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Why invest in Ethiopian agriculture?

Interview - March 12, 2016

Agricultural value addition is the best thing any entrepreneur should look at in Ethiopia, affirms Jemal Ahmed, CEO of Horizon Plantations, who lifts the lid on the vast potential of Ethiopia’s agriculture sector, where demand for its high quality products continues to far outstrip supply, and also explains why it makes not just commercial but also social good sense.


We have been witnessing a shift from West to East as investors are looking for new horizons where to place their investments, especially after the 2008 world economic crisis, and this made Africa even more attractive. Could you please discuss this relevance of Africa in the international arena, especially attracting investments?

In 2008 when the commodity prices went up, people were looking for places where they could produce more commodities, and Africa had the right resources and a huge gap; and because of that there is an attraction towards it. It has helped Africa as well to generate more jobs and the demand for African commodities has increased. In that aspect I think we benefited from it.

Agriculture is the biggest sector in terms of employment in Africa. By 2040, the World Bank expects that Africa is going to have the largest work force in the world: 1 billion workers, more than China and India combined. In your opinion, what are the challenges and how should they be addressed?

Our agricultural projects are all labor intensive. Growing coffee in Ethiopia could hardly be mechanized because we grow it in a very different way. We are not growing it like the Brazilian or Vietnamese. Our coffee grows on hills under shade. You cannot maneuver machines there. And the quality is different, the coffee type is different.

While Africa is developing, its people are having more access to education and high-standard living, and working in farms will not be as easy as it used to be. So I foresee that our biggest challenge will be labor. Although we will have more labor than China and India combined, Africans are also getting more and more skilled as a workforce. If you see our farms now, young men are not available for labor: they have access to schools and vocational training. Small towns are popping up everywhere, so other skilled work is also being available. Hence, getting labor in rural areas is going to be our major challenge.

2014 was the Year of Agriculture in the African Union, and Nigeria’s former Agriculture Minister Mr. Adesina commented that in Nigeria, agriculture is going to be the new oil. What is the trend you are seeing in that regard in the continent?

I think that has not turned out to be as he wished because agricultural commodities prices have been crushed in 2015-2016. Any agricultural commodity’s price does not justify the work you put in. So it was not reciprocated by the market.

But Africa’s productivity has increased, and I think it will increase tremendously in the near future as well, because more and more inputs are being used – people have access to the know-how for proper agricultural practices; that means extra production. So, unless Africa is able to invest in adding value to its commodities instead of exporting primary commodities – if Africa transforms itself into processed agricultural commodities – then agriculture could be the next oil. But if you just produce crops and export them, it will not be justified.

Ethiopia is obviously an agriculture-based economy. The sector accounts for more or less 46% of its GDP and 80% of employment. Could you give us a brief overview of the agriculture sector in Ethiopia?

In Ethiopia, agriculture productivity has increased year after year. Ethiopian demand for commodities in the local market has also increased and this has helped us. The last two years, the coffee price has been way below the production cost. The only thing that helped Ethiopia so far was the quality of its coffee; it gets premium value over the average Arabica coffee.

Second is the local market: more than 60% of our coffee is consumed locally, but some say 50%; and our local price, compared to international markets, is 2 or 3 times higher. Ethiopians appreciate coffee so they are willing to pay more for it. So the local price sustains the coffee producers. In Ethiopia, agriculture will keep increasing because the local demand will sustain it.

The other thing is that we are not exporting common crops. We export cash crops like coffee, spices, tea; we are not exporting the common food like wheat or corn. What we are exporting are high-value agricultural crops. They are very few in numbers, but their productivity, like the coffee productivity, is increasing, and new areas for coffee farming are being developed. So the local demand and the productivity increase will help agricultural growth.

Another point is that local agro-industries in small-scale sizes are popping up everywhere now in Ethiopia. That will also help, not only to export but also for import substitution. In our case, most of our products which we process are sold locally, here in Ethiopia, and it has good and a sustainable demand.

What you just mentioned is key, now with this commodity downturn, it is important to focus on specialty products, quality products, for which the buyers are willing to pay a premium price.

