The challenge of financing Africa s food trade. Dr Edward George Head of Soft Commodities Research, Ecobank 4 June 2014, Geneva

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1 The challenge of financing Africa s food trade Dr Edward George Head of Soft Commodities Research, Ecobank 4 June 2014, Geneva

2 Section 1 Drivers of Africa s food demand

3 Sub-Saharan Africa is heavily dependent on food imports Selected food imports to SSA, US$ millions, ,000 5,000 4,000 3,000 2,000 1,000 0 Source: Intracen. Rice Fish Wheat Sugar Flour & milling products EAC ECOWAS SADC Palm oil Dairy products Maize SSA s imports of these foods totalled US$25.2bn in Rice dominates imports, reflecting West African tastes for foreign aromatic varieties. ECOWAS is by far the largest importing region, reflecting Nigeria s food imports. 3

4 Food weighs heavily on rural and urban budgets Nigerian rural consumption (ave) Nigerian urban consumption (ave) Food & non-alcoholic beverages 12% 5% 1% 2% 1% 3% Alcoholic beverages & tobacco Clothing & footwear Utilities 5% 1% 8% 1% 4% 5% 0% Furnishing & household equipment Health 22% 54% 71% Transport Recreation & education 5% 0% Miscellaneous (incl. telecoms) Source: BoAML. Rural populations in Nigeria spend 71% of their income on food. Despite higher income levels, urban populations spend over half of their income on food. Urban populations have more disposable income, which can drive local services. 4

5 Urbanisation is advancing rapidly By 2050 over half of SSA s population will be urban Urbanisation rates as % of total population SSA East Africa Central Africa Southern Africa West Africa SSA s rate of urbanisation has risen from just 11.2% in 1950 to 36.7% in West Africa is urbanising faster than any other region in Africa, driven by Nigeria. Only East Africa is lagging behind the African average. Sources: UNPF, Ecobank Research. 5

6 Consumption levels are constrained, but rising Sugar consumption, kg per capita, 2010 Palm oil consumption, kg per capita, 2010 Ethiopia Madagascar Mozambique Tanzania SSA average Uganda Zambia Zimbabwe Malawi India Kenya South Africa EU Swaziland Brazil Ethiopia Rwanda Mozambique Zimbabwe DRC SSA Tanzania India EU South Africa Angola West Africa Kenya Indonesia Malaysia Sources: World Bank, ISO, FAOSTAT, Ecobank Research. Average consumption of sugar and palm oil is low. High prices & limited supplies have restrained consumption, but strong population growth and urbanisation is increasing demand. An emerging African Middle Class will also boost demand as disposable incomes rise. Ecobank 2013 Africa s external and intra-regional trade Dr Edward George 6 December

7 Spending on food is forecast to triple by 2022 Change in urban household spending, US$ millions, 2012 vs ,000 Accra Lagos Nairobi 6,000 5,000 4,000 3,000 2,000 1,000 0 Food & groceries (2012) Food & groceries (2022) CFTA (2012) CFTA (2022) Hardware (2012) Hardware (2022) Furniture & Furniture & appliances appliances (2012) (2022) Mobile phone (2012) Mobile phone (2022) Spending on food in Accra, Lagos and Nairobi will rise by 230% in Nigeria will account for most of this increase, driven by urban population growth. Sources: BoAML. 7

8 Dietary habits are changing, boosting food imports Africa s urban populations are consuming less grain and more meat, dairy, and fruit and vegetables. Rice imports from South & South-East Asia are surging to meet urban tastes. Western-style fast food is increasingly popular, driving up demand for breadbased products. This is in turn is driving a surge in wheat imports, notably in West Africa. 8

9 Section 2 Financing Africa s agricultural food chain

10 Risk versus finance: pulling in opposite directions Harvest / processing Warehouse in origin country (e.g. Mali) Transport Warehouse in consuming country (e.g. EU) Revenue Country Risk Crop Risk Producer Risk Quality Risk Logistics Risk Warehousing Risk Credit Risk 10

11 Financing needs to flow through the chain Demand for financing flows up the chain, and financing down it. Each link in the chain finances the previous link, as it depends on the commodity flow to sustain operations. Farmers tend to get financing for seed, fertiliser & pesticides from local traders & processers. They in turn seek financing from the trading houses & offtakers. But given the high risks at the start of the value chain, too much financing is crowded around the end of the chain. As a result, financing Africa s agricultural value chain is disjointed. 11

