Category Archives: Services

Global Commodity Outlook: Thriving on the Commodity Tightrope

The recent pain of depressed commodity prices across grain and oilseed markets has left many asking questions like, “What’s the root cause of the falling prices?” and “Will this pain continue or will prices rebound?”.

A simple scan of various news sites for information that could impact commodity markets yields headlines that might be obvious in their market impact and others that are more subtle, but may nonetheless have a large impact on commodity markets overall (Figure 1). As agribusinesses search for insights to try and make sense of commodity markets and where they might be heading, it is important to understand the history/current state of the market as well as identifying possible future trends.

Figure 1: Recent News Headlines
holland article image 2

Over the last ten years, volatility has been rampant across key crops like corn, soybeans and wheat. For example, record prices were seen in 2012 (largely due to the impact of drought conditions) with soybeans reaching $17.90/bu in July and corn reaching a price of $8.49/bu in August. This drought was followed by record crops in 2014 & 2015, depressing prices by almost half to current levels (Figure 2).

Figure 2: Historical US Production and Average Yearly Price Received
holland article graphic 1

Pulling back the curtain to understand the reasons for recent commodity volatility reveals both obvious and subtle drivers, including:

  • U.S. ethanol mandates, which stoked corn demand and prices for the last 10 years, have not been increased, leading to ethanol-related demand plateauing at around 5B bushels.
  • Weather volatility has led to some years of low production due to drought and therefore record prices, as well as years of record yields (national corn yield of 171/bpa in 2014 and national soybean yield of 48/bpa in 2015) and substantially suppressed prices.
  • The recent strength of the U.S. dollar relative to currencies of many of our trade partners has in some cases cancelled out much of the buying benefit of lower commodity prices, causing exports to stall.
  • Substantial production increases in South America and the Black Sea region continue to erode the U.S. share of world trade. (See Figure 3)
  • China’s economy has had an increasing impact on agriculture commodities, spurring demand for more protein. However, complications due to commodity price protection for domestic production of Chinese crops also skewed international trade and built up Chinese commodity stocks.

Figure 3: 5-Year Regional Exports by Commodity (Million MT)

Corn graphic Global articleSoybean graphic global grain article

While many factors have gotten us to where we are today, key questions still linger: “where will these headwinds take us?” and “are we in a new steady state of lower prices or will there be future volatility creating further swings?”. Long-term baseline projections from the USDA indicate that the current state of farm-level prices for corn, wheat, and soybeans is likely to trend pretty consistently over the next ten years. In addition to the USDA projections, The Food & Agricultural Policy Research Institute (FAPRI) also projects corn prices to remain at or below the $4.00/bu mark through 2020. Even with projections that depict a pretty consistent future state, there are inherent uncertainties impacting the markets. Given the future uncertainties, it is more crucial than ever that agribusinesses dealing directly and indirectly with commodities not only deftly manage pricing risk, but also have the foresight to maximize future opportunities- both domestic and international.

Savvy agribusiness leaders should be asking themselves, “What are potential factors that could impact commodity prices even further?” While no one can predict the future, possible scenarios resulting in a positive impact on prices could include an increased demand for protein by many developing countries turning the corner (i.e., SE Asia and LATAM) or new biofuel mandates domestic or abroad. On the other hand, a global macroeconomic recession or substantial yield boosting technologies without matching demand could cause prices to remain static or even decline. Successful companies should have a well-defined risk management plan with the ability to navigate the impact of different commodity price scenarios.

While navigating periods with headwinds can be turbulent, The Context Network has decades of experience along with in-country expertise throughout the world to identify key trends and factors that could impact our global industry. Context is well positioned to help organizations across the agribusiness value chain to synthesize and understand the myriad of factors, both obvious and subtle, that impact the overall industry and their specific bottom lines. For more than 20 years, Context has helped agribusinesses navigate the price effects of commodity supply and demand, serving as a partner to clients in developing strategic frameworks to capitalize on market opportunities. With our recent acquisition of expertise in commercial and specialty commodity systems and risk management, we are able to uniquely tailor our consulting services to our clients’ specific needs.

