Ethiopian Business Review

Struggling to Find a Foothold

The Fight to Develop Commercial Farming

Commercial farming, which dates back to the imperial era in Ethiopia, has gone through many ups and downs. Even though the government gave local and foreign commercial producers the green light to start producing around five years ago, many of the companies that leased land and took loans from the Development Bank of Ethiopia (DBE) have left the sector altogether, citing difficulties with developing their land for production. However, this has left DBE unable to recover the billions of birr it disbursed to commercial farmers. EBR’s Ashenafi Endale explored the problems facing commercial farming, and the potential in its future.

When members of Parliament (MPs) from the Finance and Budget Affairs Standing Committee assessed the status of commercial farming in the state of Gambella last month, they found that many large scale commercial farmers have fully or partially disengaged from operation.

Although the MPs were surprised when they learned that the locations of 36 commercial farming projects were unknown, the most disappointing news was the fact that the Development Bank of Ethiopia (DBE) had been unable to collect over two billion Birr in loans given to commercial farmers in Gambella.

“This clearly shows that commercial farming has become a shortcut to earning hundreds of  millions of birr at the speed of light, instead of being a way to revolutionize the agriculture sector,” said one of the MPs who was part of the assessment.

This is bad news for Ethiopia, which has been struggling over the past half a century to revolutionize its agricultural sector, and become a self-sufficient and industrialized nation. But instead of creating such structural changes in the economy, the agricultural sector is still weak and unproductive, forcing the country and its citizens to face food insecurity and poverty.

A rising population and an inability to increase productivity in the agriculture sector, which constitutes 34Pct of gross domestic product (GDP) and employs over 80Pct of the population, means relying on imports. On top of industrial and technology products, Ethiopia still imports raw agricultural commodities, with wheat and maize high on the list. Ethiopia annually imports wheat at an average cost of ETB10 billion, as well as cotton and many agro-processed products.

A Blind Policy
Ever since EPRDF took power in 1991, increasing the production and productivity of small scale farmers has been the country’s principal goal. Economic policies, including agricultural led industrialization, which was introduced 20 years ago, have focused on the promotion of small scale farming. The first and second phases of the Growth and Transformation Plan (GTP I &II) are no different. Even though production by small scale farmers increased by 70Pct in the last decade and reached 314 million quintal in the last harvest season,  and a few model farmers have been created, the approach has failed.

“Small scale farming hasn’t gone beyond the highland areas, nor can the farmers afford to go to the lowlands, where there is a lot of land suitable for commercial farming,” says Isayas Lema, director of the Crop Development Directorate at Ministry of Agriculture and Fishery (MoAF).

However, Demis Chanyalew (PhD), general manager of Demal Agricultural Consulting, who has published a number of critical books on Ethiopia’s agriculture, argues that economic plans are centered on small scale farmers to politically win over small scale agricultural workers.

With all that taken into account, the government has reluctantly started to consider other options. One of them was launching the Agricultural Commercialization Cluster (ACC), on the recommendation of the Agricultural Transformation Agency (ATA). Under the ACC, farms that lie next to each other and which are owned by different small scale farmers would be  arranged as a single commercial farm to cultivate the same crop at the same time. This would then create a convenient input supply, efficient use of modern agricultural machineries, and direct supply to industries. Close to 500,000 small scale farmers have been included under the ACC since it started two years ago.

Khalid Bomba, CEO of ATA, stresses that ACC is not a replacement for commercial farming, explaining, “It is intended to increase productivity significantly, which the ACC has achieved.”  

However, Demis argues ACC is already straying from its original concept. “ACC is about arranging nearby farms to produce selected items for industries, using similar inputs and technologies. However, at the moment, it is only arranged to make the farms suitable for the use of combiners.”

Even though the government hasn’t focused on it from the policy level, expanding commercial farming is the other option they have considered and implemented, with the government calling for investors to start commercial farming in the low land areas around five years ago.

Accordingly, 460 investors went mostly to the states of Gambela, Benishangul, Amhara and Somali, taking a total of 500,000 hectare of land. DBE loaned them ETB6.3 billion in total, with the largest portion given to foreign investors, none of whom are currently operating in Ethiopia. For instance, Karuturi, a foreign company that leased 100,000 hectares in Gambela, took ETB172 million in loans from the Commercial Bank of Ethiopia (CBE), DBE and other private banks before leaving the business.

