A recent article in the Economist (“Barbarians at the farm gate”, January 3rd) highlighted that for more capital to flow into agriculture, farmers and financiers will have to learn a lot more about each other.
Mutual misunderstanding and incomprehension between these two worlds is real and felt most keenly in Africa. The problem is broadly attributable to scale and execution. The average farm in most parts of the world is under two hectares in size and Africa’s farms are even more heavily skewed towards smallholdings. The few large-scale public businesses which do exist across the world, such as SLC Agricola, Black Earth Farming and AdecoAgro, are only relatively large when set against these small peers. The individual market capitalisations of these four large-scale pioneers amount to little more than two hours of trading of, say, Apple stock on NASDAQ.
Building an industrial management class from such lowly beginnings takes time and effort. Research indicates that farms of 800-2,000 hectares may represent a limit for individual managerial unit economies of scale. Thus finding the key personnel to manage a complex and capital intensive 200,000 hectare agribusiness can represent a major operational headache. Much of the structural change that will transform the sector in the decades ahead will come from the adoption of conventional practices common across other industrial sectors. Just as you won’t find a new CEO for a large UK supermarket chain from the ranks of corner shop owners, future farmers will bear little resemblance to today’s current managers. If getting the right people in Brazil or the US is a problem, try to imagine the structural impediments across Africa.
The cultural chasm – if is not to become a cultural collision – between farmers and financiers can be bridged by adopting and adapting models to suit local circumstances. For example, out-grower schemes – an adaptation of what might be termed a co-operative model elsewhere – are useful models which provide market access and funding to smallholder farmers which they might otherwise lack. As Africa urbanises, smallholder schemes are useful models which can promote stability in rapidly changing social environments.
If these models provide what might be described as a half-way house between smallholders and large-scale industrial farms, they also minimise the capital requirements to develop the latter. That should not only boost returns but provide a way for farmers and financiers to love one another.
Richard Ferguson is an agribusiness advisor for PwC. This article was first published on PwC’s Africa Upfront blog.