For more details about how Context can assist your organization in this space please contact: info@contextnet.com

Sources
Des Moines Register
Financial Times
The Ethanol Mandate & Corn Price Volatility
Trading Economics
USDA NASS
USDA Foreign Agricultural Service
USDA Grain & Oilseeds Outlook
USDA Agricultural Outlook Forum:
USDA – ‘Slowing Economy: Effect on China’s Agricultural Imports’
US Grains Council – ‘China’s Potential Future Imports of Feedgrains & Oilseeds’
Farm Service Agency – ‘2016 Grains and Oilseeds Outlook’
USDA Agricultural Projections to 2025
FAPRI US Baseline Briefing Book – Projections for Agricultural & Biofuel Markets
Bloomberg Argentinian Peso Article Headline
US News & World Report El Nino Article Headline
USDA Foreign Agricultural Service

Revolutionizing Grain Storage and Logistics

Bagged grain technology has revolutionized grain logistics and storage in Argentina, as well as in other producing countries of the world for the last decade. Since the beginning of agriculture, grain has been stored in oxygen. In a radical change from the past, grain storage in a silo bag is an airtight storage. The grains, associated microorganisms and insects breathe, ingesting O2 and producing CO2, creating a modified atmosphere within the sealed bag. This modified atmosphere creates certain advantages for the conservation of grains.

INStory1Image1

There have been several attempts to store grain in a modified atmosphere to improve grain conservation. However, storing silage in airtight bags has provided the first successful results both commercially and on a large scale. In Argentina last year, the adoption scale of bag-stored grain was so large that out of ~100 million tons of grain produced, 55-60 million tons went through silo bags. The many benefits that this technology provides the entire chain easily explain its rapid adoption. Harvest can be accomplished in record time. A bagger can easily store what has been threshed by 4 modern combine harvesters. Silo bags have also allowed grain producers to keep grain at the production site, and thus encourage new businesses that previously were not available.

Finally, silo bags allow the producer to plan logistics in a much more efficient way. Collection companies have expanded their storage capacity, and thus reduced the fixed costs of their facilities. Using silo bags, the lack of capacity silos is no longer a barrier to shipping grain to port at the time of harvest.  

For exporters, silo bags allow them to participate in a much more aggressive grain acquisition policy as very low costs entice grain deposits in places where they had no presence before. In many cases, this has allowed them to double the volume stockpiled. They also manage to have strategic stocks with their crushing plants to stabilize the supply of raw material.

Bagged grain technology preserves grains for long periods of time with no downsides. The use of an excellent quality bag is essential. The cost of a bag is less than 1% of the value of the stored goods, thus an economical approach.

IpesaSilo™, Ipesa-Rio Chico’s trademark, is the leading bag in the Argentine market. IpesaSilo exports to more than 50 countries worldwide. Five years ago, the company created IpesaUSA as a distributor company working with farmers, dealers, and end-users such as co-ops and elevators countrywide. The cost of storage per bushel in silo bags in the U.S. is only $0.07 per bushel compared to traditional storage methods costing ~$1 per bushel.

The company has also expanded into Canada where grains are experiencing strong freight competition from mining, and have found that silo bags allow them to store grains in the field at low cost. In the case of South Africa, the company introduced grain bagging with Louis Dreyfus, and today 10% of the South African grain production is stored in silo bags.

Other countries where IpesaSilo has begun significant developments in the use of silo bags include Russia, Ukraine, Australia, India and China. Sales in Brazil reached the milestone of 45,000 bags and about 9 million tons of grain is stored annually. Brazil’s potential for the product is huge due to the lack of storage infrastructure and long distances between production areas and ports.

Grain bagging has provided the entire agricultural chain with a powerful storage and logistics tool, enabling the steady growth of grain production minus the inevitable bottlenecks typically experienced in traditional storage. Today, we know that agricultural expansion has no limits, and that storage is determined by the revolution of bagged grain.

INStory1Image2

More Grain in Silo Bags, Better Quality

Silo bag grain storage is a common alternative for producers, middle-men and the grain processing industry in Argentina. During the last 5 years, roughly 40% of grain production in this country was stored in silo bags, highlighting the importance of this technology in Argentina. Moreover, silo bag technology is being exported to various countries across the five continents.

