The Addis Ababa based think tank, Access Capital forecasted that Ethiopia’s “plans for large gains in food production face daunting ‘execution risks’, both for commercial and small-holder farms, but will still materialize’; adding that:

‘The main reason for optimism with respect to the food production outlook is: (i) the strong policy push and investor response to put in place hundreds of modern commercial farms and (ii) the equally determined plans in place for comprehensive, output-increasing interventions within the still-dominant smallholder agricultural sector.’

Access Capital presented its analyses on its recently published annual report, titled ‘the 2011/12 Macroeconomic Handbook’ that focused on the new Five-Year (2011-15) Growth and Transformation Plan (GTP) of Ethiopia.

The report expects that: ‘The agriculture sector, representing 41 percent of GDP but a much higher share (85%) of employment, is set to carry the burden of the “transformation” sought under the GTP and will most likely achieve’.

The think thank considers the GTP’s goal of achieving ‘an agricultural transformation involving rising acreage, rising yields, and rising exports is a very realistic possibility’. Adding that:

‘First, there is now a deliberate push to put in place hundreds (perhaps thousands) of modern commercial farms, and second because the still-dominant smallholder agricultural sector is set to benefit from a wide range of output-increasing policy interventions (in the form of more irrigation, more fertilizers, better seeds and better farming practices).’

In its analysis of Smallholder farms, the report estimates an 8% annual growth in Agricultural GDP rather than a doubling of agricultural output. The report opines that:

A leap in the productivity of smallholder agriculture—involving the 12 million small farms currently operating in Ethiopia—is the second and simultaneous transformation expected within agriculture to boost food production levels and thereby stimulate overall economic growth…….We would question whether a doubling of agricultural output—as envisaged under the GTP—is possible without a more radical set of policies, but there is still a package of policies and interventions that in all likelihood can sustain agricultural growth by at least at the same strong growth rate—of 8 percent per year—as what was registered in the past five years.

The set of GTP policies and interventions aimed at boosting smallholder agricultural output are welcome for their comprehensive and complementary nature. Many of the policies have already been in place gradually in recent years and explain the rising production and yield figures registered so far (Table 2.5). At the same time, the intention is for an intensification of these early efforts, including through the efforts of a newly formed Agricultural Transformation Agency that is backed with high-level funding from the Gates Foundation and other donors and that can potentially play a spear-heading role in precisely the task—of agricultural transformation—for which it is assigned. Most notable among the public interventions planned under the GTP for the smallholder agriculture sector include improving seed quality and supplies, expanding irrigation, intensifying fertilizer use, upgrading farmer extension services, and adapting farm products to varying land and soil characteristics.

Regarding ‘commercial farms’, the report opines that ‘there is little reason to doubt….the promises of increased food output will turn into a reality’.

Though ‘this is a sector always vulnerable to “execution risks”,’ there are  ‘at least three reasons’ to be optimist. The report lists:

* First, the conducive policy framework put in place for commercial agricultural ventures in 2009 remains in place and has recently been strengthened even further.
* Second, a big part of the increased food production is coming simply from putting new lands under commercial cultivation, a one-off and relatively “easy” means of boosting food production.
* Third, among commercial farms with land allocations, several of them are already operational, often well past the land-clearing process and either in the planting phase or already producing their first harvests.

There are two factors that could potentially ‘jeopardize the promised gains from an expansion in commercial farms’. However, neither are likely to be critical, according to the report.

The first factor – i.e., financial, infrastructural, administrative and the like limitation – would be neutralized by:

‘’The dedicated government unit at the Ministry of Agriculture is, for example, screening potential investors with much stricter standards to ensure that initial capital outlays are actually put in place and tight ‘delivery periods’ of as short as six to twelve months are being imposed as an additional check on performance (i.e., investors who fail to develop a given tract of land as promised lose the lease to the undeveloped parts of land).

The second factor is, the report indicates, ‘there is a modest risk that a backlash against commercial farm allocations builds up as the public discourse on this issue is sometimes dominated by highly critical commentary focused on themes of “land-grabbing”, population displacement, and/or environmental concerns.’ 

The report downplays the impact of the “land-grabbing” criticism by arguing:

while possibly legitimate concerns in other parts of the world, the validity of such criticisms is quite weak in the Ethiopian case and the potential for a domestic backlash particularly unlikely: Ethiopia is a country where any gains to food production are to be welcomed given still-fragile food security conditions; the allocations are open to and being taken up by domestic as well as foreign investors; the scale of the land allocations involve just 3 percent of total land and cannot by any stretch be seen as large-scale land-grabbing; and the areas of land involved are generally remote areas with no or very little populated settlements. For these reasons, we think both of the above mentioned potential risks are unlikely to adversely impact the production increases envisaged from most of Ethiopia‘s commercial farms.

