“Despite agriculture’s importance to Africa it has remained below its potential – even backward relative to other developing regions. This is apparent in agriculture’s extreme undercapitalisation and lack of competitiveness in world markets.”

This was the World Bank’s damning verdict. Setting out the prospects for development in a report to mark the start of this new century, it pulled no punches in describing a saga of past failure and missed opportunity.

In cocoa, coffee, groundnuts, cotton, rubber, coffee and bananas, sub-Saharan countries have seen their share of world markets fall, in some cases massively. Across much of the continent, the rural economy continues to operate at a bare subsistence level, contributing to the weakness of overall economic output and the wide extent of rural poverty.

Scope for change

Yet, contrary to what one might expect, the Bank’s conclusion from this analysis was fundamentally optimistic. Noting that the potential for African agriculture remained latent, it pointed out that even modest policy reforms in the 1980s and 1990s had triggered significant improvements.

There is huge scope for development. Less than 7% of cropped land is irrigated, while the use of machinery and inputs such as fertiliser is low. Labour productivity is low. An analysis of agricultural capital stock in 1988-1992 showed that in Africa it was a sixth of Asian levels and a quarter of levels seen in Latin America; there is little reason to believe that matters have improved. Cereal yields are less than half those of other regions of the developing world.

However, what this shows is that fresh investment could have a huge impact in rapidly raising output and productivity and the farming sector’s overall contribution to sub-Saharan economies.

Much of this will have to happen at the grassroots level, through rural micro-credit, changes in small farmers’ local production systems, and other local development initiatives.

But the expansion of commercial agribusiness also has many opportunities to take up and a vital contribution to make. Indeed, some of the most successful African agricultural exporting economies have been built around the synergy between small farm producers, big commercial plantations and a processing and export sector that can service the needs of both and deliver product to the world market competitively.

This is not a short-term game. Indeed, conditions at present are particularly difficult. There is little early sign of the World Bank’s century-opening hopes being realised.

Tragically, two of the most important farm-exporting countries in the continent, Zimbabwe and Ivory Coast, have been riven by political instability and violence over recent years. Kenya, another key producer, has had a difficult relationship with the donor community.

But Cameroon, for example, and Mozambique, have demonstrated the potential for a largely agriculture-based economic revival, and growing export success.

Mozambique used to produce 250,000 tonnes of cashew nuts a year. During the worst years or war and economic decay output plunged to a mere 35,000 tonnes. But this has now recovered to 60,000 tonnes.

Finance minister Luisa Dias Diogo attributes this revival partly to liberalisation, which has allowed new private sector investors to get involved and partly to government making effective use of the fiscal resources this growth generates.

“Money from export taxes is being used to expand the industry,” she says. Ms Diogo believes production could eventually be rebuilt to the previous 250,000 tonnes level.

No quick fix

However, the free market is not a simple answer to African farming’s efficiency challenges. Francophone West African states have spent the best part of a decade wrestling with the dilemma of how to make their key cash crop sectors more successful – in particular cotton, which is the main source of cash livelihoods for families across a swathe of Sahelian countries.

Traditionally, production has been sustained by state marketing boards, often working in close association with one or two major international companies – usually French.

The flaws in the system have been all too evident: a government reluctance to set prices at commercially realistic levels, a tendency towards sluggishness, bureaucracy and in some cases corruption, and a lack of competitive vigour.

But it has gradually become clear that the pure free market alternative also has its limitations. Local farmers lack commercial bargaining power vis-ŕ-vis big export houses, and private sector pressures mean small growers are sometimes deprived of the long-term technical extension support and credit that was provided by the integrated parastatal system.

Governments are under pressure to develop structures that can bring together the best of the private sector, in terms of competitiveness and commercial flexibility with an ongoing, albeit more flexible, network of support for the smaller growers who still account for a large chunk of output.

Commodity risk

One of the new mechanisms emerging to play a role in this is the Commodity Risk Management (CRM) initiative, which aims to give small producer groups at the grassroots access to the price insurance tools that have long been available to big transnationals through the global options market. Developed by a joint task force of international agencies and interested private sector participants, such as Crédit Lyonnais and Rabobank International, the scheme entered pilot operation in August and September 2002, in Uganda, Tanzania and Nicaragua.

It is the sort of facilitating measure that could help African farmers become more viable and stable partners for international agribusinesses and export groups.

An alternative option, of course, is for a major foreign investor to take a more direct role in production, by operating plantations, sometimes supplemented with purchases from small local farmers on surrounding land.

Doing this successfully requires, of course, a major long-term commitment, both because it often takes years for investments to produce a return – after all, trees need time to reach production maturity – and because the global commodity markets are so volatile.

Demand and prices can plunge or soar to an extent unimaginable in other investment sectors such as manufacturing; a foreign investor must therefore have deep pockets and be prepared to take the long view, assessing returns over a multi-year period and seeing their involvement as an enduring strategic move.

Many a slip

A good example of this type of operation is Brooke Bond Kenya, which is a subsidiary of Unilever. In the first half of 1998 the company turned in a KSh475.3m ($377m) profit – compared with a loss of KSh53m the previous year – thanks to the combination of a record crop and high export prices.