Silo bags are made of a three to five layers of plastic material (white on the outside and black on the inside) shaped as a 235 microns thick tube. The most typical bags are 60 m (200ft) long and 2.74 m (9ft) in diameter, can hold approximately 200 t (8000 bushels) of grain each. With equipment currently available, handling (loading and unloading) is very simple to perform. The bags can be assembled on the same production lot, or in an especially equipped area in the vicinity of the storage or processing plant.

The effect on grain quality of wheat, corn, soybean, sunflower and barley, on humidity and period of storage, was analyzed by Bartosik et al. (2012). Cardoso et al. (2009) studied the changes in the concentration of phosphine during fumigation of grain in silo bags, and Cardoso et al. (2012) implemented a pressure test to determine the airtightness level of silo bags and their evolution after being stored for four months in the field.

Cost calculation of storage in silo bags requires certain considerations. The equipment needed includes: bagger, extractor, self-unloading hopper car and two tractors enough to carry the hopper car and provide movement to the threads (one for the hopper car and one for the bagger and extractor). In addition to the costs of having ownership of equipment (depreciation, maintenance and interest), other expenses related to labor and fuel are required to be able to operate. The bag is not reusable, so whenever bagging is done it is essential to buy a new bag.

A typical Argentine grain storage operation using silo bags was analyzed. It includes the following sub-steps: 1) transport from harvester in the field to bagger, 2) bagging, and 3) extraction of grain. The subsequent transport of grain to collection, processing industry or port was not considered in the analysis, as this should be done regardless of the period of grain storage in silo bags.

The equipment required for bagging includes a bagger, an extractor, a self-unloading hopper car and two tractors. One of the tractors is also used for grain extraction. The bagger has a capacity of 400 t / h and requires power of at least 60 HP. The extractor has a capacity of 80-110 t / h (depending on the type and condition of grain), and requires power of 90 HP. The self-unloading hopper car has a capacity of 14 t and is equipped with a thread of 360 t / h capacity. To meet the power needs of this equipment two 90 HP tractor were considered, which can be used interchangeably for the bagger, extractor or hopper car.

This is a typical equipment configuration for a contractor that provides the bagging service to producers or middle-men in Argentina.

Table 1. Equipment Configuration for Silo Bag Contractor

INStory1Image3

Equipment and supply prices were taken from magazines (Agromercado), and in consultation with suppliers. The equipment was granted a life span of 10 years, except the tractors which were allocated a life span of 20 years. The residual value of the equipment was considered 25% of its value, while the annual maintenance cost was set at 3% of its value (Table 1).

 

Precision Ag: A Dynamic Growth Area Redefining Agriculture

Our world is full of technology. The fastest growing and most applied is “smart technology,” which allows people to unconsciously do many things intuitively without even thinking. Smartphones and tablets are good examples. They are very integrated into our personal and professional lives, and in agriculture, they allow us to access and accomplish many tasks on the go.

Precision Ag (PA) is a great example of “early technology” moving to “smart technology.”  If you look quickly at this picture you don’t see much; if you look longer you think almonds or rice panicles and if you look longer it appears the picture is moving even though it is not an animated picture. PA is like that to many people. Some think of it as “a thing;” a steering solution, variable rate applicators, precision planters and yield monitors. Others think about it as “a service;” imagery, remote sensing or field maps.

As we move forward, PA is likely to be defined in value not by mechanical products or service but more from the “creation of data that becomes actionable knowledge.” Who you work with will become more about who can support your PA initiatives and use them to increase a producer’s ROI.

SCStory2image1

PA becomes a system that generates profit optimization. It is about the creation, capture, analysis and use of data to improve outcomes.  For retailers, information will be the key to success, and new business models may emerge.

The new marketplace will reward those producers and their retail partners who are fully utilizing PA. Basic manufacturers and OEM may shift their support model.

The PA market is 10-15 years old and we are in our 4th generation evolution of tools, systems and applications.

The picture for PA is not totally clear, but it is moving and creating new value across agriculture. The winners will offer smart products, support them and create impact for their farm, outlet and business.

Provided by Context Senior Associate, Kip Pendleton.

