BY NADRAT MAZRUI
Although less than eight per cent of Kenya’s land is under cultivation, agriculture in Kenya is the most important economic activity. About 80% of Kenya’s workforce engages in agriculture or food processing. Farming in Kenya is typically carried out by small producers who usually cultivate no more than five acres using limited technology.
These small farms, operated by about three million families, account for 75% of total production. From independence, agriculture sector expanded by undergoing two basic changes: first, widespread acceptance of private ownership (replacing communal ownership) and cash crop farming and second, the success of intensive nationwide efforts to expand and upgrade the production of African small holders. Before this, agricultural development occurred almost exclusively in the “white highlands”.
Although the expansion of agricultural export crops has been the most important factor in stimulating economic development, much agricultural activity is also directed toward providing food for domestic consumption. Kenya’s agriculture is sufficiently diversified to produce nearly all of the nation’s basic food. To some extent, Kenya also helps feed neighboring countries.
Agriculture has defied odds to emerge the leading economic sector recording the highest growth since 2012. Agriculture is expected to post even higher growth rates due to good rains, thereby causing a ripple effect in the manufacturing and financial sectors. The Government hopes to roll out the infrastructure required to put one million acres of land under irrigation and build abattoirs in each county as contained in Jubilee’s manifesto.
This grand plan that will move the country away from rain-fed agriculture would require billions of shillings. The infrastructure is to help attract the private sector to move in and do the actual farming. Development partners are already helping with construction of abattoirs. Apart from attracting the private sector, the Government plans to seek donor funding to ensure that its plan takes off. The Government is confident that by making farming a commercial activity, 70% of Kenyans will immediately generate improved earnings.
The Government has instituted a number of reforms to improve the sector’s efficiency and production. These include legal reforms in which some 130 laws were consolidated. This process is expected to encourage investment. The Agriculture Sector Development Strategy is among the key achievements as the strategy is now the blue print for agricultural planning in Kenya. An enabling environment for agriculture has been created through the formulation and publication of several policy documents.
The Agricultural Finance Corporation has increased its competitiveness and service delivery. In recent times, regional and international trade has reduced the dependence on home agriculture, and the quantity of available food is less a function of the harvest than of the political decision on the amount of food imports.
The more people live in the cities and have to buy food at the market, the more agricultural prices became a political issue. The interest of urban society in agriculture is an interest in low prices, and the request of the primary sector for price increases is a regular nuisance for the urban population. Today, agriculture is deeply interwoven with other sectors of the economy.
The changes in agriculture bring with them new tasks in training and research for colleges of agriculture. The process of agricultural production has become increasingly complex and requires therefore scientific help in research and extension. The provision of food for the population with so many contributors and interest-groups can be achieved only with a functioning marketing and distribution system as well as a sound agricultural policy.
In respect to poverty eradication and raising the welfare standards of the population, more focus should be put on agricultural activities. Agriculture in Kenya is an important fundamental economic development as it contributes to the gross domestic product and constitutes 40% of export earnings. It establishes the industrialization framework through supplying raw materials for industries. The purchasing power is improved through income generation, hence creating a market for industrial products.
Worldwide, the attraction to small farms lies in their economic efficiency relative to larger farms and the fact that they can create large amounts of productive employment. Small holders in Kenya are known to be resource poor and operate below their potentials. It is acknowledged that agricultural production is only for three purposes; Subsistence, Commercial and as a hobby.
Subsistence farming does not adequately address food insecurity since it neglects non-food needs of man. Agricultural production as a hobby exhibits the presence of excess resources in households where it is practiced but is not common. Sustainable food security is addressed most effectively through commercial agriculture. As a ‘fun farmer’ so to call him, that is the agricultural producer as a hobby why not invest in commercial or semi-commercial farming?
The objective function of commercial farming is profit maximization. Who wants to get into a business that runs on losses? Every farmer is a profit maximiser, which the desired commercialization requires. However majority of the farmers in Kenya lack the adequate resources and that is where the big investors like you and I come in. Subsistence farmers are now forced into passively selling part of the meager food output for cash requirement. The trick of the trade that these small-scale farmers have not yet grasped is the magic of investment.
Commercial agriculture is on the rise for the past three years and every investor worth his or her wits is seeking to invest. All that they are searching for is the right ‘fit’. The money value of production for profit maximization is significantly different from that of semi-subsistence production that characterizes many Kenyan smallholder farms. This reiterates the need for smallholders to consider changing their strategies from semi-subsistence production to commercialization.
Once the business starts showing good returns the investors become genie in bottles making sure all the farmer’s wishes in terms of resources come through as in the end they are the ones who benefit from their good investment decisions. Statistics show commercial agriculture as the potential goldmine.
Question is, should one be tempted to invest? Is food really that likely to be a good investment over the next few years?
The commercial agricultural space has blossomed into a market full of options for investors and potential businessmen. No matter how much one is seeking to invest there is certainly an agricultural option that fits ones investment pocket.
There are different ways in which an investor can choose to invest in the agribusiness;
FUTURES.
Futures were the original method for obtaining exposure to commodities. These contracts can be difficult to understand and are not meant for the average investor. This is a contract where parties initially agree to buy and sell an asset for a price that is agreed upon today with delivery and payment occurring at a future point. For those who understand the nuances of these contracts, futures can be one of the most powerful trading tools. Most common future contracts in Kenya include coffee, corn, cotton, sugar, wheat, live cattle and rice. These are the most popular agricultural contracts.
STOCKS
Investing in the equity side of the equation is not always pure play on agriculture, but it can make for a number of interesting opportunities that other investments vehicles simply do not offer. Stocks offer a number of advantages over other options.
There is no better asset to own during an economic change than farmland or investing in commercial agricultural stocks. After all we all have to eat. In some ways agriculture is even better than gold or silver as it doesn’t run out. Humans will give up a lot of things during a financial crisis before they consider giving up their meals. Worldwide, the per capita calorie intake is likely to rise even while quality soil is on the low. All this is further proof that commercial agricultural investment is the new green gold.
Investing in agriculture today is like investing in oil in the early 2000s. Right now, this sector is locked in underinvestment, so there is opportunity here when one considers the case of future demands. This has been fuelled by the volatility in commodity prices globally and worries about food security due to the rising demands of biofuel. The more days go by the more the population of Kenya increases, meaning more mouths to feed, which is equal to more profits for that smart commercial farmer and his silent investor.
The returns from investments are more strategic from the long-term point of view as most of the investment initially goes for asset creation. Capital infusion is required initially for a certain period after which the project itself becomes sustainable.
Some of the best returns in this decade will come from agricultural investing, and the kinds of companies that keep us supplied. The agricultural boom has only just begun. Position yourself accordingly. Invest in commercial agriculture now and thank me later.