The 96-page report, organized in terms of ten major economic and business themes, discusses various aspects of the Ethiopian economy.

Read below the agricultural section of the report: [two tables are not included due to their length; the formatting below is original]

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Table 2.1: Ethiopia’s Agriculture Potential: Starting From a Low Base Ethiopia

[Source: CSA Agricultural Sample Surveys, FAO Country Stat, IFPRI]

An Agricultural transformation—involving a proliferation of modern, commercial farms and a leap in the productivity of smallholder agriculture—is a realistic and likely possibility within the course of the next few years, and will hence be a key driver of economy-wide growth.

Key Points:

* Agriculture will have to be a key sector to drive any economic “transformation” in the Ethiopian context, via changes in farm types, in farm inputs, and in farm products.

* Plans for large gains in food production face daunting “execution risks”, both for commercial and small-holder farms, but will still materialize in our view.

* The main reason for optimism with respect to the food production outlook is: (i) the strong policy push and investor response to put in place hundreds of modern commercial farms and (ii) the equally determined plans in place for comprehensive, output-increasing interventions within the still-dominant smallholder agricultural sector.

The agriculture sector, representing 41 percent of GDP but a much higher share (85%) of employment, is set to carry the burden of the “transformation” sought under the GTP and will most likely achieve it in our view. The need for a structural transformation in this sector is not in doubt, given Ethiopia‘s long-standing challenges in ensuring nation-wide food security for its population. Moreover, the scope for an agricultural transformation is significant when one notes that Ethiopia‘s smallholder farmers: (i) cover only 19 percent of potentially cultivable land; (ii) utilize irrigation for only a tiny share (1.3 percent) of their land; (iii) apply fertilizer to only 36 percent of land, and (iv) produce yields that are just half of the world average (Table 2.1). These four remarkably low starting conditions offer tremendous scope for improvement with carefully planned policy interventions and with the shifting role of farms as business enterprises, be it for smallholders moving from subsistence farming towards production of a marketable surplus or for large modern farms with an explicitly commercial orientation.

Changes in farm types, in farm inputs, and in farm products will be the most notable features of the agricultural sector in the coming years. To be more specific, farm types will gradually evolve to include some large-scale, commercial farms; farm inputs will be enhanced to deliver better seeds, more fertilizers, and other yield-increasing inputs; and farm products will expand increasingly to include high-value, export-oriented produce. All of the above are in line with the key objectives of the GTP, which has laid out detailed agriculture sector targets as laid out in Table 2.2 below.

For two main reasons, we think an agricultural transformation involving rising acreage, rising yields, and rising exports is a very realistic possibility within the next few years. Why? First, there is now a deliberate push to put in place hundreds (perhaps thousands) of modern commercial farms, and second because the still-dominant smallholder agricultural sector is set to benefit from a wide range of output-increasing policy interventions (in the form of more irrigation, more fertilizers, better seeds and better farming practices).

New Commercial Farms

For food-producing commercial farms, although this is a sector always vulnerable to “execution risks,” there is little reason to doubt—in our view—whether the promises of increased food output will turn into a reality. We think this is the case for at least three reasons.

First, the conducive policy framework put in place for commercial agricultural ventures in 2009 remains in place and has recently been strengthened even further. As we highlighted in our 2009 Macro Handbook over a year ago, a combination of policy initiatives have laid the groundwork for the take-off in commercial agriculture, including: a government allocation of 3 million hectares of land for commercial farming investors; a streamlined process of providing large agricultural land leases via the Federal Government; and a strong package of incentives. The latter include: (i) income tax holidays that range from 3 to 7 years where the grace period becomes incremental depending on the agricultural value added created by the investment scheme and the proportion of exportable products; (ii) duty free imports of capital goods used for projects; (iii) no restrictions on repatriation of corporate profits; (iv) no restrictions on the use of the land for particular crops or purposes (e.g. exports); (v) absence of water charges, allowing investors to dig for and utilize underground water sources without charged, and ; (vi) long-term leases (up to 45 years) with fixed prices (which are generally set for a period of 10 years and then subject to an increase of only 20 percent).[9] All of the above make for very favorable supply-side factors which, alongside equally favorable demand-side factors (rising populations, incomes, and urbanization), make for very positive prospects for rising commercial farm production.