The Strategy of Licensing

Companies often struggle when contemplating licensing deals.  This is especially true of small companies with new technology.  The decision to license, when to license, and the overall licensing approach are crucial factors when considering how to generate new income from newly developed or even existing products.  – Context Partner, James Mann

Although not typically done, any licensing approach should be accompanied by a broader strategy that outlines the trade-offs between the company’s need for near term income/cross license, and the risks of approaching a deal too early. Our suggestion for optimizing a licensing strategy is to approach each deal systematically through a series of internal steps:

  1. Determine the fit of the licensing strategy within the overall strategic direction of the company. Ensuring a clear fit with the company’s overall strategy will safeguard a product or concept that could create a tactical advantage in the future from being sacrificed for short-term income.
  2. Evaluate the multiple license options that exist for products today. Much like the Pharmaceutical industry, licensing is no longer a one-size-fits-all proposal. Multiple options now exist that can combine tactics from the past with new tactics learned and honed from other industries.
  3. Size your opportunities. Determining the size of the licensing opportunity is just as important as determining the size of the market for a business plan. However, this tends to be the most overlooked portion of the licensing planning process. By understanding the market dynamic and the size of the opportunity, the appropriate resources can be applied not only to market the product, but also to creatively explore multiple licensing options and maximize value capture.
  4. Empathetically understand your potential licensees. Multiple internal term sheets should be developed as you begin the licensing process. These should include term sheets developed not only from the licensor’s lens, but also from the lens of the licensee. This will ensure that the company can predict and plan to mitigate any major objections before they occur.

SCStory1image1

All of these process steps should be wrapped by a scenario planning session where role-playing can be used to validate and adjust the company’s licensing strategy. Following these steps can ensure the company’s top opportunities are monetized through the licensing process.

For more information, contact James Mann at: James.mann@contextnet.com.

Volatility in the Animal Ag Sector

As in other agriculture pursuits, volatility has become a constant in the animal agriculture and poultry industries. From weather volatility that whipsaws grain/feed costs to the volatility caused by disease outbreaks, and including the volatility of the marketplace, these conditions are imposing production and business adaptation along the animal agriculture value chain. Gradual adaptation is no longer an option. Production, processing and allied businesses must be quick, efficient and strategic.

When businesses respond to the forces causing volatility, it is
 crucial that they assess the effects on their operation
 accurately, and then, strategically develop plans and methods that will turn negative projections into positive results.
 Uninformed, knee-jerk reactions will only accelerate problems.
 For example, responding to high feed costs by replacing ingredients with lower-cost substitutes may save money in the
 short run but lead to longer grow-outs, increasing costs on the facility, labor and management side of the balance sheet. Jumping on a societal ‘bandwagon’ created by activists and adopted by a business’s competitors may prevent executive headaches, but a more creative reaction may lead to competitive advantages unseen at first examination.

INStory5Image1

The great hope of China, a society that appreciates pork and poultry and an economy that seemed to be growing to absorb the United States’ best production, recently added to the volatility of the animal agriculture and poultry business climate. In future issues, we will delve into China’s and other markets that are developing at varying rates, but also look at both the advantages of and concerns about international trade. We’ll look at other factors driving the animal agriculture industries in the US, many of which are also impacting commodity crop and specialty agriculture while spilling into the world of livestock and poultry protein production.

For years, The Context Network has been helping agribusinesses and organizations project the effects of volatility in their industry, analyze them carefully and strategically plan to capitalize on the differentiation that volatility creates. With our recent acquisition of expertise and experience in animal agriculture, we provide the same world class essential management consulting services to meat, livestock, poultry, companion animal and allied businesses as we have been providing crop agriculture and food sectors for over twenty years. 

For more information, contact Context Senior Associate, Becky Doyle at becky.doyle@contextnet.com.

Equipment Manufacturers Feel the Pain of “Doing the Splits”

Over the past 25 years, the majority of land farmed in the Corn Belt has flipped from operations with less than 500 acres to those with over 1000 acres. The implication of this trend towards the larger farm operation managing a greater portion of production area is simultaneously being matched by the signification of smaller operations, which still account for > 80% of the farming operations. Nearly 50% of the farms less than 500 acres are smaller than 50 acres, and are frequently categorized as lifestyle farmers. The effects of this increasingly polarized customer base is having a dramatic impact on equipment providers this year. It is a key factor in why big tractor and harvester sales can be down by as much as 40% and small tractor sales are still realizing year over year growth!