12 Repayment Inventory finance predominates The starting point for all discussions Typical inventory finance model Bank Repayment Buyer Banks prefer this type of financing as it carries no crop or quality risk. This model is typical for national agencies and large traders. Payment Warehouse receipt Commodity Warehouses can be located on the coast or in the interior. More complex financing structures and higher compliance requirements dissuade many banks from financing further up the chain. Exporter Warehouse Farmers must take crop risk. Commodity Source: Ecobank Research. 12

13 Pre-Export Finance (PXF) is riskier This model is dependent on the performance of the borrower Maize marketing value chain, Ghana Banks finance the purchase of inputs, including: Seed Fertilser Pesticide Tools Transport The bank takes crop risk, but mitigates the repayment risk through structures like the Letter of Credit (LC). The farmer, the trader or the buyer repays the bank. This model works best with cooperatives and outgrower schemes. Sources: UNCTAD. 13

14 Working capital, overdrafts and global facilities The loosest form of financing Many clients have to use working capital and overdrafts as a substitute for trade finance. These types of financing are available only to the bank s trusted clients. Banks offer huge facilities to national agencies to finance their entire operations throughout the season. Facilities offered to the big trading houses are the loosest of all, with few conditions. Global facilities give trading houses the flexibility to run a pan-african trading strategy. 14

15 Trading Houses: the new financiers By recycling money trading houses have become shadow banks Trading houses offer their suppliers a range of financing options: Discounted bill of exchange Prepayment The offtaker prepays the supplier via the trader. Ownership structures Forfaiting & repo. Discounted bill of exchange (right) The trading house pays the supplier and receives a bill of exchange from the trader which can be discounted by the bank. Discounted invoices The supplier can immediately cash the invoice from the offtaker. Sources: HFW, Ecobank Research. 15

16 SMEs are being squeezed out New entrants are starved of trade finance SME financing requirement in SSA, 2012 SMEs make up 90% of businesses in SSA and most are de facto in the informal sector. 80% already have bank accounts, but lending to them is limited by their lack of credit history. The IFC estimates total SME lending in SSA at US$25bn-30bn, leaving a gap of US$80bn-100bn. The major losers are the Missing Middle, SMEs that fall between micro-smes and large SMEs. Banks focus on their main clients is starving SMEs of finance and choking off the emergence of new players to challenge the market leaders. Banks could address this issue by having a portfolio of SME loans to spread the risk. 77% Available financing 23% Financing gap Source: IFC. 16

17 Section 3 Key opportunities to finance Africa s food value chain

18 Value chain financing: from farm to fork Source: FAO. The key to a successful agricultural sector is knitting the value chain together: Inputs Seed & seedlings, fertiliser & pesticide Farmers & cooperatives Training, financing, market for goods Agri-processors Financing (working capital & capital investment) Logistics Warehousing, ports, roads, railways, border crossing Traders & retailers Financing (inventory & pre-export) Exporters & offtakers Financing (inventory & pre-export) 18

19 Mobile banking & money transfer Mobiles bring huge advantages to farmers & traders Mobile banking & money transfer is highly developed in East Africa, but has not taken hold in West Africa. Mobile payments can considerably reduce losses caused by theft & embezzlement of funds. This method of payment gives the farmer more flexibility with his finances. A money transfer system can also serve as the platform for implementing projects in agriculture, health and education in agricultrural communities. But mobile money transfer is rarely possible at the farmgate, at least for the time being. 19

20 New corridors could substantially boost regional trade Proposed regional/coastal corridors One-stop border posts planned by 2040 Source: Ecobank Research. 20

21 Commodity exchanges could transform food marketing ECX geographical reach, 2012 Many initiatives are under way across SSA to create commodity exchanges (CEX) The Ethiopia Commodity Exchange (ECX) opened in 2008, trading five commodities The ECX currently trades around 60% of Ethiopian coffee production. But problems over the transparency and management of the Nairobi Coffee Exchange (NCE) persist, resulting in periodic boycotts by traders. Benefits for farmers: Guaranteed market, accurate prices, security of payment, new financing opportunities (warehouse receipts can be used as collateral) Benefits for buyers/traders: Fair & dynamic prices which reflect supply & demand, reduced transaction and transport costs Commodity exchanges are no panacea, but they can catalyze crop marketing. A successful exchange requires a high and diverse volume of commodities. 21

22 Any questions?

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