True, and substitute imports, because imports cost a lot; the logistic cost is high. Ethiopia is a net importer of food, and there are so many things to be done. Local demand is very clearly visible. In the last 10 years, our cooking oil demand has increased by thousands of percent nationally. We are a net importer of Malaysian palm oil or European soya oil. Half or our coffee export money goes on cooking oil imports. That can easily be substituted locally. Our company is also working in products like that and a lot of projects will come up. Things like that will have a sustainable market in Ethiopia, and Ethiopia could benefit if it focuses its investment on that kind of agro-industry business.

Speaking about agro-industry, Midroc and Horizon Plantations were pioneers carrying out what the government wants to do, moving from agriculture to agro-businesses. You started by for example turning oranges into marmalade or tomato into tomato paste.

Horizon and Midroc are doing a lot of agri-business; coffee is just one of them. We have 5,600 irrigated fruit farms, 100% for the local market. We do not only sell fresh fruits but also processed fruits, like orange marmalade or tomato paste. We process it and substitute import as we used to import it.

Regarding our cereal crops, we produce more than 40,000 metric tons of cereals for the local market of different crops, like wheat, corn, soya, and now rice. We have the largest rice-processing factory in Africa. We have 10,000 hectares of rice farming in Gambela; 70% is already developed and now we are catering the entire product for the local market. We are hoping that with further expansion we will export, but our first priority is to substitute imports and we have a good market to do that.

We are in many crops and some of the crops are value-added supply for the local market. However, we have crops that we produce for export only, like cut flowers. We do it entirely for export purposes. As for coffee, in our case more than 80% of our coffee is exported. Roasting coffee is not our business. We export green coffee to major roasters in the world. What differentiates us from others is that we do not trade; we only grow our coffee and export it. So our coffees are traceable, and our customers have confidence in the sustainable supply that we have, because we manage our farms properly. The same quality and the same volume are assured for future shipments as well. So that has given us leverage for export markets and we work with premium roasters in that regard, and we are exporting good quality green coffee mostly to the Western market. We have two of the country’s three tea estates, and our two estates cover 90% of the local market. And we have surplus, which we export to the international market. We produce over 8,000 metric tons of tea.

In Midroc we are vertically integrated. And we keep adding value, seizing the gap in the local market and the potential of developing for the local market and keep investing in that. We have over 110,000 hectares in production, we have over 57,000 people working in our projects, and that’s only for Horizon. Midroc has over 76 companies, and within the Horizon Group we have 13 involved in industry and in agri-business. Horizon Investment Group alone has 57,000 employees. You can imagine what impact we have on the national economy.

We are going with the government plan, which we believe is the right thing, the Growth and Transformation Plan second’s phase. The first Growth and Transformation Plan has helped us a lot. Ethiopia is moving forward and our projects are also moving forward. In the second Plan we are more focused and we will invest mostly in import substitution and also export products.

Speaking about investment, in late 2014 Sheikh Al Amoudi said he wanted to invest up to $500 million in agricultural projects all over the country to double production in three years. How is this project advancing and where are these investments being placed?

It’s on schedule. Our coffee businesses are getting more investments. The coffee farms we got through the privatization process are very old, and we are clearing them and planting proven varieties. We are investing heavily in irrigation and new land development. For our cooking oil project we are currently developing 20,000 hectares; the rice project and the coffee investments are the major stakeholders on that. And the rest are in poultry, in dairy farm and in agro-industry. As we planned, we are investing in it.

The Ministry of Trade expressed its willingness to increase coffee exports up to 45% only in 2016. How feasible do you see this and how will you also be part of this ambitious target?

I have my reservations about that. You cannot increase 45% output from a perennial crop. Coffee is a tree; you don’t just farm now, or harvest in 3-4 months. Increasing 45% of productivity is increasing by half the national output; Ethiopia’s production of coffee data says over 540,000, and the export is around 200,000 metric tons. So the legally transacted coffee in Ethiopia for the local market is not more than 60,000 tons. The rest is traded inside the villages in illegal transactions. By making the export more efficient, they want to increase the output, but the price of coffee in the world is not pushing that. Farmers are getting better payment at a local level, in local trading that pays more than the exporter base, so they sell locally. My personal opinion is that 45% of output increase will not be realized.

