Agriculture and climate – Innovative market approaches for improved economic empowerment

By Rob Floyd and Rick Gilmore

At the recent African Transformation Forum (ATF2018) in Accra, the African Center for Economic Transformation (ACET) highlighted four key issues that will, in large part, define Africa’s economic transformation agenda over the next decade. These are climate, innovation, youth/jobs and regional integration. While all are inter-related, particularly in the context of jobs, climate and innovation on the African continent must seek to mitigate the negative impacts of climate change such as desertification and heat-induced crop failures, while continuing to pursue economic growth and transformation strategies.

As ACET argued in its ATF2018 special publication, DIRECTIONS magazine, the African continent has a unique opportunity to leapfrog to low carbon energy, climate resilient agriculture and green infrastructure. A leapfrog to sustainable and climate resilient agriculture will lead to improved food security, access to new markets, and enhanced value addition agriculture products. Ultimately, this means the potential for improving the standard of living for millions of farmers across the continent. Importantly, African governments will need to do more than innovate around smart-phone apps, improved seed varieties and better extension services to make this happen. They will also need to seek market solutions that serve to incentivize good agricultural practices and food security by reducing carbon and greenhouse gas (GHG) emissions in their agriculture sectors. Given the current state of traditional carbon trading and the precarious position of the Paris Agreement following the U.S. promise to withdraw, one could argue that the best strategy to reduce GHG emissions is a market-led solution. And Africa may be the place to implement such a solution.

The Paris Accord and Africa

Since December 2015, 197 countries have signed the Paris Agreement on climate change and 179 have ratified it – including 48 African countries. That is 87 percent of the countries on the continent and represents more than 95 percent of Africa’s population. Likewise, numerous countries in Africa have formulated Nationally Determined Contributions (NDCs), their national strategies to achieve climate change goals.

African countries now have an opportunity to maximize green socio-economic development and become a leader in climate smart investments, particularly in agriculture, energy and infrastructure. In energy, for example, given the low amount of power currently produced on the continent, bringing online new large solar and wind power can quickly transform Africa to a green energy continent. Likewise, for agriculture, Africa has 65 percent of the world’s arable land and 10 percent of the world’s freshwater resources, hence innovative climate-smart market innovations can lead to higher production rates, higher quality products and hence higher farm gate prices for Africa’s farmers. According to the World Bank, improved agriculture value chains can reduce poverty two to four times faster than other sectors.

Innovative market-driven tools

The GIC Group, a leading global consulting firm in agriculture and biotech, has worked with the American Carbon Registry to develop a new market tool for value creation and risk management in the rapidly changing carbon market. One of these tools is a “commodity plus carbon” futures contract. Given the relative maturity of African commodity exchanges, such futures contracts could propel Africa to the forefront of innovative market oriented solutions to address climate change.

There are now numerous mercantile and commodity exchanges in Africa – from the East Africa Exchange (EAX) to the Nigeria Commodity Exchange (NCX) to the South African Futures Exchange (SAFEX). These trade in a wide range of commodities from coffee and ginger to maize, wheat and soybeans. While these exchanges have faced challenges, particularly with regard to warehousing capabilities, most are now operating effectively. These exchanges (and others in Ethiopia, Madagascar and Kenya) offer platforms for suppliers and buyers to hedge their risks and maximize the gains from low carbon production and processing strategies.

GIC has developed the new breed of futures contracts for commodities that measure carbon reductions in crops and agricultural products. The reductions would be certified and contracts traded at a higher value than the standard futures contract, hence creating revenues along the agricultural value chain. The additional income is intended to benefit local farmers, particularly smallholder or contract farmers, and incentivize good agricultural practices.

Africa setting the global standard

The contract would be assured by a certification and verification system that rewards good agricultural practices through the use of new technologies and strategies that result in measurable and lasting carbon reductions. The architecture for measuring and certifying carbon reduction levels is already in use in some places, but can be adapted to African food products, focused on high value crops and formulated to ensure higher prices for farmers. The contracts can be adapted to commodities and to high value processed products. Ultimately, the farmers will secure at origin a premium quality product that can satisfy global consumer demand for greener products.

Agriculture accounts for one-fifth of emissions worldwide according to the Food and Agriculture Organization (FAO), but climate-friendly practices can lower the carbon footprint and address climate change risks. As outlined in ACET’s recent report “Agriculture Powering Africa’s Economic Transformation”, there will be a significant intensification of agricultural production in Africa over the following generation to meet local and global food needs. Strong, innovative market-oriented incentives will be critical to counteract the climate effects of intensification, including fertilizer use, water use and mechanization. This will be particularly important as the impact of climate change becomes evident. Simulations undertaken for the Fourth Assessment Report of the Intergovernmental Panel on Climate Change found that East Africa will experience a 7 percent increase in precipitation, while the Sahel region will see a 6 percent drop – all while temperatures increase overall.

The economic empowerment imperative

Almost all African governments are struggling with the prospects of jobs for their populations, particularly in rural areas. According to a forthcoming ACET report, if demographic pressures continue unabated, the working age population (15–64 years) is set to reach the 1 billion mark just before 2030, up from 743 million in 2017. The structure of the labor force has so far remained fairly stable, with no significant shifts toward high value-added sectors. Projections to 2030 are largely the same, with agriculture continuing to be the largest employer in the low- and lower middle-income African countries.

With this scenario, it is imperative to provide maximum value to agricultural products, and hence the highest possible incomes to farmers. As the World Bank report, Future of Food, noted, there is a growing spectrum of practices and innovations that can help secure increased resilience to climate change. The commodity plus carbon futures contracts can be one of those innovations. That said, food demand is projected to rise by at least 20 percent globally over the next 15 years, with the largest increases projected in sub-Saharan Africa. Therefore, food production in sub-Saharan Africa will need to increase by about 60 percent over the next 15 years to meet the rising demand for food and to eliminate hunger. African growers are true shepherds of the soil but have been insufficiently rewarded for their hard work. Climate changes in Africa may create more challenges in the food chains of African countries. The “commodities plus carbon” futures contract strategy offers opportunities for growers to mitigate their risks and capitalize on the value and quality of what they produce.

Rob Floyd is Director and Senior Advisor at the African Center for Economic Transformation (ACET).

Rick Gilmore is President and CEO of the GIC Group and Chairman of the Global Food Safety Forum.

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