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Rainfall set to boost growth in southern Africa

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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.

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Agriculture

AFEX Raises $50Million for Agri-SMEs, Africa’s First Warehouse Receipt Backed Commercial Paper

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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.

Also Read Cocoa Pricing: Why Public-Private Sector Partnerships are Key to Sustaining the Livelihood of Smallholders Farmers in Africa

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SunCulture secures $11m debt facility from SunFunder syndicate to expand solar irrigation in Africa

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SunCulture CEO and co-Founder, Samir Ibrahim (Source: YouTube)

SunCulture, a solar irrigation company headquartered in Nairobi, Kenya, today received the first disbursement from a new $11m syndicated debt facility to expand its operations in sub-Saharan Africa.

The new loan is groundbreaking for the “productive use” solar sector due to its size and its innovative combination of working capital and end-user financing.

Arranged by SunFunder, the co-investors in the facility are Nordic Development Fund; Triodos Investment Management, through its Hivos-Triodos Fund; SunFunder through its Solar Energy Transformation Fund; AlphaMundi through both its SocialAlpha and AlphaJiri Investment Funds; and the AfDB’s FEI OGEF managed by Lion’s Head.

This will enable SunCulture to scale up renewable energy installations at smallholder farms and households that will mitigate over 20,000 tons of CO2 annually – as farmers replace diesel pumps with solar ones – whilst facilitating income growth and job opportunities in rural communities.

SunCulture has pioneered a “Pay-As-You-Grow” business model to make solar-powered irrigation affordable for smallholder farmers in sub-Saharan Africa, combining end-user finance, value-added services, modern climate technology, and access to improve productivity. A recent report developed by Dalberg Research shows that irrigation systems and solar-powered water pumps can increase farmers’ production between 2 and 4 times, and their income between 2 and 6 times.

Samir Ibrahim, Chief Executive Officer at SunCulture, said, “The past year was devastating for the millions of smallholder farmers in Kenya; 87% are in a worse financial position due to the pandemic. 81% of SunCulture farmers, however, were able to increase their revenue from farming in 2020. Solar irrigation helps create food security and sovereignty, and it also helps lift people out of poverty. This facility further enables our efforts to support farmers by
providing them with more of our solar solutions, and faster.”

Jemimah Kwakye-Fosu, Investment Officer, who led the transaction for SunFunder, said: “We are delighted to have led this syndicate of proactive lenders who worked well together for a common goal: to help SunCulture reach many more farmers. It shows how working capital can be combined with end user financing, which is essential for making productive use technologies affordable.”

Surabhi Mathur Visser, Head of Investments at SunFunder, said: “This is a pioneering transaction that demonstrates how productive use technologies like solar irrigation can be scaled up. SunFunder arranged this facility with a similar-minded group of lenders to support an innovative product and business model. We look forward to seeing SunCulture grow in Kenya and new markets.”

Karin Isaksson, Managing Director at NDF, said: “This loan to SunCulture is the second e[tended to a company graduating from the EEP Trust Fund managed by NDF. It is a clear demonstration that we can deliver on the new NDF Strategy and its commitment to provide flexible and scalable financing as well as catalytic impact. It has all the ingredients that define NDF’s added value in the climate financing landscape. It demonstrates our capability to convene and mobilise additional financing, as well as our unique mix of financing instruments to match the needs of our partners, public or private. We are proud to be standing with our partners and supporting the emergence of a greener economy, precisely at this time of COVID-19.”

“Since our first investment in 2019, SunCulture has made huge strides to unlock the potential of smallholder agriculture through innovative products and consumer credit. FEI-OGEF is happy to be able to refinance our inventory loan into this new working capital facility and continue that growth alongside a committed and constructive group of lenders,´ noted Harry Guinness from Lion’s Head.

Judith Santbergen, Senior Investment Manager at AlphaMundi, said: “Since 2018, AlphaMundi has successively provided support to SunCulture through a combination of technical assistance and debt investment. We are e[cited to continue and increase our investment in the company via this new, innovative working capital facility.”

Sjoerd Melsert, Senior Investment Manager at Triodos Investment Management, said: “SunCulture is a great e[ample of an innovative company that is active on the nexus of renewable energy and agriculture, using solar energy to increase farmers’ incomes. Our facility supports the further growth of SunCulture’s pay-as-you-go solar portfolio, leading to a more sustainable and higher production for smallholder farmers, which is fully aligned with the
mission, ambition and activities of Hivos-Triodos Fund.”

SunCulture

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Cocoa Pricing: Why Public-Private Sector Partnerships are Key to Sustaining the Livelihood of Smallholders Farmers in Africa

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AFEX Commodities Exchange Limited (AFEX) CEO, Ayodeji Balogun (Source: AFEX)

Pricing is a debating point in the cocoa sector, dominating contemporary stakeholder conversations; especially African cocoa producers. This is a result of the historically low cocoa prices that do not provide a fair income to farmers involved in cocoa production. Despite the announcement of the Living Income Differential (LID) by both Cote d’Ivoire and the Ghana Cocoa Boards, there still exist questions on the sustainability of this intervention – to take farmers out of poverty. Stakeholders in the African Cocoa industry need to rethink its strategy to improving farmers’ livelihood, by increasing their earning potential through value chain efficiency, facilitated by public-private sector partnership.

Interventions aimed at income enhancement and lifting farmers out of poverty are often based on the assumption that the said interventions, alone, are enough for the solution being pursued. On the surface, the decision to increase the farmgate price of cocoa and LID by an additional $400 a tonne on all cocoa contracts, appear to be a solution to lifting farmers out of poverty. However, even if farmers’ incomes were to increase – through increased farm gate prices – other structural issues like small farm sizes and low productivity levels will still keep these farmers below the poverty line.

For Cocoa farmers to earn a fair wage from their input, issues like ageing plantations, lack of adequate training and financing as well as direct access to the market, need to be addressed. These structural issues pose a more significant threat on the livelihood of cocoa producers in Africa.  Price increases on their own are not enough to lift the poorest farmers out of poverty. Price interventions like the LID must go hand in hand with other policies and programme, implemented to increase the volume and quality of beans produced. Achieving this will require a multi-stakeholder collaboration involving both the private and public sector aimed at not only improving the quality of lives of farmers but ensuring that the cocoa value chain is optimized.

To enable smallholder farmers benefit in an egalitarian way from the cocoa industry, the focus should be towards improving value chain efficiency while addressing structural challenges in the sector. This is achievable through a public-private collaboration that will drive private sector operations to deepen financial markets, scale-up infrastructure investments and enhance productivity and quality through training and input supply.

Through collaborating with Cocoa Cooperative Societies –providing training, input financing and market access, AFEX has enabled smallholder farmers to increase their productivity, while producing to international standards. With technology like AFEX Workbench – a value chain management platform which facilitates input sourcing, loan administration, sales, a transparent and efficiently executed cocoa process is achieved.

A public-private sector-driven model will create a sustainable approach which will revitalize and boost cocoa production in Africa – creating jobs and improving the living standard of the farmers. While the government takes the driver seat to develop policies and the infrastructure to catalyze this growth across the cocoa ecosystem, private sector organizations will ensure value chain efficiency – increasing the benefits stakeholders gain from the industry.

AFEX is committed to providing the support and technology to improve the quality of life for African cocoa farmers and their communities.

Author: Ayodeji Balogun is the CEO of AFEX Commodities Exchange Limited (AFEX)

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