Impact Investing in Agriculture: how can Africa sustainably unlock its growth potential?

How is agriculture pivotal to the success of the UN Sustainable Development Goals?

The United Nations 2030 Agenda for Sustainable Development, including the 17 Sustainable Development Goals (SDGs), are global objectives that succeeded the Millennium Development Goals on 1 January 2016. The SDGs will shape national development plans over the next 15 years. From ending poverty and hunger to responding to climate change and sustaining our natural resources, food and agriculture lies at the heart of the 2030 Agenda.

In particular, a focus on rural development and investment in agriculture (crops, livestock, forestry, fisheries and aquaculture) are powerful tools to end poverty and hunger by 2030 and bring about sustainable development. Agriculture also has a major role to play in combating climate change.

Central to achieving the SDGs are businesses and the investors that finance them. The Food and Agricultural Organization of the United Nations (FAO) considers the private sector to be a “key ally” in eradicating hunger, stating: “in recent decades, the governance of food and agriculture has been increasingly transformed on a global level by new technological, knowledge-based, financial and managerial resources and innovation.”

Why is Africa so important from an agricultural perspective?

FAO statistics from 2016 highlight why Africa has such an important role in the success of the SDGs from an agricultural point of view. The table below shows some key data:

Of course, it is over-simplistic to generalise across the African continent; there are significant variations in the above statistics between countries. Nonetheless, with the population of Sub-Saharan Africa projected to double by 2050, it is clear to see that a sustainable supply of food will be critical over the coming decades to avert a widespread food crisis. Balancing this alongside reducing CO2 emissions from agriculture is just one of the many challenges governments are grappling with worldwide (and not just in Africa).

Where will agricultural growth in Africa come from?

McKinsey suggest, in their recent article, “Winning in Africa’s agricultural market“, that the answer lies in significant investment. “Sub-Saharan Africa will need eight times more fertilizer, six times more improved seed, at least $8 billion of investment in basic storage (not including cold-chain investments for horticulture or animal products), and as much as $65 billion in irrigation to fulfil its agricultural promise. Much investment will also be needed in basic infrastructure, such as roads, ports, and electricity, plus improvements in policies and regional trade flows.”

The article also stresses that the biggest growth driver is likely to come from increased smallholder productivity. Most land is managed by farmers with less than five hectares (approximately five football pitches). If these farmers are to boost productivity, economic conditions in many regions must improve significantly. Smallholder farmers often lack the risk mitigations that would make investments a safer bet. These include crop insurance, government welfare plans, guaranteed offtake, and even access to low-cost food for purchase that would allow them to focus on growing higher-value, non-food crops versus crops for their own subsistence.

Some governments are therefore trying to consolidate some of the smallholder-farmer activity to increase productivity, provide market access and reduce risk.

Further, if African agriculture is to play a greater role in supplying local food demand (and even global food demand), McKinsey notes that it will be important to improve cost competitiveness for food crops compared with major trading partners in South America and Asia. Sub-Saharan Africa has already demonstrated a competitive advantage in select “cash crops”, such as cashews, coffee, processed horticulture, and tea in East Africa and cocoa in West Africa. For some of these crops, such as cocoa, Africa has the lowest cost of production in the world. The same is not necessarily true for “food crops” (such as grains, edible oils and sugar), for which yield improvements alone are often not enough to improve cost competitiveness.

The McKinsey report also analyses potential for agricultural growth across 44 countries in Sub-Saharan Africa, showing that nine countries make up 60 percent of the total potential, with three countries – Ethiopia, Nigeria and Tanzania – comprising half of that. Prioritizing geographical areas rather than fragmenting resources (especially given the significant variation in agricultural development and policy between countries) may therefore be preferable.

Growth and inequality

Nonetheless, as a Business Daily Africa report points out, GDP growth does not capture the reality of poverty and inequality, neither is it a reflection of the status of food security and nutrition at household level. Some African countries that have recently experienced high levels of economic growth also have the highest levels of inequality.

A 2019 study by Oxfam reported that inequality has reached a critical and alarming level. African billionaires now have more wealth than the poorest 50% of the continent.

The Oxfam report adds that “climate change and its associated recurrent shocks have brought a whole new set of challenges that make the task of transforming agriculture into an engine for pro-poor growth and poverty reduction even more daunting. For example, a study in Malawi found that extreme droughts cause average GDP losses of 10.4% and increase poverty by 17%, which is equivalent to an additional 2.1 million people falling below the poverty line.”

Unfortunately, despite agriculture’s importance in Africa’s future, public investment in this sector is still low in many parts of the continent. According to the 2017 African Union Biennium Review Report on the progress toward the Malabo commitment of allocating at least 10 percent of annual public expenditure to agriculture, only 10 member states have met the target for the period 2015-2016.

In the absence of significant government intervention, the role of other sponsors such as development finance institutions, private equity houses and social impact funds will continue to be crucial in providing the required investment.