-dealer networks Product bundling Risk mitigation in purchasing Contract/ nucleus farms Crop selection optimization Water demand reduction Practical capability building Support SMEs to enter value chains Local cold storage, and processing Optimize food aid procurement Proper incentives for R&D High-caliber institutions` Grants for orphan crops Farmer networks/organizations Fertilizer dealers and input availability Quality seed availability Train off-farm skills, diversification Improve extension services Property and tenure rights Water supply efficiency Investments in value-add industries (e.g., oil refining) Support farmer groups/co-ops Policy environment Market access FDI, trade policy Land use change Land tenure Input subsidies Extension and education Gender equity Infrastructure Ports, roads and railways Electricity Phone networks Irrigation/aqueducts Cold Storage and silos Manufacturing and retailing Consumer table Sustainable sourcing Fair trade pricing Local distribution networks Fortification Ethical labeling Build consumer awareness on diet diversity/ nutrition Access to export markets Quality/safety standards Grain exchanges Nutrition education Access to potable water Prioritize maternal/infant health Market linkages Input delivery Price information Risk-sharing/insurance Credit/patient capital Knowledge-sharing and skills training 5
Potato sub-sector could benefit from identifying opportunities where its output could find new markets and also help it achieve self-sufficiency A B C Identification of markets Future demand scenarios Production mix and structuring of value chains Potential opportunities Identify areas of opportunity to market existing agricultural output and value-added processed products Identify possible shifts in crop production given future resource constraints (such as land or water) Identify possible shifts in product demand Identify gaps in supply of potato production that could be needed to achieve Africa s production and export goals Identify opportunities from structuring value chains through cost/benefit analysis Opportunity needs to be defined from both the farmer and investor perspective National economies and farmers will benefit from leveraging the cold-chain infrastructure Farmers will have the flexibility to move between crops of their choice Today this choice is nonexistent and therefore provides no reason for farmers to move to higher value add opportunities 6
Potential opportunity 1: Increased demand for inputs and mechanization There exists a potential market of nearly USD 5mn in EAC for input and services suppliers, if farmers incomes can be assured and the production risks reduced Market opportunity by input 9,, 8,, 7,, 6,, 5,, 4,, 3,, 2,, 1,, Seed Chemicals Fertilizer Mechanization Storage Kenya Rwanda Uganda 7
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Potential opportunity 2: Need to reduce market risk and related price volatility Whole sale prices in EAC are very volatile reflecting potato growing seasons. There is a requirement to provide adequate storage facilities to break this correlation Potato supply and price volatility (Kenya example) 6 5 4 3 2 1 Supply Machakos Wakulima Average 7 6 5 4 3 2 1 Lack of storage leads to high price volatility, even in some months immediately after high production season Inadequate storage also leads to huge amount of post harvest losses, which exceed 33% of production. Reducing these losses to 15% are a USD 2mn p.a. opportunity in the EAC region Adequate storage and reduced market risks not only help increase farmer incomes but also lead to other benefits such as warehouse receipts and increased finance availability 8 Source: MaxiTerra Team Analysis, based on PotatoPro and Esoko figures
Farmer income Potential opportunity 3: Competitive costs for financing agri-operations In addition to reducing risks and increasing efficiencies, the cost of capital accessed by farmers needs to come down. This will have a multiplier effect across the value chain Potential impact on farmer income through reducing cost of finance (USD/ha/season) 7 6 5 4 3 2 1 Kenya Rwanda Uganda Net impact on income per Ha Median interest rates in informal sector Potential for interest rate reduction for small farmers in EAC Interest rates Median interest rate in formal sector 16% 14% 12% 1% 8% 6% 4% 2% % Lack of formality in managing value chains makes the farmers (esp. small holders), overly dependent on informal financing options including money lenders or loans from input suppliers Creating formal value chain systems especially at farm and post-harvest stages would allow formal finance to enter and lower interest rates if market risks and production risks can be covered The potato sub-sector in EAC needs about USD 1bn of financing annually and has the ability to more than double net farmer incomes in Rwanda and Uganda 9
Potential opportunity 4: Increased efficiency of transport logistics High costs and inherent inefficiencies of logistics in EAC are another major bottleneck in trying to improve farmer incomes Comparative average trucking cost between main logistics assets, US$ per container per km United States Mexico 1.-1.5 South Africa China India Africa.5-1.5.3-.5 1.5-2.5 1.5-2.5 5.-7. Reducing logistics costs in EAC countries and aligning them with global benchmarks represents a USD 18 MM opportunity Restructuring the logistics within EAC is a complex task that will require strong government intervention both in terms of policy and also to ensure more open and transparent Reduced transport costs and shortened shipping times will have a key role to play in making not only potatoes but all value chains competitive at regional and global level 1 Source: MaxiTerra team analysis
