Opportunities for value chain finance in Africa’s

intra-regional food trade

Lamon Rutten

CTA Revolutionising finance for agri-value chains

Nairobi, 14-18 July 2014

Overview

• Overview of Africa’s food production, consumption & trade flows 

• Value chain financing in Africa’s agricultural & food sector

• Recommendations to boost financing of Africa’s food value chain

Based on a report done for AFRACA and CTA by

Overview of Africa’s food production, consumption & trade flows 

Sub-Saharan Africa is a major food producer

Leading producers of grains, roots & tubers, 000s MT, 2012

0

1,000

2,000

3,000

4,000

5,000

6,000

Sugar Nuts Cocoa Palm oil Coffee & tea Cotton

Côte d'Ivoire South Africa Nigeria Kenya Ghana Cameroon

Ethiopia Mozambique Zimbabwe Zambia Uganda Tanzania

Leading producers of cash crops, 000s MT, 2012

But there has been under-investment in African agriculture

Source: Deutsche Bank, Agricultural value chains in Sub-Saharan Africa, 14 April 2014

The potential of African agriculture is huge

Food dominates rural and urban household budgets

71%

0%

5%

12%

5%1%2%1%3%

Food & non-alcoholic beverages

Alcoholic beverages & tobacco

Clothing & footwear

Utilities

Furnishing & household equipmentHealth

Transport

Recreation & education

Miscellaneous (incl. telecoms)

Rural versus urban food consumption in Nigeria, 2012

54%

0%5%

22%

4%1%

5%1%

8%

Rural households buy on average 30% of what they consume.

Africa is heavily dependent on food imports

• In 2011, SSA imported US$ 43 bn worth of agricultural commodities while exporting US$D 34 bn worth

• The value of agricultural exports from Thailand is greater than that of the whole of SSA

• Imports of key staples – rice, fish, wheat, sugar, flour, palm oil, dairy products & maize – was US$ 25.2bn in 2012 (60% of SSA wheat & flour consumption & 40% of its rice consumption)

• Fish imports: US$ 3.9 bn, as Africa allows others to empty its seas.

There is a thriving intra-regional food trade, but most of it is off the radar

• Vast quantities of rice, sugar, flour and cooking oil are imported and then re-exported into neighbouring markets, many of these flows passing through illicit smuggling networks

• Informal flows are critical to Africa’s food security, and they are likely to be at least as large as official flows, and in the case of East Africa could be several times larger

• Numerous policy obstacles prevent this trade from becoming legal – import duties out of synch, physical trade blockages.

Urban food markets are set to quadruple and the food and beverage markets to reach US$ 1 trillion by 2030. The region’s biofuel market is also growing.

Surging urban markets drive food demand

In countries like Côte d’Ivoire or Mali, the size of the local food market is already more than double the size of agricultural exports.

Per capita food consumption levels are bound to rise

Consumption of sugar & palm oil, kg per capita, 2012

Sources: World Bank, ISO, FAOSTAT, Ecobank Research.

• McKinsey: Africa’s middle class (US$1,000-5,000 per year) will surge from 39% of the population in 2005 to 55% in 2015

• BAML: expenditure on food in Accra, Lagos and Nairobi will rise from US$ 2bn in 2012 to US$ 6.7bn in 2022

• Demand is shifting towards meat, dairy, and fruit and vegetables, most of which are now imported into Africa; as well as fast foods, increasing dependence on imports of wheat and sugar. Rice demand will remain high.

Value chain financing in Africa’s agricultural & food sector

Finance is least available at the beginning of the chain

Most banks start financing once commodities are in a warehouse

So a network of warehouses would be the logical entry point for regional food trade financing…

Unfortunately, warehouse systems, regulatory regimes for the issuance of warehouse receipts and collateral management services are poorly developed.

Pre-production finance requires good records of production in past years.

Trading houses are becoming shadow banks.

The benefits of an ectronically-linked warehousing network

• links the financial and commodity sectors, at all levels (from farmer to enduser/exporter)• permits large efficiency gains• strengthens the bargaining position towards further-up parts of the value chain.

Recommendations to boost financing of Africa’s food value chain

• Build value chain financing;• Facilitate mobile payments; • Promote new trade corridors; and, • Create commodity exchanges (which include

warehousing infrastructure)• Warehouse receipt finance and collateral

management

Source: KPMG, based on Calvin Miller, FAO.

Business models for inclusive agricultural value chain financing    

Developing mobile money    

• Greatly reduces theft and embezzlement.• Reduces transaction costs• Permits new and innovative food financing

structures along the value chain

Develop new trade corridors  

• The flow of agricultural goods from surplus to deficit regions has to be facilitated

• Improve infrastructure, and remove obstacles to the movement of goods.

Proposed regional & coastal trade corridors

Commodity exchanges 

The creation of commodity exchanges could bring huge benefits to Africa’s agricultural value chain and facilitate intra-regional food flows:•catalyst for engaging smallholders and integrating them into the value chain •Improve agricultural prices and reduce wastage (ie, reduce food prices for consumers)•By building a warehouse receipt system, links farming to finance•Trusted backbone for long-distance trade.

Warehouse receipt finance and collateral management• 

Warehouse receipt finance and collateral management:• Help reduces losses of agricultural produce• Allow farmers and traders to secure financing, including for inputs• Facilitate food trade.

But warehouse receipt and collateral management systems are weak in Africa. Is the creation of a pan-African collateral management companies, owned by African banks (as per Latin American model) a solution?

Questions?

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Thank you for joining us in Nairobi!