Africa is back in the headlines for all the wrong reasons when it comes to food security. According to the UN, the world is enduring its worst humanitarian disaster since 1945, with 20m people facing the threat of famine and starvation in Somalia, South Sudan, and Nigeria, as well as Yemen. While not downplaying the suffering in the afflicted areas, there is at least good news to report on agricultural output elsewhere on the African continent, which should be powerful enough to meaningfully raise economic growth.
Southern Africa’s rebound
The picture is brightest in southern Africa, where a severe drought in 2015-16, driven by the El Niño weather phenomenon, has abated.
In South Africa, a 7.8 percent fall in agricultural production as a result of the drought was enough to knock 0.2 percentage points off economic growth last year, according to the country’s national statistics agency. With growing conditions now returning to normal, production of maize, Africa’s most important food staple, will rise by 65 percent this year in South Africa, according to a forecast by the US Department of Agriculture.
Using the maize forecast as a proxy for overall agricultural activity, Oliver Allen, a researcher at Capital Economics, a London based consultancy, estimates that agricultural gross domestic product should rise by about 15 percent this year, as the first chart indicates.
That in turn should boost overall GDP by about 0.3 percentage points and reduce inflation, given that futures prices for South African white maize have fallen 60 percent in a year handy for a country likely to face higher imported inflation following the rand’s 10 percent slide against the dollar in the wake of President Jacob Zuma’s sacking of Pravin Gordhan, the internationally respected finance minister.
Indeed, the likely rebound in South Africa’s agricultural output is a key reason why Capital Economics forecasts the country’s GDP will rise 2 percent this year, well above the consensus estimate of 1.1 per cent.
This is despite agriculture accounting for just 2.1 percent of South Africa’s GDP, and hydroelectric power, another industry dependent on healthy rainfall, constituting just 0.4 percent of its domestic energy production, according to figures from Capital Economics.
Countries such as Ethiopia, Kenya, and Tanzania, where farming accounts for 30 percent or more of GDP, or those where hydroelectricity is by far and away the major source of power, such as Zambia, Ethiopia again and Uganda, as the second and third charts illustrate, is clearly more rainfall dependent.
A substantial boost for Zambia
Consequently, Zambia, another of the countries struck by the Southern African drought, could be a major beneficiary this year. “Zambia is one of the breadbaskets in the region and last year was hit pretty hard,” said Yvonne Mhango, sub-Saharan economist at Renaissance Capital, a Moscow-based investment bank with a focus on emerging markets.
“The government is suggesting growth will be 3.7 percent [this year]. There are upside risks to that, I think it will be over 4 percent because of much better agricultural output,” said Mhango, who is based in South Africa and reports that food prices are already easing.
Higher hydropower production should also lower energy costs for businesses and households, given that it accounts for 99 percent of the country’s energy generation. “The return to normal weather patterns will give a substantial boost to Zambia’s otherwise struggling economy,” Allen said. “Recent reports suggest that water levels at the Kariba Dam, the country’s largest, have risen sharply since January, after two years of operating at below normal levels.”
Fitch Ratings cited the likelihood that increased rainfall would boost agricultural output and “aid the nation’s strained power generation capacity” in its decision in February to maintain Zambia’s singleB credit rating, despite the country being on negative outlook.
Mixed picture for East Africa
The picture in East Africa is more mixed, however. Ethiopia was also hit by drought last year, but the UN has forecast a rebound in crop yields this year, a recovery that it predicts will halve the number of people dependent on food aid to 5m. Given that 80 percent of the Ethiopian workforce is employed in the agricultural sector, this should provide widespread gains. However, parts of the country are still seeing little rainfall, suggesting that the UN’s forecasts may not come to pass.
Renewed drought may also hit harvests in Tanzania and in Kenya where, as a result, Allen sees inflation rising to 8 percent this year from 6.3 percent in 2016 preventing the central bank from cutting interest rates below 9.5 percent. Mhango is more worried still, fearing that Kenya’s inflation trajectory since the turn of the year “is similar to that of 2011” when inflation peaked at 20 percent, with knock-on effects. Inflation hit 10.3 percent in the year to March, the highest rate since 2012, with food inflation higher still at 18.6 percent, according to official data.
“A comparison of 1980/2012 macro data from drought and non-drought periods tells us that the 2017 drought will have a marked effect on consumer spending and tea output,” Mhango said, with “weak” credit growth and a slowdown in capital expenditure ahead of August’s presidential election “likely to compound the drought’s impact on growth”.