INStory2Image1

The challenge for equipment providers is to best serve and market to the differing needs for each of these divergent customer segments. The larger farmer is looking for performance out of their equipment to cover maximum acres in a targeted farming window with minimized cost and increased precision.

Meanwhile, those in the lifestyle farmer segment want a basic range of functionality in a comfortable environment at minimized cost.

The larger farmer is looking for service and support characteristics of where he buys, while the lifestyle farmer is looking for more of a retail experience similar to how they make most other purchases. Providers with a footprint in both markets are feeling the pain of “doing the splits”! Appropriately scaled product and marketing strategies are needed now more than ever to effectively serve the large and small farm operation segments.

Both large and small customer segments present opportunities for growth for equipment providers. The cyclical nature of farming forces manufacturers and dealers to look for the segments of customers with the most opportunity in the current stage of the cycle, and to find ways to connect and stay connected with those customers.

INStory2Image2

Context’s proficiencies and knowledge in the equipment industry range from deep technical know-how on equipment functionality and precision technology integration, to strategic marketing and management training experience, to operational excellence in supply chain and channel distribution. The Context arsenal includes industry leaders and innovators who have served globally as vice-presidents, directors, and field employees of major equipment companies. We have the experience and expertise to credibly provide pragmatic, actionable solutions that are especially needed during times like these to focus equipment providers on their diverging customer base and best position for growth through the next turn in the commodity cycle.

Provided by Context Partner, Mark Nelson; Context Senior Associate, Doug Griffin; and Context Senior Associate, Kevin Monk. For further information contact mark.nelson@contextnet.com.

Issues in Animal Ag: A Strategic Approach

People: the planet has more of them every day. More of them are eating better. Global consumption of protein is increasing. In 15 years projections show there will be a 35 percent increase in demand for vegetable oils, meat and milk. Forecasts for future food demand offer many opportunities for higher farm incomes and post-harvest additions.

Context’s Animal Ag Practice is taking an in-depth look at food, feed, and the general ag climate contributing to this fast-paced industry segment. Trends we are considering are very inter-related and will lead to a targeted view of industry direction.

Under those categories, Context has further examined and defined key drivers influencing the production of food in livestock and poultry sectors. Key drivers in food production will include:

  • Shifting Consumer Preferences – including natural, organic, locally sourced or grown, etc., many of which eventually lead to higher food costs.
  • The Sustainability Initiative – downstream value chain and end consumer demand more sustainability, which will have a profound effect on producers.
  • GMO Global Acceptance – GM acceptance varies globally while the market for biotech seed continues to grow. At the same time, consumers increasingly demand non-GMO foods.

SCStory4Image1

Complex, intertwined issues in animal agriculture pose many daunting challenges. Disparities exist in producing safe, consistent, trusted animal food products that meet consumer demand tiers. In the products consumed, those range from the quality of the nutrients (high in Omega 3, low fat, high protein, etc.), to the breed of livestock (Angus beef, Berkshire pork, etc.), to the type of care the animal received during the course of its growth and development (cage free, pasture-raised, grass-fed, happy cows) and so on. Marketing capabilities within, among, between and even against varying segments add to both idealistic and opportunistic venue pursuit. Customized marketing promoting an individual market niche may effectively improve sale of a product but open up negative or prohibitive restrictions on other production methods.

With a goal of supporting and sustaining a viable, productive animal agriculture food production sector, Context’s Animal Ag Practice is supporting companies across the globe. Each initiative is individually approached, and a team of specific expertise is assembled to provide vision and actionable solutions to advance animal agriculture.

For more information on Context’s Animal Agriculture Practice, contact Mike.borel@contextnet.com.

Provided by Context Senior Associate, Kathleen Erickson.

