Why agribusiness?Why now?

What challenges & opportunities?

John StaatzMichigan State University

Patrick KormawaUNIDO

Presentation at IFPRI, Oct. 25, 2011

Why agribusiness?

• Recent African growth:– Commodity boom– De-industrialization since 1970s– Agricultural growth largely through extensification– Cf. Asia. Is this growth sustainable?

• Key role of agribusiness in CAADP “Big A” Agriculture-led growth approach – Declining contribution of farming in SSA GDP (42% in 1965;

12% in 2008)– “Ag as engine of growth” argument depends on strong

backward and forward linkages as well as consumption linkages

Why agribusiness?

• Structural transformation as a shift in the locus of value added in the economy– From >60% in farming in poorest countries to

<10% in industrialized countries– Agricultural transformation inherently linked to

agribusiness and agro-industry transformation.

Why agribusiness?

• Potential contributions to vital objectives:– Employment generation (the big time bomb)– MDG 1 (hunger and poverty alleviation)

• Via employment generation• Contributions to dealing with the food price dilemma

– Lower unit costs of food– Market segmentation

– MDG 3 (empowering women)– MDG 8 (developing global partnerships for development)

• It is the basis of much of Africa’s current manufacturing capacity….but it is highly heterogeneous

Agro-industry as percentage of total manufacturing

value-added (selected countries, most recent year)

0

10

20

30

40

50

60

Senegal(2002)

Madagascar(2006)

Ethiopia(2006)

Ghana (2003)

Morocco(2006)

Mauritius(2004)

Kenya (2006)

Botswana(2006)

South Africa(2006)

Perc

enta

ge (%

)

Source: World Development Indicators , 2009

Characteristics Artisanal Semi-Artisanal Semi-Industrial IndustrialScale Micro-enterprise Small enterprise Medium enterprise Large enterprise

Labour Family or social Family Large and moderately specialized

Large and specialized

ProductsTraditional products, often “humid” with a

short shelf-life

More or less standardized products,

stable shelf lifeDiversified products with stable shelf life

Products that meet grades and

standards; branded products

OrganizationInformal enterprise.

Little of no organization (embryonic)

Beginning to be organized

Formal; separated functions of employees;

accounting systems

Very modern (Administrative

units, divisions and departments)

InvestmentsSmall to none. Operations are

essentially manualSome machines Important

mechanizationImportant and

modern

Production Low level of production

Regular and larger level of production

More mechanized processes

High capacities for production

Types of Markets Local and very targeted Local distribution

National distribution and sometimes

subregionalAll markets (local, regional, overseas)

DistributionShort distribution

channels; direct sales to consumers

Direct sales and/or by intermediaries

Long distribution channels

Long and professional

channelsEst. % of total

processing firms in West Africa

75% 20% 5%

Characteristics of different types of processing firms in West Africa

Source: Ilboudo and Kambou (2009)

Why now?

• Growing demand– Internationally, particularly in emerging economies– Regionally– Nationally

• National and regional markets often receive less attention but are largest immediate markets

• Regional markets under-exploited due to intra-Africa trade barriers

Projected increases in intra-Africa demand 2000-2030

38

50

10 10.5

150

2.9 1.6

30

0

20

40

60

80

100

120

140

160

High-value exports Commodities Urban foodstuffs

US

$ bi

llion

2000

2030

Potential smallholderincome from meetingthis demand

Source: NEPAD Secretariat (2005)

Structure and size of Sub-Saharan Africa’s agricultural market

Eastern Africa

Southern Africa

Western Africa Total Africa

Traditional exports to non-Africa (%) 10 13 15 13

Non-traditional exports to non-Africa (%) 6 15 7 9

Other exports to non-Africa (%) 2 4 3 3

Intra-African trade (%) 2 6 1 3

Domestic markets for food staples (%) 80 63 74 73

Total market value (billions of US $) 22 19.1 27.2 68.2

Source: Diao, et al. (2006)

Why now?

• Shifts in share of agro-processing from industrial countries over past 30 years

• Potential future shifts due to increasing costs of water in parts of US and Asia

• Business environment improving in Africa– Macroeconomic reforms– More political stability– Real moves towards regional integration, although

much remains to be done

1990 1995 2000 2005 2006 Growth rate (%)