Second, a big part of the increased food production is coming simply from putting new lands under commercial cultivation, a one-off and relatively “easy” means of boosting food production. Ethiopia is one of 11 African countries identified as having the largest amounts of still-uncultivated land, estimated at 59 million additional hectares according to national statistics.[10] A large part of the still uncultivated lands are being developed via Federal Government allocations for new commercial farms. Our compilation of the relevant data suggests that about 350,000 hectares, or one-tenth, of the planned 3 million hectare allocation has already taken place. Of the already granted allocations, we find that the five largest commercial land recipients are: (1) Karuturi Agro Products Plc; (2) Shapoorji Pallonji; (3) BHO Bio Products Plc; (4) Ruchi Soya Industries; and (5) CLC Spentex Industries Limited (see Table 2.3). The average size of the land leased is 15,000 hectares, but excluding the top two exceptional cases, the median commercial farm size allocation is 5,000 hectares. We also find that the mix between foreign and domestic investors (based on land area) is about 5-1, though this changes to just 2-1 if we exclude the top two cases. In terms of crop production, plans by commercial farm investors are mainly focused on cereals and cash crops. The focus on basic cereals such as wheat and maize makes particular sense, given the country‘s large reliance on importing such food items in recent years: for example, cereal imports (which are comprised mainly of wheat), have jumped from just $157 million about a decade ago to $480 million in 2010 , or from 2 to 4 percent of total imports.

Third, among commercial farms with land allocations, several of them are already operational, often well past the land-clearing process and either in the planting phase or already producing their first harvests. Some of the initial beginners include Karuturi PLC, Saudi Star, and BHO Bio Products. Many of the above have spent the past two years in the clearing and preparation of lands for planting. Most of the largest farms expect to realize their first crops in 2012 and are targeting yields that will be about 2 or 2½ times the norm seen from smallholder farms. If this is realized, the initial allocation of around 227,000 hectares to the top five commercial farm allocation recipients alone could potentially be the equivalent of almost half a million smallholder farms based on the latter‘s 2010/11 average produce and yields.[11]

All of the above encouraging trends—favorable policies, the large pipeline of new projects, and the start of several promising commercial farming operations—are of course subject to risks and two in particular could jeopardize the promised gains from an expansion in commercial farms. First, there is the usual fear that promised and committed investments may not materialize due to a host of “execution risks”: investors failing to put in their equity contributions; becoming unable to find loan financing; or encountering operational problems related to poor infrastructure, land clearing, and so forth. However, it is becoming increasingly unlikely for investments to fall through due to such factors. The dedicated government unit at the Ministry of Agriculture is, for example, screening potential investors with much stricter standards to ensure that initial capital outlays are actually put in place and tight ‘delivery periods’ of as short as six to twelve months are being imposed as an additional check on performance (i.e., investors who fail to develop a given tract of land as promised lose the lease to the undeveloped parts of land). Second, there is a modest risk that a backlash against commercial farm allocations builds up as the public discourse on this issue is sometimes dominated by highly critical commentary focused on themes of “land-grabbing”, population displacement, and/or environmental concerns. However, while possibly legitimate concerns in other parts of the world, the validity of such criticisms is quite weak in the Ethiopian case and the potential for a domestic backlash particularly unlikely: Ethiopia is a country where any gains to food production are to be welcomed given still-fragile food security conditions; the allocations are open to and being taken up by domestic as well as foreign investors; the scale of the land allocations involve just 3 percent of total land and cannot by any stretch be seen as large-scale land-grabbing; and the areas of land involved are generally remote areas with no or very little populated settlements. For these reasons, we think both of the above mentioned potential risks are unlikely to adversely impact the production increases envisaged from most of Ethiopia‘s commercial farms.

Expansion in already-established agricultural exports

Beyond the changes expected from new commercial farms, a large part of the anticipated agricultural transformation in Ethiopia will come from the planned boost to six agricultural commodities in which the country has already established an export record—four of which are particularly well developed (coffee, oilseeds, pulses, and flowers) and two of which are only just emerging (fruits and vegetables and meat and livestock). For all six commodity groups, the next five years are expected to show large production and export increases (Table 2.4), sometimes as much as three to five-fold increases. As these sectors are almost exclusively in the private sector, these ambitious export increases will have to be generated by existing private sector firms who are capable and ready to undertake the large capacity expansions and by prospective new entrants to whom these sectors still offer promising green-field opportunities.