But, more recently, profits for the whole of 2001 were a mere KSh221.8m, because prices in the last nine months of the year were down by a quarter on the same period in 2000. This wiped out most of the gain in income that the company might have hoped to make from a substantial rise in output.

In management terms, such market developments are almost impossible to plan for. All a company can do is work hard to keep itself in shape to ride out unpleasant experiences. Brooke Bond, for example, has invested in a better manufacturing plant and the development of extra value-added products, as well as keeping a lid on costs.

Meanwhile, the head office had already been moved from Nairobi to the small town of Kericho, close to the centre of production in Kenya’s green and misty tea-growing hills. Ongoing research is also a key factor in maintaining quality and the company’s ability to retain market share.

Such sector specific expertise can make agribusiness an awkward sector for portfolio investors, because it is hard to extract the best results unless one has the expertise and wider business connections needed to make the most of the trade.

CDC sales

CDC Capital Partners – the former Commonwealth Development Corporation – has sold off a host of its African agribusiness assets. It felt that the operations could be better developed in future by established industry players with relevant distribution skills and marketing resources. Typical of these disposals was the sale of the Ruwenzori Highlands Tea business in Uganda to the specialist tea company James Finlay.

CDC has retained some African agribusiness assets – rubber in Ivory Coast, sugar in Swaziland, teak plantations and tea in Tanzania and arable farming in Zambia. But the sector is now less prominent in its portfolio and image. CDC explains that this is partly because it is looking for a specific financial return – within its development and poor country business mandate – rather than a long-term agro-industry strategy.

The World Bank’s International Finance Corporation (IFC), which has a similar mission to invest in private sector business in developing countries, does retain African agribusiness involvements, as does France’s parastatal Proparco. The latter is investing €6.5m in an environmental and tree-planting operation in northern Cameroon.

IFC has a $32m portfolio in agriculture and multi-million dollar in forestry in 39 sub-Saharan businesses. Among its new projects are loans of $1.8m and $1.7m for two tea factories owned by local smallholder growers in Kenya.

Meanwhile, the philosophy of concentrating on what a company does best is not, however, confined to the big portfolio players such as CDC Capital Partners. It can also apply within agribusiness itself.

For example, in the late 1990s Brooke Bond sold the Sulmac flower business that it had owned for two decades. Demand for Sulmac’s spray carnations had been falling and the sale allowed Brooke Bond to focus capital and expertise on its core tea business.

Security issues

A factor that is becoming increasingly important to the long-term viability of agribusiness in Africa is the security of the “downstream” market outlet. On one level, global raw commodity markets are fairly secure; the crop can almost always be sold. But the question is, at what price ?

To some extent these risks can be contained by focusing on higher value specialist products that are sold under individual arrangements, often with long, contracted lead times.

This is often the case with luxury vegetables, exported to European supermarkets. The client can be highly demanding and drive a harsh bargain on quality, price and delivery times. However, these horticultural crops are not subject to the same global fluctuations in market condition seen for the big raw commodities such as cotton, coffee or cocoa.

For those that are producing the main soft commodity cash crops, the best hope must lie in greater liberalisation of trading rules for the major export markets – the European Union and the US – to allow the easier entry of processed or finished products from the developing world. Ivory Coast and Ghana export huge volumes of cocoa to the developed world, but they could export more of it as finished chocolate – which is less exposed to commodity market fluctuations – if the trading rules allowed.

Cotton offers a hopeful example of how things might evolve, in this respect.

The US Africa Growth and Opportunity Act (AGOA) – passed just before the end of Bill Clinton’s presidency – opened up new trading opportunities for African garment makers, albeit subject to some tough rules of origin for the exported goods.

Even in its first couple of years AGOA has begun to make its impact felt, particularly in helping the spectacular growth of Madagascar’s clothing exports (until the island slid into political crisis in January 2002). This had a direct consequence for the island’s cotton farmers, opening up the prospect of rising local industrial demand for their crop, even while conditions in the global market remained difficult.

The AGOA content restrictions – designed to ensure that the thread used was mainly imported from the US itself, or locally produced in Madagascar, was a nuisance for the clothing companies but a help for the island’s cotton growers.

Long-term outlook

With trade liberalisation advancing slowly in world markets and privatisation opening up new investment openings at the production end, these are interesting times for potential agribusiness investors in Africa, provided they can afford to take a relatively long-term view.

But these days, such activity requires more acute political and cultural antennae than was once perhaps thought necessary.

In south-west Cameroon, a zone of astonishingly high fertility, the local Bakweri people have been protesting about plans for the privatisation of the Cameroon Development Corporation. Despite avoiding major losses, the company is much in need of new ideas and capital and a touch of competitive vigour.

It has 100,000 hectares of land, mainly in the rich volcanic soil around the foot of Mount Cameroon. Bananas, tea, rubber and palm oil are produced on 47,000 hectares by the parastatal. These are alluring assets for potential investors.

But the Bakweri have been objecting. They were ejected from their land to make way for the company’s colonial predecessor in the colonial era. They insist the land is not the government’s to sell freely.

Some sort of accommodation will probably be found – eventually. But the government has been in no hurry to stir up further argument by rushing ahead with a sale.