Going industrial: Impetus to shift from small sharecropper farms to larger producers is coming from within and without

Crucial to the economy, Ghana’s agricultural sector is the country’s largest employer and a significant contributor to its production value. Together with economic growth opportunities, a push for a stronger food security policy has created a drive to modernise farming business in recent years. The aim is to boost yields without sacrificing jobs. Ghana is at the forefront of change, as one of several African states in which a mix of public, private and non-governmental actors are experimenting with new approaches to farming. The country’s rich soil, untouched arable land and water-rich climate have attracted new investment and programmes that aim to address infrastructural weaknesses, cultivation techniques and access to financing.

A WORK IN PROGRESS: In spite of the sector’s high revenue and employment rate, it has yet to reach its full potential, hampered a lack of expertise and advanced inputs such as fertilisers and irrigation systems, poor transportation infrastructure that prevent crops from reaching buyers, inadequate storage facilities to keep goods from spoiling and processing facilities that would allow it to capture more of the value chain at home.

Governments have worked in the past to address these problems, often in tandem with donor-funding agencies, with noticeable results. By 2009 Ghana was considered on track to be the first country in Africa to cut poverty and hunger numbers in half, progressing toward one of the eight Millennium Development Goals. Former president John Kufour was given the World Food Prize in 2011 in recognition of policies to combat hunger among the impoverished. However, yields per ha of maize and rice, two key staples, are at a third of their potential, according to Ministry of Food and Agriculture (MoFA) calculations. Post-harvest problems are responsible for roughly 30% of harvested maize and cassava going to waste yearly, according to the MoFA. A recent World Food Programme assessment found that in the Northern, Upper East and Upper West regions of the country, some 10%, 15% and 34% of households, respectively, suffer from “food insecurity”.

SIZE & SCOPE: Agriculture accounts for 28.3% of GDP, and grew at a rate of 0.8% in 2011, less than the 5.3% expected. That target was identical to the rate of expansion in 2010, according to a report on the Ghanaian economy from international consulting firm PwC. The sector accounts for 60% of employment.

There are an estimated 2m-3m small farms in Ghana, a rough guess given the lack of precise data. Agricultural potential is not limited to one geographic area, as cocoa thrives in six of the country’s 10 administrative regions and crops are cultivated in all regions.

The agricultural sector can roughly be placed into five categories. Crops include cereals, grains, starchy staples, fruits, vegetables, shea nut, cotton, oil palm, rubber and coconuts. Cocoa beans are a category of their own, and the others are livestock, fisheries and forestry. Due to the impact they have on the country’s import bill, the cereals, grains and starchy staples segments often comes under particular scrutiny.

This is also the case for processed products resulting from cereals and grains, where the operating environment can be challenging. Flour milling, for example, has seen an increase in competition in recent years, with Singapore's Olam having recently invested $31m on a new 115,000-tonne-per-annum plant. However, while domestic demand has increased roughly fivefold from two decades ago, the four firms currently active in the segment – Irani Brothers and Takoradi Flour Mills, who prior to Olam’s arrival together controlled roughly 95%, or 250,000 tonnes per annum, as well as Ghana China Food Company, with roughly 50,000 tonnes, and now Olam – are operating plants at only partial capacity. Speaking to OBG, Serge Bakalain, the executive chairman of Takoradi Flour Mills, stated, “There are currently four companies operating flour mills in the country, and none of them are working at full capacity. It will be interesting to see if all of these can continue to operate because of the extra capacity in the market.” This is part hampered by extremely competitive imports, particularly from countries such as Turkey, where production is subsidised, as well as by high input costs, including import duties, which remain stiff. According to Antoine Moukazel, the managing director of Irani Brothers, “Import charges at the harbour are high, and sometimes erratic, and this is a cost that ultimately gets passed on to the consumer.”