It is not only foreign investors, but almost all the local commercial farmers who have left the sector because of multiple issues. As a result, DBE has been unable to collect repayment on the loans. According to the government, one issue is that some commercial farmers used the money they borrowed for other purposes. Meanwhile, the Association of Commercial Farmers insists that the main factors behind this underperformance, such as the absence of a commercial farming policy and no cooperation between federal and regional governments, have been overlooked.

Adhena Seyoum is a commercial farmer who leased 300 hectares of land in the state of Gambella, with an eight million birr  loan from DBE. He covered the remaining 30Pct of the costs from his own pocket. He claims to have spent three million birr on importing machinery, ETB800,000 on the construction of a camp, and the rest on land development, road construction and other infrastructures. As a result, he was left with only a small amount to cover operational costs.

Despite the ‘harsh circumstances and shortage of money’, Adhena developed all 300 hectares of land. But he couldn’t withstand the challenges for long, even though he was able to repay ETB1.9 million to DBE. “I was unable to sell the crops because all the domestic brokers and buyers refused to buy from commercial farmers operating in Gambela,” he explained.

That was not the only challenge he faced. The government banned him from exporting his products directly to international buyers. Adhena says, “Engaging in commercial farming was a total disappointment for me and a major failure for the country. Most investors are unable to import machineries, construct camps, clear forest and prepare the land for cultivation in their first two years. There were many genuine farmers. But they couldn’t continue because no bank understood the nature of agricultural investment.”

Experts warn that now is the time for the government to reconsider its business as usual approach towards commercial farming. “We cannot structurally transform from agriculture to industry without structurally transforming agriculture,” argues Demis. “To do so, one of the right approaches is allowing commercial farmers to thrive, but policy analysts seem to overlook this.”

The Food and Agriculture Organization defines commercial farming as the implementation of scientific research and technologies that yield maximum productivity on a large scale in order to gain the most profit from the commodity market. This, in turn, means that commercial farming increases production many times more than subsistence farming on a small scale, which is not even enough to fulfill nationwide household consumption.

The necessity of commercial farming was well recognized even in the imperial era, when graduates of the former Ambo and Jimma agricultural colleges received financing to establish large farms in Awash, 217 kilometers from Addis Ababa. The socialist Dergue regime also established state farms, including in Arsi and Bale, which are some of the few successful commercial farms in the country.

Farms over 500 hectares are considered commercial farms in Ethiopia. But some regions classify cultivated lands over 300 hectares as commercial farms. Presently, there are almost 5,000 commercial farmers, less than one percent of the 14 million farmers in the country.

On top of this, commercial farmers cultivate only 800,000 hectares, which is only a third of the land they have leased, according to the Central Statistical Agency (CSA). The farm land developed by commercial farmers constitutes 4.7Pct of the total 13 million hectares that are currently cultivated in Ethiopia.

In a developing country like Ethiopia, commercial agriculture can be expanded using three models:  plantations or estates with on-farm processing; contract farming and outgrower schemes; and medium-scale commercial farming areas. Plantations are characterized by diverting labour from peasant agriculture and alienating land. This approach has more opportunity to diversify income sources and raise cash for special purposes, but has been criticized for worsening poverty and inequalities in terms of land ownership.

On the other hand, contract farming is often known for being inclusive. It connects smallholders with those in commercial value chains. The former produce cash crops on their own land, as ‘out growers’ on a contract basis and supply them to agro processing companies.

The third approach is through medium-scale commercial farming. This comes with growth in a new class of “middle farmers”. These are often educated business people and civil servants who invest money earned elsewhere into medium-scale commercial farms which they own and operate themselves.

Although all of these models exist in Ethiopia, the best one for the country’s situation hasn’t been identified. Actually, Ethiopia has not had a well-defined commercial farming policy for the last thirty years. “Even though they do not directly say ‘commercial farming’, the economic plans introduced before 2010 envision a well-organized agriculture that use modern inputs,” explains Demis. “But when we evaluated GTP I & II, they say nothing about commercializing farms, directly or indirectly.”

The Saga Continues
The failure to modernize and commercialize agriculture emanates from macroeconomic fallacies, according to analysts. Basically, money is a tool used to produce. But in Ethiopia, money is used to make more money, according to Demis.