Context on Continued Investment in Ag Tech

Throughout 2014 and the first quarter of 2015, the agriculture sector continued to see significant interest from institutional investors with increases in activity from both growth and venture capital providers.  One of the most active areas for investment was in the agriculture technology (AgTech) segment, which, according to AgFunder, saw $2.36 billion in investments across 264 transactions during 2014.1 The spread of transactions represents a focus on early stage companies and a pivot from past mega-deals, with many investors now placing multiple bets across the industry.  Context believes several important trends can be discerned from the activity in 2014 that will continue to impact the market in 2015:

  • Strong Big Data Interest: Investors have allocated capital across the big data spectrum, with software and hardware providers both generating significant interest from investors during 2014.  Combined, the Decision Support Technology, Smart Equipment and Hardware, and Drones and Robotics subsectors received $370+ million of funding across 75 deals during 2014, or approximately 15% of total AgTech funding.2
  • Muted Impact of Weak Commodity Cycle: the pricing pressure experienced across agricultural commodities in 2014 did not dissuade investors from pursuing transactions and may have actually created a buying opportunity in the market for many institutions.  This trend may seem counterintuitive in the agriculture sector, but reflects past behavior from institutional investors.  Weaker commodity markets allow for more investment due to more moderate valuation expectations.
  • Interest and Investment Across Value Chain: While data has been a key theme in agriculture, there are still many uncertainties. Where will data processing and ownership rest?  Which participants, both in the sector and potential new entrants, will be most successful at creating and capturing value? What will be the structure of the next iteration of data based solutions?  These uncertainties have caused investors to allocate capital across the value chain in an effort to retain exposure to all sectors with high potential, even those outside of the “data” vertical.  According to AgFunder, during 2014 ten subsectors of the AgTech market received at least 5% of the invested capital, led by Bioenergy at 16%, Food Ecommerce at 16%, and Soil and Crop Tech at 13%.3

A few trends suggest investor interest will continue through at least the end of 2015.

  • The recent increase in macro demand evidenced by increasing allocations to the agriculture sector by institutional investors shows no signs of immediate slowing.  
  • Micro interest themes continue as well with a specific focus from strategic and institutional investors on improving yields.  
  • Lastly, increasing technological leverage or the scalability of technology being applied to the agriculture sector promotes additional investment.

Provided by Context Senior Consultant, Dan Creagh.

 

References:
1 AgFunder, AgTech Investing Report – Year in Review 2014, March 3, 2015

2 Ibid

3 AgFunder, AgTech Investing Report – Year in Review 2014, March 3, 2015

Understanding the Produce Value Chain

Think back several decades and walk into your favorite grocery store. What did you see? Was produce the first department you entered? Did you see a vast array of fruits and vegetables including fresh cut, a dozen or more different types of apples and tomatoes, and fresh berries every day? (Hint: the market for small tomatoes has tripled in just the last decade to now well over $1B). Leap forward to today, and if you don’t see a well-stocked, well merchandised impressive display of fresh produce then you’re probably shopping in a store that won’t be around for long.

INStory3Image1

Grocery retailers know that it is the ‘fresh perimeter’ of their store that sets them apart from competition, with produce being the number one point of differentiation. The aromas, colors and vibrancy of so much fresh and wholesome food are a powerful way to greet their customer. It also is a powerful way to grow profitability.

According to the United Fresh Produce Association, fresh produce accounted for 13 percent of store sales in 2013, up from just under 11 percent in 2011. The average produce department in 2013 generated $47,209 in revenue every week, up 4.8 percent from 2012 with most of this gain coming from pricing. Innovation in convenience, variety and flavor helps drive these price gains. Newly popular items like clementines and kale, snack-sized tomatoes and peppers, fresh cut salad and fruit are just examples of categories that have exploded due to innovation.

However, not all innovation is successful. In fact 70-80 percent of new grocery items fail. It is not enough to know only what the consumer wants, or know only how well a product yields on the farm. One also needs to understand cost of production, handling, packaging, distribution logistics, shelf life and challenges faced by the grocery retailer. Bringing forth a new produce item is risky business and is not for the faint of heart.

Context has extensive experience all along the produce value chain, from seed and inputs, through packing/shipping to grocery retail and foodservice. A critical factor in launching any product innovation is to make sure the value chain is lined up beforehand. Growers can’t take the risk to produce a new item unless they know who is buying, and for how much. A packer/shipper may be willing to take some risk, but they need to understand seasonal impacts on supply and product quality, best practices to preserve flavor and shelf life, have some idea as to consumer willingness to purchase the item and retailers willing to carry and promote the product.