OUTPUT: Preliminary estimates for 2011 output show a slight drop across the board. Maize production slowed 1.8% to 1.84m tonnes that year. Rice was 10.6% lower at 439,636 tonnes. Millet and sorghum output fell by 9% each. Yam, cocoyam and plantains production also fell. Cassava was the outlier in 2011: production jumped 5.6% to 14.26m tonnes, according to the estimates.

The country is reliant on imports for most foods, and is self-sufficient only on some starchy staples, including cassava, yams and plantains. Export strength comes from cocoa, but has also benefitted in the past from niche crops such as pineapples, typically destined for European markets, although a shift in consumer preferences has seen demand for Ghanaian pineapples perform less robustly than hoped. In many cases, however, Ghana’s fruit and vegetable output cannot meet standards to export to developed markets. While most goods are open for export, the government has banned sale of maize and rice abroad for food-security reasons.

SHARECROPPER TO INDUSTRIAL FARMING: The benefit of Ghana’s small-scale approach for both cash crops and staples has been the sector’s ability to employ millions, but the drawbacks are clearly significant, and include the general lack of capital, expertise and awareness of best practises among farmers.

Despite their potential, Ghanaian farmers are not known for their skills, explaining why they have not received as much attention. “A farmer in Zimbabwe is more likely to know about soil content or which fertilisers to use,” said Brian Frimpong, who manages a pan-African agriculture fund for the Accra-based securities firm Databank. The African Agriculture Fund’s mandate is to invest in agribusiness ventures on the continent. It has brought in money from national development agencies, but hopes to attract private capital as well.

More developed forms of agribusiness on a major scale are in the early stages, although low-volume processing activities have been a long-time feature of the sector, including the production of gari, a starchy staple dish made from roasted cassava, and smoked fish for resale in traditional markets. Some large enterprises are gaining an increasing foothold on the domestic market, however, such as Blue Skies, which processes fruits into juices, while multinational investors such as Swiss and US chocolate companies Barry Callebaut and Cargill have established local facilities. One of the main constraints on agribusiness that the country hopes to address in its reform plans is a limited range of locally accessible inputs. A 2008 study by the Organisation for Economic Co-operation and Development found that Ghana produces only 30% of the raw materials that are required by current agribusinesses.

SECTOR ORGANISATION: MoFA oversees policy development and is the main relevant government agency for the sector. By dint of its heft within the sector, a unique body called the Ghana Cocoa Board was created in 1947 to oversee cocoa production. Other agencies involved include the Ghana Investment Promotion Centre (GIPC), which is involved in promoting export-oriented activities and is therefore a major participant in the overall strategy; the Ghana Forestry Commission, which oversees the timber industry; and the new National Food Buffer Stock Company, founded in 2010 with a mandate to provide food security through creating price stability by setting minimum prices for staple crops and storing excess crops without letting them spoil. However, the agency is for-profit, causing some confusion over its role in the market. “We’re encouraging Ghana to be more clear about this agency and its mandate,” said Accra-based World Bank senior agricultural economist Jan Nijhoff.

The current government’s policies are articulated in a document called the Food and Agricultural Sector Development Plan (FASDEP II), which features six priority themes: food security, income growth, boosting competition and integration with domestic and foreign markets, environmental sustainability, improving institutional coordination, and leveraging science and technology. FASDEP II is meant to help modernise outdated sector technology and methods in an efficient and sustainable way to help struggling farmers. The plan focuses on 2010-15, and according to MoFA’s Medium Term Agriculture Sector Investment Plan (METASIP), 10% of the national budget will be allocated to agriculture. To support implementation, MoFA hosted a workshop on METASIP to get the private sector more involved. The government calculates it can boost agriculture’s contribution to GDP by a minimum of 6% per year as well as halving the poverty rate by 2015.

