Grain demand booms in eastern Sub-Saharan Africa, creating trade and business opportunities, but new dynamics and challenges abound to tap into increasing consumption and trade
With twenty-two different economies, the Eastern Sub-Saharan Africa region is a sizable and growing market for grain trade and milling. In 2022, the region consumed approximately 80.4 million metric tons of key grains and cassava, as reported by the USDA. Corn was the most consumed cereal in the region, accounting for 39% of consumption, followed by cassava (28%), wheat (20%), and rice (13%).
In a recently released report, Rabobank, a leading food and agricultural sector finance bank, noted that ESSA’s population is forecasted to reach 705 million by 2035, up from the current 520 million. The bank noted that the population growth boom, combined with low local production and yields, is expected to drive demand for imports, creating new opportunities for trading grains.
Although the region is rife with opportunities, it’s important to understand that ESSA is a dynamic region comprising twenty-two different economies with diverse consumption patterns. In this market update report, we highlight the new dynamics, challenges, and opportunities that players in the grains industry need to be aware of in order to maximize their business potential in the region.
Local wheat production in ESSA is insufficient to meet the increasing demand. The region, therefore, relies on global markets to meet demand. Russia and Ukraine are the largest wheat source markets, accounting for 46% of the total wheat imports into the region. Other major suppliers include the European Union (20%), Argentina (12%), the USA (8%), and Canada (6%).
Rabobank projects that the region will continue to rely on imports, as local wheat yields have historically been low, often below 3 metric tons per hectare. The climatic conditions in the region are also not the most suitable for this crop. When combined with drought, this can significantly impact yields or even lead to volatility.
Kenya and other countries where the above statement is true are therefore expected to increase wheat imports by at least an additional 2 to 3 million metric tons by 2035, according to Rabobank. “This will trigger trade opportunities for several global wheat-exporting countries. EU, Danube region, and Black Sea region countries will benefit due to their strategic proximity to ESSA, depending on the resolution of the war in Ukraine in the medium term,” the bank added.
However, some countries, such as Zambia, Zimbabwe, and Ethiopia, may gradually reduce their imports as their local production improves. “Ethiopia, the largest wheat producer in ESSA, benefits from high altitudes and has gradually and steadily increased wheat yields to 45% in the last decade,” observed Rabobank. “With the Ethiopian government strongly encouraging local production, the country has potential to make even further improvements in the next decade, but we do not expect it to become self-sufficient by 2035.”
Kenya Makes Attempt to Boost Corn Production
Kenya is the largest importer of corn in the ESSA region, averaging 0.6 million metric tons per year. This is close to half of the amount of total corn imports which amount to 1.3 million metric tons per year. A steady decline in local production has exposed the country to fluctuating global prices, triggering a hike in local maize meal prices. In 2022, maize prices reached their highest level in history, with an average price of a 2KG maize meal packet retailing at KES 230. This prompted the government to intervene with a subsidy program, which later proved to be costly.
The new Kenyan government, established in September 2022, aims to improve food security through ambitious policy measures aimed at enhancing local production. Improving farm irrigation through the construction of dams in the eastern part of the country is one of the measures the government is currently exploring. The new project aims to increase corn production by expanding irrigation to up to 400,000 acres in the next two years. “This will be hard to achieve in such a short time, but it can happen by 2035,” notes Rabo Bank.
Kenya has also opened its doors to importing and producing genetically modified (GM) corn, which has the potential to significantly impact the market in the near future. Currently, there is an ongoing lawsuit regarding the cultivation and import of genetically modified (GM) commodities, which is hindering the implementation of this plan.
Beyond Kenya, corn production is a priority for several countries in the region, many of which subsidize the sector. However, many countries are not self-sufficient and rely on Tanzania and South Africa to meet their local demand. White corn is primarily used for food consumption, but it is also used to a lesser extent in animal feed. As the population grows, there will be a greater focus on producing white maize for human consumption. Rabobank notes that the feed sector, which is growing and driven by demand, particularly from poultry, will create a new trading opportunity for grain handlers. “By 2035, the trade of yellow corn from outside ESSA could become interesting due to the rapidly increasing demand for feed and limited local availability of feed grains,” the bank projects.
