Why are Africa's Farmers Hungry?

Africa’s agricultural production is nowhere near as efficient or productive as it could be, and yet immense population growth on a continent already facing food insecurity and poverty will demand that the sector improve. McKinsey estimates that over 60% of the population of sub-Saharan Africa are smallholder farmers and that ~23% of the GDP comes from agriculture (McKinsey 2019). Sub-Saharan Africa faces a huge agricultural productivity gap and it is argued that sub-Saharan Africa could be 2-3x more productive:

To feed the rapidly growing population, it is necessary to solve this equation.  It is shocking that Africa as a continent is a net importer of food given its agrarian foundation. Academic and institutional literature have spent time and resources developing hypotheses on the core issues in the sector and potential solutions. Much ink has been spilled on identifying “transaction costs” as the factor which keeps productivity low and produce out of the markets.

Defining and Identifying Transaction Costs

In their piece on smallholder participation in Banana markets in Central Africa, E. Ouma et al. (2010) define transaction costs in the following way:

“Transaction costs, occasionally referred to as “hidden costs,” are the observable and non-observable costs associated with exchange of goods and services. These costs arise due to the frictions involved in the exchange process as it entails transfer and enforcement of property right.”

Often times, there are an array of costs that are considered transaction costs, but among the most common and identified costs are:

1. Information Costs: There is a lack of transparency on several factors that farmers have to deal with when looking to sell their produce. They might need to expend resources to identify trading partners, information about market prices per unit, how much produce is requested in trade, and what quality is expected from the trading partner.
2. Negotiation Costs: Non-enforceable handshake agreements may lead to renegotiation or subtly shifting price metrics, quality of produce, or agreed quantity of produce.  There are thus costs in determining the terms of the deal with a trader and creating a contractual relationship (more will be said about contracts soon).
3. Transaction follow-up: delivery, logistics, and enforcement of deal terms can be costly. Estimates indicate between 30-40% post-harvest losses, which can often be attributed to logistical issues, such as the inability to get produce to market in time, lack of cold storage for perishable produce, and the lack of an identified buyer.

These are more broad-stroke categories, and we could create sub-categories if necessary, such as the screening of contractual partners and the monitoring of contractual partners.

Contractual Relationships in sub-Saharan Africa

The relationship between contractual partners has been noted a few times with regards to transaction costs, so we ought to discuss this relationship and the nature of agreement. While sub-Saharan African smallholder farming is a massive and diverse market, we are speaking in generalities about how trading contracts are conducted. At the most basic level, smallholder farmers will produce crops, consume a portion of them, and sell the rest to a trader. However, given the market size, there may be different numbers of traders and farmers. These two parties will enter an agreement to buy and sell produce. Deal terms will vary, and some traders will buy more or less produce at differing levels of quality. The majority of these agreements will be informal, meaning that they are not governed by a third party and are not enforceable via legal action. Therefore, upholding the bargain will be for the purpose of preserving one’s reputation as a good and fair trading partner and for the prospect of continued partnership. Those who break an informal contract may gain a reputation as being untrustworthy, lose future partnership prospects, or be removed from any farming or trading organization partnership they may be a part of. Because the contracts are informal, much of the sector relies on trust and reputation. Thus, there are costs involved in finding the right trading partner, verifying the trustworthiness of the partner, and making sure that both parties are sticking to the deal as the agricultural product is grown.

The informal nature of contracts is most damaging as it significantly mitigates the ability to finance agricultural inputs, like fertilizer, other nutrients, equipment, or high-quality seeds. Often times, traders will finance fertilizers and other inputs that smallholder farmers cannot afford with the promise that they will be able to buy the produce at a given price. However, in areas of informal contractual relationships, financiers run the risk of losing their investment to a higher-bidding trader who will pay a better price for the produce that was financed by a the original trader. Because of this risk, smallholder farmers often do not receive financing for inputs, nor are they able to access traditional sources of financing as banks, and other lenders are not able to monitor the smallholder, which deems them a high-risk loan recipient. Thus, smallholders are left without quality inputs and without finance options.

The Unfortunate Nature of Small Farms

One further issue regarding the state of agriculture in sub-Saharan Africa is that smallholder farms tend to be too small. In their piece on small farms in sub-Saharan Africa, K. E. Giller et al. (2021) found that the majority of farms are less than 1 hectare (2.47 acres). Additionally, they found strong relationships between farm size, population density, market access, and household incomes. They write:

“Within each location, farm size is a major determinant of food self-sufficiency and a household’s ability to rise above the living income threshold. Closing yield gaps strongly increases the proportion of households that are food self-sufficient. Yet in four of the locations (Ethiopia, Tanzania, Ghana, and Malawi), land is so constraining that only 42-53% of households achieve food self-sufficiency, and even when yield gaps are closed only a small proportion of households can achieve a living income.”

Small farm sizes are not allowing many households in sub-Saharan to earn a living income nor enough food for themselves. While research suggests that reducing the productivity gap has significant impact on household income, it does not fix every issue in the agricultural value chain, and for some small farms, it is not enough to reduce the gap.

What must be done, then, in light of the many challenges and transaction costs that face smallholder farmers? Thus far, we have highlighted a few issues in the agricultural value chain of sub-Saharan Africa. First, we can identify the fact that informal contractual relationships are a net-negative for the sector. Governments and other institutions ought to work towards formalizing agricultural agreements as to reduce transaction costs and create trustworthy and enforceable agreements between parties. If formalized agreements become enforceable, then traders and others are able to invest in the farmer and land with whom they are legally bound. Additionally, government programs regarding input subsidies have proven beneficial. Alan de Brauw and Erwin Bulte (2021) note that after a largely successful agricultural input subsidy program by the government of Malawi following the poor harvest of 2005, nine more African governments followed with their own input subsidy programs, which have yielded overall positive results. Furthermore, either some form of farm conglomeration or farm producer organization (POs as de Brauw and Bulte call them) can have positive effects on yield production. If farms are either conglomerated or acted as one entity via a PO, there are then ways to generate higher efficiencies as ‘larger farms,’ and POs have the ability to invest more into the land and also have higher market power than individual smallholders. Lastly, as Giller et al. (2021) suggest, off-farm work and employment must be developed alongside the sector as Africa’s growing population cannot afford to further divide the land into smaller farms.

Concluding with Optimism

While the agricultural system of sub-Saharan Africa is diverse and the value chain highly fragmented, there still must be optimism for the sector. As it was stated at the beginning of this post, the sector can still reach 2-3x productivity. This must be seen as an opportunity for investment into a sector that has great growth potential. While it is a difficult sector, it is one that must be harnessed by the right government initiatives and private investment. Africa’s booming population desperately needs agricultural transformation, and this need will manifest itself into new systems and opportunities for all who are involved. Africa’s tech ecosystem has been finding new ways to innovate in the sector, each addressing the various inefficiencies in the sector, ranging from logistics, micro-finance and collective processing. To compress the productivity gap, initiatives must be taken to industrialize the sector in as many ways as possible. The intersection of awareness and innovative technology are the path to feeding the growing population in Africa, and those that can harness those solutions can see massive growth.