Potential opportunity 5: Increase processing capacity to meet growing demand Historical growth trends and increased potato processing in EAC to similar global benchmarks ensures that demand for relevant potato varieties will continue to grow Estimated market opportunity in potato processing can reach between USD 4 mn to 1.2bn by 225 All figures in Millions USD Business as usual baseline growth Additional optimal growth scenario Economic and population growth, plus urbanization trends provide drivers for increase in processed foods consumption F 1228 4. The whole potato value chain will have to be transformed in an integrated manner if EAC countries have any hope of capturing this emerging opportunity in processing at a regional level 52 16 36 Kenya 378 18 27 Uganda 33 132 198 Rwanda 828 Total market size Even proceeding with a baseline growth scenario shows that consumption by processors will reach about 16% of total production by 225 very much in line with other similar regions 11
Points to consider for further discussions during the session and some potential next steps Some points to consider during discussions Inputs and seed breakout: How do we ensure that farmers adopt use of certified seed and improved agronomic practices and that these are available in adequate quantities? Infrastructure breakout: How critical do you consider the need to create adequate storage (cold chain) and road infrastructure to increase farmer incomes? Processing breakout: What are the most critical incentives to get more processing capacity in place and ensure that the potato subsector can meet expected demand? Potential next steps Formation and strengthening of farmer groups Importance of contract farming in improving farming practices Access to markets and structured trading systems Provide farmers with more options to ensure flexibility Reduce price volatility via creation of more storage capacity Create structured trading mechanisms such as warehouse receipts etc, which help increase SHF incomes Access to working capital at competitive rates Access to the right potato varieties Improvement in quality standards to meet market needs - chips 12
BACKUP 13
Mechanization of the productive cycle can also help increase production yields, by improving the pre harvest, growing and post harvest process Mechanization productivity and profit (usd/ha/season) Mechanization can be utilized in plots over,2 ha 45 4 35 3 25 2 6 5 4 3 Increases productivity of land by creating better conditions for growing and by reducing post harvest losses 15 1 5 Kenya Rwanda Uganda 2 1 Required investment Gross profit Increased yield (ton/ha) 14
Storage can also prove to be an important development tool for farmers productivity and access to markets Storage can provide better access to market, allowing farmers to avoid periods of glut in the market It reduces post harvest losses, allowing farmers to achieve better prices by reaching markets when prices are higher Storage profitability for farmers (usd/ha/season) 1 9 8 7 6 5 4 3 2 1 Kenya Rwanda Uganda Revenue increase Gross profit Required investment 15
Quality inputs utilization and sound financial conditions can make a big difference in the output and financial position of farmers Revenue, profit and yield growth with quality inputs 6 5 4 3 2 1 Current Improved inputs I+M I+M+S+F Revenue Profit Yield (t/h) 3 25 2 15 1 5 16
Availability of quality seeds is one of the main tools that can increase farmers output Investment required and profit increase (usd/ha/season) Investment of USD 4 in quality seeds per hectare can increase farmers revenues and profits by large margins, increasing average revenue by +15% and profits by +3% 18 16 14 12 1 8 6 4 2 Kenya Rwanda Uganda Seeds Fertilizers Gross profit increase 17
Farmer output and profit can be largely increased by strengthening the value chain Current Improved inputs+storage+finance Yield (T)/hectare 8 Yield (T)/hectare 25 USD USD Price/t 17 Price/t 24 Revenue 136 Revenue 51 Costs USD Costs USD Seed 23 Seed 55 Chemicals 6 CP Fert 152 Fert Labor 29 Labor Storage Storage 3 Mechanization Mechanization Finance 326 Finance 334 Total 977 Total 24 Utilization of inputs and value added steps can generate a big change in results farmers outcome Profit 383 Profit 396 18
The growing demand can be met either via higher production and productivity or a reduction in post harvest losses Supply demand balance Supply demand balance, reducing post harvest losses 3, 5, 2, 4, 3, 1, 2, 1, -1, -1, -2, -3, 214 215 216 217 218 219 22-2, -3, -4, 214 215 216 217 218 219 22 Rwanda Kenya Uganda Total Rwanda Kenya Uganda Total 19
The main reason for low farmer income is the highly fragmented nature and informality of the market Wholesale Price volatility June 13-Dec 15 7 6 5 4 3 2 1 Eldoret Kibuye Kitale Kongowea Machakos Nakuru Wakulima High Low Average 2
The potato value chain structure needs to be transformed if smallholders farmers are to benefit from growing demand Trader profitability 7 6 5 4 3 2 1 65 45 35 35 35 24 15 1 High Price Low Price High Price Low Price 85 kg 2 kg Bag Farmgate price (USD) Wholesale price (USD) 21
In addition, there is a potential business opportunity waiting to be captured both for storage and processing For supplying the processing industry, inputs to meet required future demand offer a market opportunity of +US$13 MM Seeds, storage and finance offer +US$2 MM returns Market opportunity 14,, 12,, 1,, More than 67k farmer involved 36% Kenya 39% Rwanda 25% Uganda 8,, 6,, 4,, 2,, Kenya Rwanda Uganda Total 22