Currently, DBE is in the process of taking over all the land provided to commercial farmers, following its failure to recover loans. Reports by Haileyesus Bekele, president of DBE and Yinager Dessie, governor of the National Bank of Ethiopia (NBE), presented before Parliament on March 28, 2019 showed that DBE’s Non-Performing Loans (NPL) are mounting.

Out of the ETB46.71 billion in total loans that were provided by DBE as of February 2019, NPL accounted for 39.4Pct, exceeding the 15Pct limit set by the NBE. Yinager cautioned that DBE’s existence will come into question if the Bank continues in its existing path. Taking this into consideration, Haileyesus announced that the Bank has completely stopped financing any rain-based commercial farming. Both Haileyesus and Yinager also underlined that DBE will take legal measures on all farmers who have not paid their loans back.

Yemaneh Seifu, the head of the Commercial Farmers Association, says that despite the farmers’ extra efforts to continue developing additional lands, DBE is taking them back. “We are paying back the loans at 12Pct interest, even though initially it was eight percent,” says Yemaneh. “The government must extend loans for farmers who did everything right so they can continue operations.”

In April 2018, the Agricultural Standing Committee of Parliament, representatives of commercial farmers, officials of MoAF, officials of the Ethiopian Investment Commission and other stakeholders convened in Adama town to solve the problem once and for all. The government agreed to extend the loan period, in addition to reaching 13 major agreements.

Solomon, for his part, believes that what killed commercial farms was not the narrative of ‘land grabbing’, but ‘money grabbing.’ “Billions of birr was given to phony farmers by corrupt government officials, and now, the officials are trying to cover that up,” adds Solomon Kebede, another commercial farmer whose business buckled under various pressures.

Adhena agrees. “I believe there are two governments in this country. The first is one that encourages investors to start commercial farming through provision of land and loans. The second tirelessly works to prevent us from realizing the projects. The current administration must take note of who is who in this particular case.”

A high level official of MoA close to the issue underlines that nobody wants to remember the failed commercial farming projects. “Nobody wants to take responsibility personally nor institutionally for the lost money and the mess.”

The Agricultural Investment and Land Administration Agency, which gave the farmers land, doesn’t currently exist. The Agency’s role was divided between the Ethiopian Investment Commission and MOAF.

“This leaves commercial agriculture without a sole responsible institution,” explains Abera Mulat, former director general of the dissolved agency, who is also a member of the Steering Committee established by the former Prime Minister to address the chaos.

For Khalid, on the other hand, what is hindering the development of commercial farming is a complete absence of accountability, follow-up or control mechanisms. Demis contends that the option is transforming small and medium scale farmers into large scale commercial farmers. “In Ethiopia’s context, commercialization can be achieved both by consolidating and modernizing the existing small farmlands, and by establishing new large scale farms in lowland areas. You cannot create commercial farming without following the dynamics of small scale farming.”

To make this happen, he suggests the formation of a new land policy that allows harmonious leasing and contractual farming for both lowland and highland areas.  “Small parcels need to be added up and made into huge farms,” he says. “Ethiopian farmers are not free. They must be free from dependence on the government.  A farmer must decide what, when and for whom to produce. Ethiopia must undertake consolidation so farmers can grow to the commercial level without leaving their original niche.”

When it comes to finance, stakeholders stress that there is a need to establish an agricultural bank.
Although a proposal to establish one was tabled before late Prime Minister Meles Zenawi it was not implemented. Instead, the government decided that Micro Finance Institutions (MFIs) would provide financing and backing for the agriculture sector. But MFIs can only support small scale farmers who use few inputs. It is not enough for medium and large scale farmers, according to experts, as more money is needed to use improved inputs and technologies. Once farmers graduate to the medium and large scale, they are stuck without a financing institution.

Developing irrigation infrastructure is another necessity for commercial farming, according to experts. Since Ethiopia’s agriculture has been rain-based for centuries, around USD10 billion is needed to develop irrigation infrastructures over the next six years, according to Sani Redi, state minister of MoAF. Without it, modernizing agriculture is difficult.

In a recent speech, Prime Minister Abiy Ahmed (PhD) promised that government will fully support the development of irrigation and commercial farming in lowland areas. “We started developing irrigation and commercial farming of wheat on 25,000 hectare in lowland areas last year. We will focus on expanding this trend.  We should at least be able to feed ourselves. Then we can produce for industries and export,” said Abiy.


8th Year • May.16 - Jun.15 2019 • No. 74




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