Expansion in four well-established agricultural exports: Four large agricultural products—coffee, oilseeds, pulses, and flowers—currently make up the bulk of the country‘s agricultural exports. With the exception of the flower sector, which mainly comprises several dozen large, labor-intensive greenhouse-using farms, the agricultural exports are largely grown by small-holders whose produce is aggregated by cooperatives or traders for supply to central markets. Production and yield-improving initiatives for the smallholder sector (see below) will thus provide part of the underlying expansion for this sub-sector. But, in addition, changes in the ‘super-structure’ of markets and institutions in which these products operate will also help. Products like coffee and sesame that are currently traded at the Ethiopian Commodity Exchange, for example, stand to benefit from two key contributions of the ECX—the incentive to provide higher output across all quality levels (via more readily transparent prices) as well as the incentive to focus on higher value produce (given price differentiation by quality).

Expansion in fruits and vegetables sectors: Despite a potential for fruits and vegetable exports that is as big or even bigger than flowers, Ethiopia‘s exports in this area have only recently and very gradually begun to take off. This is a promising development, as the production of fruits and vegetables tends to offer a high-margin and more stable business opportunity in contrast with the flower sector, which tends to be a low-margin, high volume business and one that, as a luxury/discretionary good, tends to be susceptible drops in demand during difficult economic conditions in European markets. Moreover, the potential for growth in fruits and vegetables is as large as what occurred in the flower industry: Kenya, for example, exports almost the same amount of flowers ($380 million) as it does fruits, vegetables, and other horticultural products ($335 million), yet in Ethiopia the flower sector has taken hold ($170 million exports last year) but the fruit and vegetable export sector is still only beginning ($32 million in exports). Two notable challenges do, of course, exist in this area and explain part of the divergent performance: (i) global health and hygiene certification standards are required and often quite demanding for fruits and vegetables; and (ii) securing regular and adequate air cargo transportation to key European markets has been difficult since fruits and vegetables (much more so than flowers) have demanding temperature control and time-to-market requirements. Both these challenges are gradually being addressed, however, as air cargo issues are being eased with Ethiopian Airlines rapid expansion and some pioneering firms with the requisite global certification standards are emerging. For example, several firms now have ―Global Gap‖ certification and regularly supply UK and other European supermarkets with vegetable exports of several million USD dollars per year.

Expansion in Livestock and Meat Sectors: The livestock segment of the agricultural sector and one of its primary end-products (meat) are likely to become a major part of the agricultural transformation in Ethiopian given the country‘s livestock population (first in Africa, tenth in the world) and a proximity to export markets that happen to have high demand for such products (North Africa and Middle East). The GTP targets in this area foresee a quantum jump in activity levels, as seen from the planned export increase in livestock exports (from 334,000 cattle heads in FY 2009/10 to 2.3 million cattle heads in FY 2014/15) and in meat exports (from 10,182 tons in FY 2009/10 to 111,000 tons in FY 2014/15). These targets are, in our view, certainly within the realm of the achievable given growth rates being observed in both livestock and meat exports (up 74 percent last year and 88 percent in just the first quarter of this fiscal year). For meat exports, in particular, most of the growth can be handled by large capacity-raising and/or expansion plans from some the largest players such as Luna, Elfora Agro-Industries, Organic Export Abattoir, and Modjo Modern Export, in addition of course to the inevitable new entrants that are likely to join the sector—and would be justified in doing so—given the very promising market opportunities in this area.

Smallholder farms

A leap in the productivity of smallholder agriculture—involving the 12 million small farms currently operating in Ethiopia—is the second and simultaneous transformation expected within agriculture to boost food production levels and thereby stimulate overall economic growth. In this case, although the outcomes involved are influenced by a much greater range of variables than is the case for commercial farms, the overall prospects are still strong enough in our view that a major increase in smallholder agriculture is achievable. We would question whether a doubling of agricultural output—as envisaged under the GTP—is possible without a more radical set of policies, but there is still a package of policies and interventions that in all likelihood can sustain agricultural growth by at least at the same strong growth rate—of 8 percent per year—as what was registered in the past five years.