GROWTH STRATEGY: Private partnerships form a crucial pillar of the government’s medium- and long-term plan for the sector’s development, exemplified by the Ghana Commercial Agricultural Project (GCAP), which is a joint effort by the government, the World Bank and USAID. The idea is to take a market-oriented approach (to ensure demand before building capacity), partner with private firms, target specific high-potential zones and products, and enable value-added activities to the greatest possible extent. Small farms own the land and large-scale farmers have the capital, according to the GCAP. The idea is to bring them together. The project objective is to provide increased access to secured land, private sector finance, and input and output markets for smallholder farms from public-private partnerships (PPPs). The project will establish a mechanism for matching interested communities with available land to interested investors. The programme calls for several PPPs to provide needed infrastructure, such as developing an irrigation project covering 7000 ha. Ghana has recently established a PPP-support unit within the Ministry of Finance and Economic Planning in order to ensure successful execution of partnerships, which may answer some of the common concerns private partners have about the bankability of PPPs, such as a lack of coordination between financing and executing agencies on the public side.

GCAP also outlines legislative reforms to make the legal environment clear, develop capacity-building programmes and increase storage capacity. GIPC was in the midst of an inventory of storage options in mid-2012.

PRIVATE INVOLVEMENT: Recent years have seen a shift for the sector, one that is indicative of the emphasis on improving agricultural value: the presence of the private sector as a chief participant. Increased attention from foreign investors following the financial crisis, especially from major Asian conglomerates, along with the food-price shocks of recent years have reinvigorated capital spending. “People are seeing that Ghana is a much more attractive place for investment,” said Fenton Sands, the USAID senior food security officer in Accra. “It has done well in bringing down overall poverty in the country, and there is a trend to partner with the private sector. The convergence between business and development is really encouraging.”

One of the most discernable trends in this larger role for the private sector is a shift to an inclusive model focused on end-markets, with a concomitant transition from small-scale farms to larger enterprises that are commercially viable for outside investors without sacrificing jobs for locals. “Investors who come in wanting to do business in an enclave are not going to be received well,” Sands said. “But if you get a foothold somewhere and this works, there will be a rush of people coming in.” Palm oil provides a handy example. The oil palm crop is native to the region, and 60 years ago countries like Malaysia and Indonesia, which now rank among the largest palm oil producers in the world, came to Ghana to explore the potential of commercial production. Local production declined in the subsequent years, but with initiatives from firms such as Singapore’s Olam, the sector is now seeing a large push for improved production by a mix of public, private and foreign interests. Backing up long-standing major initiatives on oil palm, this experience could be useful for other crops as well (see analysis).

Some exceptions apply, of course. Cocoa farms account for a fifth of exports and support almost a fifth of the population, and the sector is overwhelmingly small-scale. It is a commonly held opinion that for reasons specific to cocoa beans, Ghana’s small-scale approach is the explanation for its reputation as the highest-quality crop available, and that means reform plans may not apply here. The reason for this is that the best cocoa is produced when the beans are uniformly dried. The piles that come from small farms are smaller and therefore get more even sun exposure, while piles from large farms dry out unevenly, leaving processors with uneven moisture in the beans.

GLOBAL APPEAL: In many ways, the increased attention from foreign investors on Ghana’s agricultural sector is part of a broader trend across the continent to explore opportunities in crop cultivation, fisheries and animal husbandry (see analysis). In 2010 McKinsey, a global consulting firm, said an African agriculture sector unbound from its constraints could triple output by 2030, jumping from $280bn in value to $880bn. A global investor survey for the Abu Dhabi Investment Company found that, as of September 2011, agriculture ranks second in terms of attractiveness for potential foreign investors in Africa, behind resource extraction.

However, Ghana is drawing particular interest as a testing ground for new investment because of its track record as a development partner with foreign agencies. For example, on the small scale, Global Giving, which is dedicated to making small donations to support specific projects, has a donation site dedicated to funding Ghanaian farmers. The country also has some clear competitive advantages; most noticeably, strong logistical links with both major consumer markets abroad and relatively robust regional and domestic markets. It has significant production potential in a number of categories where imports currently dominate, including staple crops, and given the low levels of productivity due to cultivation and distribution inefficiency, there is room for high returns. According to MoFA figures, adapting best practices would boost the maize yield by 37% and cassava by 55%. Furthermore, rice output could increase by 42% and yams by 36%.