In our case, we are very proud of what we have achieved, as coffee has off and on seasons. It is known internationally: that means that if the tree produces coffee this year, it will not produce the same next year; it would take a break and produce less. But in commercial farming, if you supply the right input for the tree it will produce the same, so we produce sustainably year after year. That’s the experience of our last four years. This year we repeated the product we got last year with a slight increase of 5%. And most of our coffees are young; they are coming year after year. And I think that in the next three years we will get around 40% more of our product because all our young coffee trees will start producing.

Speaking about sustainability, you received certificates from, for example, the Sustainable Agriculture Network, Starbucks, 4C Compliant Coffee, and so on. How important is a sustainable business for Horizon Plantations?

All our plantations are certified. For Starbucks they are certified with C.A.F.E Practices, and Rainforest Alliance, UTZ and 4C Associations, and for Coria Organic from the Ministry of Agriculture. We always get audited and we get certified every year. That has helped us to promote our coffees to the roasters and also assured our roasters and gave them confidence that our coffees are sustainable and also produced with the right ethics. The auditors always need to know how much we pay our employees, what kind of social investment we did. That’s also in line with our chairman’s goal of helping our 57,000 workers. We are sustaining their employment by sustaining their production.

You are giving back to the community.

Yes, we do that a lot. Every year we are building schools, we are building bridges for the communities, and mainly we are giving them sustainable employment. And they get paid rightly; we believe the rate we are paying them is right. We don’t compare with local markets how much laborers get paid. We set up our own rates; they are very happy and we are also very happy when we do that. We want to sustain that and increase their revenue as well by increasing our market share.

It’s a benchmark for other companies.

Yes, we want to be a role model. I believe in commercial farming we are already a role model and we want to sustain that and do a lot. Another aspect is by increasing our productivity. From inferior agriculture we have to transform whatever way possible to irrigated agriculture. Sustainable moisture supply is a necessity now because of the volatility of the environment, like this year with the El Niño phenomenon, and you don’t know what is coming next. Ethiopia is rich with water resources; its underground water resources and its surface rivers are quite enough to produce crops. We are introducing different types of irrigation systems and with that we are going to increase our production which we are already doing.

We are aware of how the farmers with the small-scale irrigation schemes SSI are achieving a lot of productivity.

What has been done in some parts of the rural areas with small-scale farmers introducing small-scale irrigation systems is an amazing achievement. They are producing three times a year and their livelihood is changing.

Horizon Plantations has been growing steadily over the past few years and now you are a conglomerate of different companies. What would you say where the biggest challenges you faced and how did you overcome them?

Our biggest challenge is management. It is only 25 years since private businesses started in Ethiopia. And there is no corporate management culture in Ethiopia. Whatever corporate management we had is what we had inherited from the government enterprise, which was not efficient and productive. So to get the right management was a bit difficult.

The good thing is that many universities have opened up in different parts of Ethiopia. We were able to get young recruits to work with expatriate managers from Europe and India. And our young managers are learning the right corporate management system. Particularly in our commercial farms where you live outside major cities, where you have lack of infrastructure, to have a skilled workforce to work in those areas is very difficult.

So we have also to set up the whole community infrastructure within the farm: recreational facilities, management residential houses, everything has to be built there and whatever is there has to be upgraded. That needs capital expenditure as well. That’s our major challenge. But again, there is a great deal of commitment on investing in infrastructure by the government; roads are being built, ICT towers are being erected... Most areas are going to change so they are willing to do their part. We still have that problem but we have overcome the worst part and now, more or less, we have a better environment in our farms, but our challenge is to retain the management in rural areas.

You just mentioned the commitment of the government towards infrastructure development. This year the Ethio-Djibouti Railway is going to start operations and the government is linking Ethiopia with roads to Kenya, Sudan or Djibouti, and has plans to construct the biggest airport in Africa too. How do you think all this infrastructure development is going to impact your business?