Processed and preserved meat

Industrialized 30.5 45.9 42.5 63.3 67.4 4.58

Developing 2.0 7.8 7.7 17.2 18.5 13.26

World 32.5 53.78 50.2 80.5 85.9 5.68

Processed and preserved fish

Industrialized 14.8 18.9 19.3 27.9 29.6 4.25

Developing 7.0 18.6 22.1 30.4 34.8 9.29

World 21.8 37.4 41.3 58.4 64.4 6.4

Processed and preserved fruit and vegetables

Industrialized 10.4 17.4 16.9 25.9 29.4 5.97

Developing 3.8 8.0 8.5 14.4 16.3 8.58

World 14.2 25.4 25.4 40.4 45.7 6.8

Vegetable and animal fats and

oils

Industrialized 7.2 13.3 10.9 19.7 20.8 6.46

Developing 5.4 17.0 14.5 28.9 30.9 10.07

World 12.6 30.4 25.3 48.6 53.7 8.3

Processed food exports for selected production categories 1990-2006 (US $bn)

Source: Industrial Statistics Yearbook (UNIDO,2009a)

What challenges and opportunities?

• Basing agro-industrialization on comparative advantage (value addition vs. value subtraction)

• Where to focus among different types/scales of firms?

• Success depends on sectors outside of agriculture, especially:– Electrical power– Transport– ICT

What challenges and opportunities?

• Ease of doing business environment (nationally & regionally)– Contract enforcement– Land tenure rules for foreign investment– Platforms for multi-actor dialogue (e.g., Value-

Chain Participant Councils & other professional organizations)

• Making regional integration real – e.g., the implementation of ECOWAP

What challenges and opportunities?

• Human capital development– Vocational and agricultural higher education– Greater focus on off-farm parts of food system—

e.g., food science, packaging, logistics– Managerial skills for various levels/types of firms– Policy analysis skills for agribusiness issues within

government. • Financing. Limits of:– Traditional bank financing– Microcredit

Importance of selected determinants of competitiveness in the four economies of agriculture

Determinants of Competitiveness

Production, Assembly, Transformation (Processing) & Final Distribution of:Undifferentiated Primary

CommoditiesDifferentiated Primary

Products Semi-Processed Products Consumption-Ready Products

Natural Resource Advantage, Factor

EndowmentsGenerally critical, but the mobility of technology is likely

reducing its importance.Little importance, but

varies with the mobility of primary outputs.

Little importance, but varies with mobility of

primary and semi-processed products

Cost-Reducing TechnologyMandatory, but

technology is increasingly mobile.

Some importance, but product differentiation requires certain characteristics be reflected in production practices; technology is generally mobile.

Human Capital and Managerial Expertise

Some importance; skills application of production technology important, many people involved.

Great importance; skills are critical, especially in organization and coordination of activities, with fewer

people involved.

Quality-Enhancing Technology

Some importance: Quality, transportation, etc.

Some importance: Quality, transportation, etc.

Great importance; end-use characteristics most important

Product Characteristics and Non-price Factors

Some importance: grades and standards provide

information

Moderate importance: product differentiation

possible through quality differences

Great importance: degree of product differentiation and other activities determine the amount of value added.

Firm Strategy Minimum cost is only feasible strategy.

Some importance: cost and differentiation are

possible strategies.Great importance: cost leadership and product

differentiation, or a combination may be pursued.

Industry StructureInput Supply, Marketing

and Distribution

Some importance: markets provide vertical

coordinationImportance varies; policies greatly influence competitiveness and trade patterns. But,

often the policy impacts are indirect. Technical barriers matter most

Infrastructure Important to cost competitiveness. Important to cost competitiveness, product differentiation, and innovation.

Regulatory Environment and Trade Policies

May determine trade patterns

Importance varies; policies greatly influence competitiveness and trade patterns. But often, the policy impacts are indirect. Technical barriers matter most.

Source: Abbott and Brehdahl (1993)

Lessons from others’ successes—e.g., Brazil, Thailand, Malaysia

• Policy Reforms• Market orientation in line with comparative

advantages • Use of trade negotiations and agreements• Investment in agro-industrial research and

extension services• Challenges of social inclusion and

environmental sustainability

Contentious issues

• Role of GMOs• Small vs. large farms and firms• Climate change• Development of biofuels value chain• Regional integration vs. national interests• Land tenure/ “land grabs”

7 pillars of agribusiness development

1. Enhancing agricultural productivity2. Upgrading value chains3. Exploiting local, regional and international demand4. Strengthening technological efforts and innovation

capabilities5. Promoting effective and innovative sources of financing6. Stimulating private sector participation7. Improving infrastructure and energy access

Cross-cutting issue: Mechanism for partnerships—Policies and institutions

Summary of UNIDO’s agenda for action: Synopsis of program framework for agribusiness development in Africa

1. Public-private sector dialogue on agribusiness development

2. Technical cooperation for agribusiness development

3. Aid for trade for agribusiness exports4. Global agribusiness partnerships5. Agribusiness knowledge and information

sharing6. Program governance

Thanks very much!