Farmers’ capital fund lost $0.4m in 2008

African Agricultural Capital — a regional investment fund specialising in agricultural financing — has invested more than $6 million in various enterprises since 2005 but made an operating loss of $442,639 in 2008.

According to the company’s annual report for 2008, African Agricultural Capital is currently financing 16 ventures in the region, comprising seven agricultural businesses in Kenya, five in Uganda and four in Tanzania which are mainly engaged in production of agricultural inputs.

African Agricultural Capital was founded in 2005 and provides risk capital to small and medium enterprises (SMEs) in the agricultural sector, through acquiring equity and extending credit finance.

Major beneficiaries include prominent seed companies such as Western Seed Company of Kenya, Victoria Seeds and Naseco of Uganda as well as Fica Seeds of Tanzania.

It also supports enterprises focused on improving market access for smallholder farmers in vegetable oil export, product certification and vanilla export trade in Uganda and Kenya.

Investments in selected enterprises are driven by high economic returns and potential impact on wider community development through extended commercial benefits reflected among local suppliers and employees.

However, growing operational costs saw the company register a loss for the third year running.

It incurred an operating loss of $442,639 at the end of June 2008, reflecting a 24 per cent increase compared with 2007. Besides, the impact of the global economic crisis has already been felt by its client businesses in form of hiked fuel and fertiliser prices during 2008.

According to Tom Adlam, managing director of African Agricultural Capital, the firm’s future performance will be largely influenced by its ability to break even and steady growth in its capital base.

“We have invested $8 million of capital so far and more is needed. We need to double capital every three years and put $30 million under management in six to seven years. However, improved performance among our client businesses will see us break even in 2010,” he said. The company’s targeted return on investment is 12 per cent per annum.

African Agricultural Capital’s significant investments in the East Africa’s seed sector are apparently driven by the need to reach out to more farmers than is possible with centralised farming projects such as tea estates.

Mr Adlam told The EastAfrican that two of their client seed businesses are currently serving an estimated 250,000 customers in the region.

Victoria Seeds obtained a loan of Ush460 million ($233,500) with a fixed interest rate of 9 per cent per annum from African Agricultural Capital during the three-year period meant for improving product quality and distribution.

In addition, Western Seed Company obtained two loans worth $400,000 and $600,000 with interest rates of 9.5 per cent and 8 per cent per annum during the same period.

But African Agricultural Capital’s investments in the seed sector are still hampered by challenges related to regulation and insufficient production capacity.

The firm claims that the seed regulation regime in Kenya is still superior to that in Uganda and Tanzania, which has created a serious imbalance in the supply of good quality seeds in the region.

Consequently, Kenya’s seed germination rate has remained the highest at 90 per cent compared with that of Uganda and Tanzania.

Besides, the region’s seed sector is still suffering from generally insufficient capacity with only a few companies capable of mass production, leading to substantial seed imports.

Other notable investments include Africado Ltd of Tanzania, which obtained a loan of $100,000 for an avocado growing project targeting the European Union market. Its interest rate is 10 per cent per annum.

However, rising fuel and fertiliser prices caused by the global economic crisis also affected AAC’s client businesses in 2008, although the negative impact is expected to remain marginal this year, mainly because of high population growth and sustained demand for food in the region.

“The potential for increased earnings in the agricultural sector is considerable, especially in the development of regional markets and in value-addition for export,” said Patrick Oketa, chief investment officer at African Agricultural Capital.

“As our population continues to grow, it is essential for us to increase agricultural efficiency. This will create significant opportunities for investment and growth in the future,” he added.

AAC’s losses for the past three consecutive years are directly attributed to limited capital flows and heavy management costs that exceed investment income