Limits to Growth in the Agro-processing Sector

By: Katie Collier

Date: April 21, 2021

The importance of the agro-processing industry to African economic development cannot be understated. In the agro-industry sector, less than 10 percent of value-addition is attributed to Africa. The African Development Bank Group (AfDB) believes that growth of this industry could lead to new employment opportunities, increased income, greater food security, and poverty alleviation. Its backward and forward linkages can promote greater value-addition to African countries’ GDPs and increase African engagement in the global value chain.

The development of the agro-processing industry is hampered by many institutional constraints, primarily within raw material suppliers. Without a competitive market in this first step of the value chain, subsequent agro-industries are bound to struggle. Infrastructure is a considerable gap in the African agriculture sector. Absent or weak storage capacity, electricity, road networks, and communication tools have an effect both on the production of the food as well as the marketability of the final product. Post-harvest loss (PHL) can result from this lapse: the FAO, estimates that PHL in Africa can be as high as 20 percent for cereals, 30 percent for dairy and fish, and 40 percent for produce.

Poor infrastructure is also tied into low access to technology. Water, electricity, diesel-petrol, and other resources needed for agro-processing are not available or are too expensive as a result of inadequate infrastructure. Limited technology access is also caused by a lack of expertise by the processors. Taxation systems imposed by governments impose an additional restriction of technological advancement via increased imported cost of agro-processing equipment.

A problem also exists within technology, including digital technology, that is already present in Africa. One is the near absence of uptake of local technology development by agro-processing firms. There are also more than 400 digital agricultural technologies in use, yet many are not scaled: in sub-Saharan Africa, most technologies have user bases that are less than 30 percent active. This scalability issue is due to patchy digital access and literacy, low data access, and lack of context-specific modifications.

Within the initial, agricultural stage of the good, attention has been placed on extending production rather than considering the forward linkages of the goods. This is due to farmers’ limited access to market knowledge: many do not know the market’s threshold and processing needs. Without developing this market intelligence in the first step of the value chain, the agro-processing industry may remain stagnant in Africa.

To compete in the market, it is essential for African farmers to implement certification schemes to ensure compliance with various market standards. Modern markets have requirements based on food safety, quality, quantity, and cost. In particular, a certain level of food safety is a non-negotiable requirement to participate in the market. Ultimately, labels give farmers entry to high purchasing power markets, like the United States, Europe, and Asia.

Agro-processing growth issues are also a result of the low supply of finance tools in Africa. Continual underinvestment in developing countries’ agricultural sectors can be due to many reasons, including political and climate risks, abnormal financing requirements, and unsteady property rights. Also, African SMEs often cannot afford the high rates at which commercial banks operate nor can they comply with banks’ high collateral demands. The underdevelopment of private sector involvement is also a consequence of poor trade policies: Sub-Saharan Africa has the highest average agricultural tariff rates of any region in the world. Although some African governments have tax incentives in place to encourage investment, such schemes are generally ineffective because the African macroeconomic environment is unstable and the incentives are simply not valuable enough for firms.

While systemic problems exist within the development of Africa’s agro-processing industry, there are some proposed solutions to address these concerns. The AfDB suggests that farmer’s associations and cooperatives can surmount gaps in the system that individual farmers and processors could not on their own. To become competitive enterprises, organizations like the AfDB will need to support farmers and processors with financial and market tools and skills. Also, established free trade areas at regional levels can increase local technological equipment, thereby making technology more accessible and affordable. Increased effective incentives for private investment in other ways will also improve the viability of the African agro-processing industry. Enacting these solutions— and others— may enable a viable African agro-processing industry, subsequently improving the economic development of African countries. Stay tuned for suggested categories of solutions in upcoming blog posts.