Agriculture is Kenya’s most important sector, accounting for 22 percent of GDP and employing two-thirds of the workforce. Tea alone constitutes 20 percent of the country’s exports. Mhango’s analysis suggests Kenya’s economic growth tends to be 1.5 percentage points weaker during drought years, and as such she is pencilling in growth of just 4.2 percent this year, down from 5.8 percent in 2016 which would be the weakest figure since 2009.
One saving grace for Kenya is that thanks to the expansion of geothermal power, hydropower now accounts for just 3,540 percent of energy supply, down from 5560 percent in 2007.
Knock-on effect in neighbouring countries
However, Mhango fears that rising food prices in Kenya are likely to have a knock-on effect in neighbouring countries.
“In East Africa, there is a lot of trade between countries. As prices go up in places like Kenya, you start to see the impact hitting Tanzania and Uganda, not because their harvests are poor but because prices are going up across the region,” she warned.
Food price inflation has already risen to 11.5 per cent in Uganda, from just 3.5 percent in October 2016, and to 7.6 percent in Tanzania, from 6 percent in October. Rwanda has seen a leap to 24.5 percent, which Mhango said was related to disruption in imports from Burundi, on top of the regional trend.
Climate change report shines spotlight on Africa’s agriculture potential
It seems almost incongruous to talk about the opportunity that exists in ensuring the world’s food security by bolstering Africa’s agricultural output when the very pressing and public crisis of climate change could be its undoing.
Particularly in the run up to COP26 and the “reality check” that came with this week’s release of the Intergovernmental Panel on Climate Change (IPCC) Six Assessment Report, it is clear the entire African continent is “highly exposed” to climate extremes, at a relatively “high level of vulnerability”.
With over two thirds of Africans deriving their livelihood off agriculture, climate change-led crises like droughts, floods and cyclones continue to threaten the continent’s economic growth, employment, and food security. And yet, ensuring Africa’s agricultural resilience would not just help Africa. It’s essential for ensuring global food security.
What’s more, these climate-led natural disasters have the greatest and most disproportionate impact on small- to medium-scale farmers, comprising as much as 80% of Africa’s agricultural output, from maize and wheat to rice, cassava, and sorghum.
“The UN Report confirmed that climate change is intensifying the water cycle and affecting rainfall patterns, bringing more intense rainfall and associated flooding, as well as more intense drought in many regions,” says Malvern Chirume, African Risk Capacity Limited Chief Underwriting Officer.
“These African farmers are the heart of the continent’s agriculture and are at the mercy of climate change events completely out of their control,” Chirume adds.
Established in 2014, ARC Limited provides natural disaster insurance relief to African countries which have joined the sovereign risk pool.
Along with its partners, which provide premium support, the insurer has already paid over US$65m to seven African countries to provide drought relief and address the economic concerns these countries’ most vulnerable citizens face.
Responding to the climate crisis
Traditionally, countries have responded to climate change-led disasters such as droughts or floods by raising funds for emergency relief. This approach is time-consuming and inefficient.
“It takes far too long for African countries to mobilise the immediate resources they need for relief efforts, to save lives and livelihoods. Our role at ARC Limited is to work with countries to prepare them for the risk exposure they have and how to respond swiftly to climate-related food security emergencies. This includes helping them to establish a rainy-day fund which pays out swiftly, before the problem has become worse, and more funding is needed.”
The ARC Limited model, built on parametric insurance (pre-specified pay-outs based upon a trigger event), has been highly successful, says Chirume.
“We have to date paid out close to $65 million dollars in claims. When one considers that every dollar in insurance pay-outs saves US$4 dollars, this makes the cumulative economic impact around US$240 million. With those funds, we’ve helped more than 5.9 million people whose livelihoods have been affected by climate change impacts,” Chirume explains.
While parametric insurance against natural disasters has enormous potential for the agricultural sector, it has a further economic impact. Because agriculture makes up such a significant portion of the continent’s economy, a downturn caused by a climate shock will echo through the broader economy of any nation affected.
This can bring an economic downturn, a lack of funding for key infrastructure and services at government level, and a loss of jobs as farmers struggle to recover. There is also evidence of migration away from areas experiencing drought, which can have a long-term impact on the regional economy.
Organisations such as ARC Limited have an essential role to play in this way in protecting agricultural value chains and the economies of and employment in Africa. “Our role is to help mitigate and manage the risk, building resilience and ensuring the African country is able to bounce back sooner after a natural disaster,” says Chirume.
With the negative impacts of climate change increasing and their potential to devastate the agricultural sectors and food security of African countries, it has become more important than ever to put sustainability at the heart of interventions.
“Creating an environment that limits the impact of climate shocks on the agricultural sector is about more than just securing economic transformation. At the heart of this investment is the need to ensure basic food security for the continent and the world,” says Chirume.