It will help us and strengthen our competitiveness. Ethiopia’s logistics cost is one of the highest. Our inland transport cost now to import inputs and to export our products is very high. The electric power train will cut that tremendously. Not only is the Ethio-Djibouti Railway being built, but there is also a plan to build one to the southwest through Jimma and Bedele, where most of our coffee farms are located within a 200km radius. So we will be able to ship our product to Jimma, and it will be moved through 1,200kmm of electric railways. That means our cost of coffee will decrease tremendously and that will make us obviously competitive, so we can afford to sell with a lower price and still survive.

The airport will also help. Daily we ship our cut flowers to Amsterdam and the increase in capacity of the cold room and the flight will also help us, and it will make it easier for our buyers to come and visit us. Ethiopia will also be promoted through that, so will be our products.

The infrastructure investment in power generation, in roads, in air transport, in telecommunications is what will make us strong and that is the best thing happening in this country.

You are a very diversified company and own the biggest tire producing plant in East Africa. Why did you decide to invest in this business?

We decided not because we had a deep knowledge about the business, because but this company is a national heritage. It’s 40+ years old. In 2004, the Ethiopian government privatized it to an East European company. Then in 2007, the fourth biggest tire producer in the world, Continental from Hannover, bought that company. In 2011 they told us that it came with a package but it is not in their strategic interest. The only factory they had in Africa is in South Africa because they do have a plant there; so because there was no interest for them to develop it and they wanted to leave, we had to make a deal with them, and they helped us by signing a technical assistance agreement and upgraded the company. Sheikh Mohammed decided that their factory would have a positive impact on the national economy, so he invested in it.

It’s funny, the tire business in Africa is like the airline business. The only surviving countries in commercial airlines in Africa are South Africa, Kenya, Egypt and Ethiopia. The same goes for tires. All tire factories are closed except the ones in South Africa, Kenya, Egypt and Ethiopia. It’s a very tough business and highly competitive, because we have to compete with Chinese products that they can’t export to Western Europe or America due to antidumping laws; they have access to Africa, and they subsidize their export. We fight in that market.

Also internationally renowned companies from China, Europe, Japan are present here. When we took over, our market share was 7%; now it has reached 22% and we are investing more and more. As you have traveled in Ethiopia you would have seen more three-wheelers; two months ago we have launched that product. We have also launched farm tires, which is another line. And the light truck radial, a third line, is coming in the next few months.

We are investing heavily, production is going on, our quality has improved, our acceptance in the market has improved, and we are more committed to invest more in that business.

As we are publishing in the UK, what business opportunities, joint ventures or partnerships would you like to highlight to the UK community?

I see agricultural value addition is the best thing any entrepreneur should look at in Ethiopia. As you know, 85% of Ethiopians are producing commodities. But they have become also consumers, so processing their products and making it available for the local market is interesting. Also across the Red Sea we have countries in the Middle East unable to grow what we can grow and a processed crop could be a good market. Poultry, milk or any agricultural product has a big market in the Middle East just a short distance away, but also here in Ethiopia with its 90+ million people. We used to have only numbers, but now we are having more and more consuming power, slowly but sustainably. So Ethiopians are consuming a lot and it’s a big market.

In every agro-industry, if investors come they will still have a market both locally and for export. And they could work like what we do now: there is not enough supply for our demand so we are investing in factories. We are also making all our surrounding farmers out-growers; they are making more money and we are making more products. So with the out-grower scheme, based on manufacturing, you cannot go wrong.

You can see all the breweries; it’s a good example. When I was young, beer was a luxury in Ethiopia, in Addis Ababa, except the locally brewed kind. Processed beverages were luxuries only for very few people. Now you can go to any village in Ethiopia and find farmers with beer. When they go out they drink beer; so 90 million people start consuming. That’s why you see that every company is investing; they are either in expansion or have a new plant.

Now, the good thing is that strong companies have come. Initially it was BGI that came and bought the St. George Brewery from the government’s Privatization and Public Enterprises Supervising Authority. Since then they expanded the existing factory and built two more in Kombolcha and Awassa; they expanded three times more in Addis Ababa and still their distributors are short supplied. Heineken bought two factories and built another one and they are also still short supplied. In the last two years Habesha and three more came. Still there is market. But all of them import over 85% of their malt and Ethiopia could grow barley and process malt. For any product Ethiopia is an open market. There is a huge menu to pick from for investors from the UK.