The set of GTP policies and interventions aimed at boosting smallholder agricultural output are welcome for their comprehensive and complementary nature. Many of the policies have already been in place gradually in recent years and explain the rising production and yield figures registered so far (Table 2.5). At the same time, the intention is for an intensification of these early efforts, including through the efforts of a newly formed Agricultural Transformation Agency that is backed with high-level funding from the Gates Foundation and other donors and that can potentially play a spear-heading role in precisely the task—of agricultural transformation—for which it is assigned. Most notable among the public interventions planned under the GTP for the smallholder agriculture sector include improving seed quality and supplies, expanding irrigation, intensifying fertilizer use, upgrading farmer extension services, and adapting farm products to varying land and soil characteristics.

Upstream and downstream industries around agriculture

A host of business activities closely tied to agriculture are set to contribute to, and get a big boost from, the prospective transformation in Ethiopia’s agriculture; this includes upstream industries that provide inputs to farms as well as downstream industries that make use of the outputs produced by farms. The striking element of Ethiopia‘s agricultural sector has been the limited number of such upstream and downstream industries, especially in the form of commercially established operators that have joined these activities for long-term, profit-making motives as with any other business opportunity. In this connection, there is much scope for the emergence and growth of upstream input-providing industries in areas such as the provision of: organic and chemical fertilizers; higher-yielding seeds and plantings; irrigation systems and their associated parts such as water pumps and steel pipes; agricultural tools and equipment; pest control systems; and modern cooling and cold storage facilities.[12] In parallel, there is wide scope for downstream industries that utilize farm outputs (as is later discussed in Chapter 3), including for example wheat derivatives, dairy products, and the processing of edible oil, fruits, and vegetables to name just a few. The full development of such upstream and downstream businesses, as highlighted in a 2010 McKinsey report covering African agriculture, has the potential to add as much as an extra one-third of the value of agricultural produce. If extrapolated to the Ethiopian context, this implies that an extra Birr 70 billion can potentially be derived from agriculture-affiliated upstream and downstream industries over time, including (based on the McKinsey‘s indicative proportions for African countries) activity levels that—focusing on three large segments alone—could be as large as Birr 17 billion in fruits and vegetables processing, Birr 15 billion in grain processing, and Birr 8 billion in livestock related downstream industries.[13]

Footnotes:

[9]. Lease rates for the majority of large commercial farm allocations have ranged from Birr 100-200 (or USD 6 to 12) per hectare per year.

[10]. A recent Mckinsey study notes that 60 percent of the world‘s total uncultivated arable land is within Africa, while according to Ministry of Agriculture and CSA‘s latest land utilization data Ethiopia is showing around 74 million hectares of arable land of which only 15.1 million hectares is currently cultivated counting both small-holder and commercial farms.

[11]. According to CSA data for 2010/11, a total of 12.7 million smallholders farmed 10.6 million hectares in the production of 18.5 million tons of cereals, which gives an average farm size of 1.2 hectares per small-holder farmer and an average yield of 1.75 tons per hectare. Using 227,000 hectares for the (initial) land-holding of the ―Top 5‖ commercial farms and applying 2½ the yield of smallholders gives an estimated ―Top 5‖ commercial farm production of 992,000 tons which is roughly the output produced by 475,000small-holder farmers. Accounting for the extra anticipated allocations to these same ―Top 5‖ commercial farms would double their land size to near 500,000 hectares and imply a potential output gain that is close to that of one million (current) smallholder farmers.

[12]. A recent synthesis report of diagnostic studies and recommendations on Ethiopia‘s agricultural sector entitled ―Accelerating Ethiopian Agriculture Development for Growth, Food Security, and Equity‖ and compiled by the Gates Foundation highlights in particular the role for ―capable, well resourced private sector actors that could have impact in key (agriculture) value chains, including ―efficient, well-regulated, and socially-responsible input suppliers and distributors‖ for supplies of seeds, fertilizers, and agricultural equipment inputs. At present, key input markets tend to be dominated by parastatal agencies such as the Agricultural Input Supply Enterprise and the Ethiopian Seeds Enterprise.

[13]. This is based on the Birr 220 billion in agriculture value-added for Ethiopia as of FY 2010/11, and McKinsey‘s estimate—based on African country norms—of potential upstream industries equivalent to 4 percent of agriculture value-added and downstream industries of 28 percent of agricultural value-added. Within the latter, the largest potential opportunities are identified as being with fruits/vegetables processing (28 percent of downstream industry value-added), cereals processing (24 percent) and livestock processing related industries (14 percent).

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* To download the report document – Ethiopia: Macroeconomic Handbook 2011/12  [1.79 MB | PDF]

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