In its Sustainable Development Series, the World Bank says the African continent could play a leading role in ensuring food security for the earth’s estimated 9 billion people by 2050.
According to McKinsey, Africa’s full agricultural potential remains untapped. It determines that Africa could produce two to three times more cereals and grains, which would add 20% more cereals and grains to the world’s current output of 2.6 billion tons.
Given Africa’s productive potential, the continent could be a key contributor to feeding the world in the future. But to fully realise that potential will require overcoming many obstacles, including how it deals with the impact of climate change on agriculture and food security.
“We need broader collaboration between private and public sector to solve the climate change disaster response problem our continent faces. The problem is so big, that all of us have a role to play,” says Lesley Ndlovu, ARC Limited CEO.
With the support of the United Kingdom and German Government, ARC Limited has been equipped to help the member states of the African Union reduce the risk of loss and damage caused by extreme weather events affecting African populations.
“But there’s so much more work that still needs to go into reaching as many people as possible to help build the resilience of local communities and ensure they have the means to bounce back whenever they are impacted by a natural disaster,” concludes Ndlovu.
World Poultry Foundation (WPF) launches video series to help Africa’s farmers improve poultry production
With poultry increasingly a focus for emerging farmers across Africa, the US-based World Poultry Foundation (WPF) has released a series of training videos to help farmers reduce waste and optimise profits.
Feed accounts for up to 70% of the costs of raising poultry, so proper feeding techniques enable farmers to reduce waste, cut production costs and raise healthier birds, says WPF. Water is equally important in poultry farming, with proper water management crucial for healthy birds.
WPF’s training series, with four videos dedicated to production, explains how farmers should store feed, proper feeding of poultry and how to prepare and manage zones of comfort to encourage proper brooding for chicks. The videos also explain the importance of litter in helping to prevent common diseases to improve production and returns.
World Poultry Foundation CEO Randall Ennis says the video series has been developed to address the most common challenges faced by emerging poultry farmers across Africa. “By applying best practice poultry farming methods, farmers can significantly increase their production, their incomes, and the nutrition available to their families and communities,” he says.
The training videos, as well as free checklists and worksheets, are available here
AFEX Raises $50Million for Agri-SMEs, Africa’s First Warehouse Receipt Backed Commercial Paper
AFEX CEO, Ayodeji Balogun (Source: AFEX)
AFEX Commodities Exchange Limited (AFEX), Nigeria’s leading private commodities exchange company, has announced the first Warehouse Receipt Backed Commercial Paper in Africa, with tech-enabled operations and a 24-hour fast cash turnaround for borrowers. With over $50 million raised for Agri-SMEs, this bridges the funding gap between lenders and borrowers in the Nigerian agricultural sector with a commodity-backed instrument – for the first time.
The AFEX financing deal will help eradicate the high cost of procurement incurred by processors by deploying a discounted value of a warehouse receipt distributed among five leading players in the Food and Beverage, Trading Poultry and Animal Feed segments in Nigeria. The receiving companies are top 10 players in their respective segments. They have now been enabled access to a tool for managing price volatility, enabling up to 30% direct savings on prices.
“With our vision to reach a cumulative total of over $5 Billion in investment to the agriculture sector over the next five years, this financing deal is right on track to achieve this goal’’ – said Ayodeji Balogun, CEO, AFEX Commodities Exchange. “As we move towards building a derivatives market in Africa, we want to be able to reduce exposure to price risk for stakeholders, by enabling them to hedge their positions and trade in commodity derivatives.”
The warehouse receipts, which can then be transferred from commodities to a financial asset and listed under the borrower’s portfolio on the AFEX trading platform, will create a sustainable funding structure and address underfunding in the Nigerian agricultural sector. With the warehouse receipt system linked to financiers, the system allows financiers value and marks the commodities’ price to market on a real-time basis.
“Our mission is to provide low-risk working capital facility for stakeholders in the Agro sector, in a way that is transparent and has a very high viable investment return’’ – said Akinyinka Akintunde, VP Financial Markets at AFEX. “As a licensed commodities exchange and warehouse receipt system operator, we deploy a warehouse receipt system and collateral management infrastructure to increase market confidence for both lenders and borrower.”With AFEX’s goal to support Africa’s food security while promoting a fair exchange of value among players in commodity value chains, this deal’s social impact is delivered through market access for farmers and reduced post-harvest losses. AFEX continues to contribute to the United Nations Sustainable Development Goals 1, 2, 5 and 8; no
poverty, zero hunger, gender equality, decent work, and economic growth.
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