Funding Could Close the Agriculture Productivity Gap
The low productivity in agriculture – particularly in Africa and the Middle East – has become a challenge due to a lack of capital and access to reasonable credit.
With productivity low in African and Middle Eastern countries, the global hunger crisis is worsening, and these countries are at the epicenter of it.
This article will explain why productivity is low and what challenges are holding these regions back – and provide an overview of a key solution to closing the agricultural productivity gap.
Why Productivity in Agriculture Is Low
While smallholder farmers often fall at the bottom of the economic pyramid, they still need access to financial assistance. Providing them with access can drive food security, improve farmers’ lives, and spur economic growth.
However, smallholder farmers are unable to attain financial services for various reasons. They lack contact with formal financial institutions, have low financial literacy and credit history, and are perceived as high-risk because they're in the agricultural sector.
With their inability to build a financial track record, the cycle of exclusion continues. Therefore, they don’t have access to low interest rates or trading with formal buyers.
Even if farmers did have access to informal value chains, operating in this area is less efficient. Additionally, it puts their business at risk of fraud and decreases traceability for certification purposes.
What’s the Solution?
The best immediate and long-term solution would be patient capital. Of course, these countries can’t solve a multi-billion-dollar problem with a Silicon Valley-type mixture of fast supplements at high costs.
For example, many African farms are the least mechanized in the entire world. If a farm were to receive a new tractor, this could cost anywhere from $10,000 to $150,000, which is an unheard-of amount for most African farmers.
However, patient capital could fund mechanization with quality equipment in these areas. For example, Kenya, Nigeria, and South Africa are already transforming through green bonds and securing clean energy enterprises.
Africa’s mineral resources are critical for clean energy production, and several projects – including some related to low-carbon hydrogen – are underway. Producing green hydrogen offers a viable way of cutting emissions and strengthening growth potential.
In fact, one startup recently secured $13.23 million in investment funding from Breakthrough Energy Ventures, led by Bill Gates. If African countries can produce hydrogen using renewable resources, the potential to strengthen food security will be high.
Why Isn’t Agriculture Receiving Patient Capital?
According to McKinsey, sub-Saharan Africa’s agriculture contributes 23% of the region’s GDP. Yet, more than 60% of the population is smallholder farmers. Therefore, if smallholder farmers could receive funding, Africa could produce two to three times more grains and cereals.
However, smallholder farmers require a significant investment since they lack risk mitigations, such as crop insurance, welfare, guaranteed growth, and more. Additionally, smallholder farmers have poor access to markets and lower crop prices.
Cost competitiveness is another challenge. Urban middle-class consumers are growing in Africa and Southeast Asia, which is helpful in consumer spending. Yet, the growth of urban consumers might also require more dairy, produce, meat, and processed foods.
While imported goods are great for sustaining food security, African and Middle Eastern agriculture will need to supply greater local and global demand. Therefore, the cost competitiveness of food crops will be an issue compared to major trading partners.
And because patient capital demands a return on investment, funding isn’t as safe compared to other regions. With these challenges in mind, investors may see it as too big of a risk.
Closing the Global Agricultural Productivity Gap
With the overall demand for agriculture, African and Middle Eastern countries need a way to facilitate the movement of food to address productivity and hunger. Infrastructure that supports increased food production, such as roadways and storage or processing facilities, would help smallholder farmers gain market access tremendously.
Additionally, active government support could address hunger and food security by empowering farmers with mechanization and new technologies. However, it will also require more investment in research, scientific-technological adoption, and open markets.
Incorporating these strategies alongside patient capital would be the long-term solution to closing Africa’s and the Middle East’s agricultural productivity gap.