INStory3Image2

For retailers, shelf space is precious and adding items requires work and often worker training. Retailers need to be comfortable that the product they receive will be consistent in delivering the promised value, dependable in supply, and unique enough to catch the attention of their customers –and of course, grow profits. Regardless of where you are along the chain, Context can link the chain together helping ensure product and financial success.

Provided by Jennifer Garrett, Senior Associate; David Stark, Senior Associate; and Jim Zarndt, Senior Associate.

Achieving Scale and Sustainability of Market-based Development: Two Perspectives

In July of 2014 the government of the Democratic Republic of Congo (DRC) announced a plan to create 20 agro-industrial parks. These parks will represent a key pillar of their $6 billion Agricultural Investment National Plan running through 2020. Included in these agro-industrial parks will be the formation of commercial anchor farms, training and financial support for small holder farmer groups, distribution of agricultural inputs, equipment, and irrigation technologies, building of grain storage facilities, and development of processing centers.  

The DRC has always been considered a potential African bread basket, rich in natural resources. With 80 million hectares of arable land, enough pasture land for 40 million head of cattle, rivers and lakes representing a potential of 700,000 tons of fish, and abundant rainfall, the DRC has the potential to serve as a key exporter in a region rapidly growing in food and feed demand. However this has not materialized as while the DRC was once a net exporter at independence, the government forecasts in 2014 agricultural imports of $1.5 billion with exports only $200 million.

While there are many reasons behind this massive agricultural gap, including political instability, lack of infrastructure and financing to name a few, this recent investment raises a greater question of what is the optimal strategy to transform an underperforming sector. After all, there are many agricultural technologies being deployed throughout parts of Africa today that are improving productivity but not reaching the DRC farmers.

At Context, we have a long history of working on the commercialization of technologies in agriculture, making it more productive, more efficient and more sustainable. In such complex development challenges as the DRC, both top-down and bottom-up perspectives are required to formulate a strategy that leverages the inherent interdependencies of two theories of change, technology-driven and cluster (network effect) approaches.

The technology-driven approach is commonly referenced within agricultural through examples of hybrid corn adoption in the US during the 1930s-1950s (and later GM corn) and more recently the rapid adoption of hermetically sealed bags (PICS) for grain in Africa.

The key component and foundation of this model is an attractive (or game changing in the above examples) technology, that is then enabled with the development of a market-like environment, a robust technology supply chain, and strong partners that drive commercialization through fostering an information ecosystem – the system supporting farmers in making informed decisions.

SCStory3image1

The cluster approach, on the other hand, seeks to accelerate development and overcome constraints that no one single technology developer can effectively surmount through ensuring macro-level market enablers (e.g. infrastructure, regulatory framework, market-clearing mechanisms, etc.) are in place, co-locating complementary stakeholders and developing market literacy, as appropriate. The most referenced example of a cluster approach is Silicon Valley and the many innovation successes that have come out of that geographical technology cluster. While less widely known, there are agricultural successes as well, such as the development of the soybean sector in Mato Grosso, Brazil (1980s-1990s) and the Amul Dairy Cooperative in India (1940s, 1970s, 1980s). If the DRC can effectively organize cluster stakeholders and foster their relational dynamics, then the DRC will join these agro cluster success stories.

As urgency to accelerate agricultural sectors in the developing world intensifies, it will be critical to not only learn from past failures and successes, but to develop the best strategy for technology adoption best suited for local market and enabling environments. Context has the know-how and expertise to break down large complex challenges into actionable strategies.

 

References

Misser, Francois. DRC – Agro-industrial parks to address the food security challenge.  Southworld, July 1, 2014, François Misser

Ulimwengu, J. DRC Agricultural Business Parks Initiative. An Integrated Strategy to Unleash Economic Development and Address Food Insecurity in DRC and Beyond.

Matopoulos, A. et al. Exploring Clusters and their Value as Types of business networks in the agricultural sector. Operations Research.  An International Journal. Vol.5, No. 1 (2005), pp.9-19.

Galvez-Nogales, E. FAO. Agro-based Clusters in Developing Countries: Staying Competitive in a Globalizing Economy. Agricultural Management, Marketing and Finance Occasional Paper. 2010.

Sonka, S. et al. Case Study – PICS Project: Triple layer bags in Africa. Rockefeller Foundation. Forthcoming 2015.