ACQUIRING LAND: GCAP programmes address wider sectoral constraints. However, crucially, there is little recourse in the programme for agriculture-specific transport projects, the lack of which is currently a major bottleneck. Building Ghana’s infrastructure needs, including roads, ports, bridges and other means necessary for transporting crops, will cost $1.6bn per year over the next 10 years, according to PwC. “The infrastructure requirements are huge, and the government obviously finds itself in a challenging position to fulfil them,” said Amit Agrawal, the senior vice-president for West Africa at Olam. “It is not an investment that private agro-industrial companies will find it easy to make, because the returns on investment for infrastructure can take a long time, sometimes between 20 and 30 years.” Land ownership is often identified as one of the chief obstacles to large-scale farming in Ghana and GCAP seeks to overhaul the current registration and acquisition process to improve transparency. The country has no proper land registry, making access to finance for a large project nearly impossible because the right to work the land cannot be easily established. Much of Ghana’s cultivatable area is privately owned or under the control of tribes. Unsettled and overlapping claims are common. It is thought that developing a database of land and owners and surveying them on their openness to foreign investment could resolve this problem. Headed by GIPC a database project was getting under way of June 2012 by creating a list of potential spots where an agreement can be made that is lasting and mutually beneficial (see analysis).

With the list in hand, the next step would be to court foreign investors using methods designed to incentivise locals to support large-scale farming. The first option is to offer land only on a leasehold basis, and, as a part of the cost of accessing it, to offer locals an equity stake in the project. If they have such a stake, it is believed that people would work in support of large-scale ventures instead of opposing them. “If you do not have local buy-in, even if you have the approval of chiefs you will still have problems,” said Nijhoff.

The other option is a nucleus out-grower scheme. In this model, local farmers will stay on their land, but as out-growers supported by a foreign investor who may establish a nucleus farm. The nucleus farmer would provide seed and inputs, support and expertise, and a guaranteed price for output. Out-growers would be obligated to sell what they produce to the nucleus.

FINDING A SOLUTION: Solving the land acquisition problem through solutions outside ownership could potentially threaten success. “One important lesson from reviews of other agro-investments in emerging markets is that a substantial portion of anticipated financial returns – typically around one-third – is derived from the appreciation in the value of the assets, i.e., land,” according to a World Bank evaluation. “Expected returns from productive activities may need to be commensurately higher for Ghana to be competitive.”

Out-grower schemes come with the risk of out-growers selling to someone other than the nucleus farmer, said Shashi Kolavilli, a programme leader in Accra for the International Food Policy Research Institute (IFPRI). Nucleus farmers often offer lower prices to reflect the costs they incur setting up out-growers with seeds, input and services. For crops with a local market, it may be tempting to sell outside the system. For that reason, crops for which there is a small market may be best suited to that model. An early example of this new programme, Integrated Tamale Fruit Company, is producing organic mangoes for European markets. Branding something organic in Ghana is not common and rogue buyers are unlikely to pay a premium for the products.

OUTLOOK: It is clear that Ghana’s aim to attract foreign investors is important to improving the sustainability of staple crops, reducing the size of its import bill, overhauling upstream efficiency and increasing local processing – all without negatively affecting employment. However, due in part to the broader trend of foreign capital to consider opportunities in African agricultural industries, combined with some fundamental regulatory improvements and the country’s broader competitive advantages, the potential for high yields and increased returns is clear. Public spending on agriculture in Africa has lagged behind the developing world in recent decades. African governments spent 5-7% of GDP on agriculture from 1980 to 2005, compared with a range of 6% to 15% in Asia, according to a 2009 IFPRI study. However, with food security now a bigger issue in Africa, the sector is ripe for more attention and investment. Steady growth in the medium-term across the sector seems inevitable given moves by local entrepreneurs and multinationals.