Kenya and Tanzania have the next largest and most developed milling industries, processing 10million and 6 million metric tonnes of grain respectively.
Ethiopia Milling Industry Largest in ESSA
According to Rabobank, ESSA has a sizeable milling industry with a total capacity of 60 million metric tons. Corn is the most processed grain across the region, accounting for around 47% of the region’s milling. It is followed by wheat (23%), cassava (19%), and rice milling (12%). Feed grain outlets are still limited and account for only around 8%.
Ethiopia has the largest milling industry by far, with an estimated processing capacity of around 17.5 million metric tons of corn, wheat, and rice, according to Rabobank. It is also one of the fastest-growing industries, with a compound annual growth rate (CAGR) of 5.1% from 2011/12 to 2021/22. Unlike corn, Rabobank notes that the wheat milling industry is not well-developed, is highly fragmented, and has a capacity utilization rate of less than 50%. This presents an opportunity for investors as the Ethiopian government also has a ten-year development plan (2020 to 2030) to improve the share of locally produced products and stimulate the industry’s competitiveness.
Milling industry in Kenya ripe for consolidation
Kenya and Tanzania have the next largest and most developed milling industries, processing 10 million and 6 million metric tons of grain, respectively. Rabobank notes that corn milling is highly fragmented, similar to other countries where milling is characterized by limited installed capacity and domestic processing. The wheat milling industries in both countries have suffered from overcapacity in recent years due to the impact of COVID-19 and the war in Ukraine.
However, unlike Kenya, Tanzania’s heat milling industry is highly consolidated, fully liberalized, and enjoys healthy margins. As a result, Rabobank expects consolidation to start in Kenya in the medium term. “Some local players are better positioned to act as consolidators compared to international investors,” the bank adds. “Other wheat millers will opt for diversification into feed and corn businesses.”
Meanwhile, geographical expansion is a strategic option for wheat millers, but it is not the only option. Rabobank opines that diversification into the feed industry could be a key strategic step for others. Rabobank, however, believes that there is room for further geographic expansion, as only two of the top ten players are currently operating in more than five countries in the region. “This strategic option can be broadened to further leverage the synergies between markets,” Rabobank notes.
Opportunities to Look Out For
Rabobank notes that the widening gap between growing demand and limited local supply will present new business opportunities for wheat importers and traders, and create a demand for trade and commodity finance products. The bank further projects that the increase in wheat imports will necessitate investments in storage capacity and infrastructure improvements in the major ports of Kenya, Mozambique, and Tanzania. Inland investments are needed to improve post-harvest storage infrastructure in order to capitalize on years with favorable climatic conditions and high yields.
In milling, an increase in product demand will lead to a need for capacity expansion by local companies that are active at either the national or regional levels. Rabobank, however, notes that in certain markets, new market entrants will provide additional capacity. It further notes that strategies aimed at geographical expansion, diversification, and/or consolidation will trigger a demand for mergers and acquisitions.
Small, fast-growing poultry markets are gradually driving demand for feed grains, creating a new opportunity in the feed industry that some millers could consider. Import of yellow maize is also expected to rise to meet this new demand for feed, further creating new business opportunities for importers.
The Buck Stops Here
ESSA’s projected grain demand is undisputed. The population is certainly bound to rise, and this metric alone is sufficient because more people essentially means more mouths to feed. Private players can only do so much, but the buck stops with national governments. It is their responsibility to implement the necessary policies that will support the production and easy movement of grains within the region.
Rabobank suggests that these strategies should begin at the farm. “Improving farming is key to increasing local production,” the bank notes. To boost production, the bank advises national governments to support the adoption of agronomic practices such as mechanization and irrigation, crop rotation, and ensure better access to farm inputs in order to improve yields.
Governments are also required to boost investments in transportation infrastructure (railways, roads, and rivers) to facilitate the smooth movement of grains and improve access to farm inputs and fertilizers.
If governments fulfill their responsibilities and create enabling environments for businesses to thrive, then the numerous opportunities envisioned by Rabobank in its report will certainly be realized, benefiting the region’s food security.