Agro-Processing: A Gateway to Inclusive Structural Transformation in Uganda?
Agro-processing is an important opportunity for inclusive economic transformation1 in Uganda. “Agro-processing” relates to the processing of agricultural products (crops and livestock, fisheries, and forestry) to generate added value, no matter the scale or complexity of the manufacturing process. The agro-processing industry is taken to include food and drinks, tobacco, leather processing, cotton ginning, textile, cloth, leather and footwear manufacture, saw milling, paper and printing, among others.
Agriculture is the biggest lever of inclusive economic development and poverty alleviation in Uganda. It employs more than two-thirds of Uganda’s labour force, most of whom are engaged in (near-)subsistence farming. The rural areas where farming is the predominant economic activity are currently home to almost 90% of Uganda’s poor. Agro-processing represents one of the most promising avenues for job creation and structural transformation. Agro-processing firms have a strong incentive to integrate smallholders into their value chains, providing them with access to inputs, skills, post-harvest handling and secure markets to increase their productivity. This increased demand for agricultural produce has the potential to drive up smallholder farmer revenues. Higher farm revenues, in turn, tend to generate greater rural demand for non-farm products, opening up business opportunities for rural populations and stimulating broader rural development. In response to this, both the government and development partners have identified agro-processing as an important sector for inclusive development.2
Despite the promising employment and income opportunities presented by agro-industrialisation, the development of the industry faces important challenges. A large number of agro-processing plants in the country currently exhibit a striking underutilisation of capacity – some plants are operating at only around one-third of capacity. For this reason, before making additional investments in expanding processing capacity to tap into the structural transformation potential of agro-industrialisation, a targeted effort must be made to understand the reasons for such significant underutilisation of existing capacity. One possible explanation may be the ex-ante overestimation of agricultural production, meaning that processing facilities are built for unrealistically high projected volumes of raw materials. A definite answer to the issue of agro-processing capacity underutilisation will, however, require a large data-gathering effort, as current data on production volume, costs and margins are too limited to allow adequate investigation.
Flower farm near Kampala. Photo credits: flickr user SuSanA Secretariat
Agriculture in Uganda’s Economy
The agriculture sector represents one quarter of Uganda’s GDP and more than half of its exports by value. It employs close to 70% of its workforce and three quarters of its youth (15-24 years of age); almost 80% of Uganda’s population lives in rural areas, where farming is the main form of economic activity.
Despite the central place of agriculture in Uganda’s economy, the sector’s growth performance has been mediocre at best (the aggregate value of Uganda’s agricultural production has grown from 5 billion International Dollars3 in 2010 to 5.2 billion International Dollars in 2016), and lags far behind that of its neighbours Kenya and Tanzania (Figure 1). What is more, the World Bank (2018) has shown that total factor productivity growth in agriculture has been negative over the past 20 years.
Figure 1: Agricultural trends in the East African Community, in International $ (Billion)
Source: author’s calculations from FAO data.
Trends in agro-processing and manufacturing and their economic impact
Agro-processing is a key component of Uganda’s manufacturing sector (Figure 2). Indeed, it accounts for almost 70% of total manufacturing output (while manufacturing itself has accounted for approximately 8% of GDP over the last decade).
Figure 2: Share of Uganda’s manufacturing output by sub-sector (% of total)
The agro-processing sector grew rapidly, at an average of 8% per year, in the 5 years to 2017. This was responsible for much of Uganda’s impressive 6% per year manufacturing growth rate in that same period.
Agro-processing as a subsector of manufacturing holds vast potential for inclusive structural transformation. By adding value to small and medium farmers’ agricultural produce, agro-processing can help increase revenues from farming production, and drive employment growth. Recent work with smallholder farmers in Rwanda has indeed demonstrated that SMEs can be an important driver of change in the agricultural sector, and can generate economic development that benefits small-scale farmers.
The structural transformation potential of agro-processing is enhanced by the growing demand for processed agricultural goods, both in Uganda and from abroad. Uganda’s population growth rate is among the highest worldwide at 3.2% per year. This, together with the rapid 5.4% annual urban population growth rate, is driving up demand for food. Additionally, income growth in both urban and rural areas is driving dietary shifts, away from staples towards higher-value, more processed foods. For example, the demand for fish increased by almost 75% between 2000 and 2011, and the demand for eggs and milk increased by more than 50%.
Uganda’s processed agricultural products also have a high export potential. The export basket has been shifting to increased value addition, reducing the historic dominant role of raw materials in exports (from 90% in 1995 to around 50% in 2017) and increasing the presence of manufactured goods from almost nil in 1995 to around one-third today.
Trade agreements offer important opportunities for Uganda’s agro-processing industry. A case in point is how effectively Uganda took advantage of the formation of the East African Community (EAC) Common Market in 2005 to substantially increase its export share to EAC countries, which have now become its main export destinations. As shown in Figure 3, in the case of milk, cream and milk products, exports to the EAC increased exponentially after the formation of the Common Market, followed by firms also successfully exporting to countries outside of the region.
Figure 3: Uganda’s exports of milk, cream and milk products (excluding butter and cheese) in USD ‘000
Source: Karingi et al, 2016.
The African Continental Free Trade Area (AfCFTA), which is to come into force shortly, represents a similar opportunity for Uganda to expand its export market. Indeed, AfCFTA economies represent a combined US$ 3 trillion in GDP, and are home to around 1.2 billion people. Uganda already earns more than 50% of its total export revenue from Africa, a higher share than any of its neighbours. Furthermore, 39% of its exports to Africa are manufactured goods, compared to just 26% for exports to the rest of the world. Uganda is therefore already well-placed to take advantage of the expansion of intra-Africa trade promised by AfCFTA; agro-processing is in a position to be one of its main beneficiaries.
Current government strategy towards agro-processing
Current government strategy for growing the agro-processing industry emphasises the importance of the so-called Nucleus Estate/Smallholder Outgrower (NE/SO) business model. This involves the aggregation of production from a cluster of farms within a given geographical area (so-called “outgrower” farms), for processing by a larger “nucleus” farm. The nucleus farm thus acts as a central processing facility, allowing smallholder farmers to share the cost of the processing infrastructure.
The first model of nucleus farms developed organically in Uganda in the 1960s, notably in the rice industry in the eastern Kyoga Plains. The model has been alive in the country ever since, and a number of companies today successfully operate a version of it. For example, the Mukwano Group of Companies has developed a 1,500 acre nucleus farm in Teso, where the nucleus farm processes its own production together with that of 70,000 outgrowers. Mukwano also runs demonstration sites where “lead” farmers are given seeds, herbicides and fertiliser kits to provide training to outgrower farmers, helping raise their productivity. The South African conglomerate AFGRI Agri Services has been operating this business model in its Ugandan maize farms since 2013; the model is widespread also in the sugar industry (for example, between 1996-2008 42% of Kinyara Sugar Works’ supply of sugar cane came from outgrower farmers). The Kalangala Oil Palm scheme, however, stands as a star example among NE/SO models: a large nucleus farm processes outgrowers’ supply of oil palm on Kalangala Island, before shipping the oil for further processing on the mainland. This model is set for replication in other areas, Buvuma, for example.
These are cases of NE/SO models operating smoothly and efficiently for both the NE and SO parties. However, it must be noted that other such estates are not as successful: outgrowers are often dissatisfied with fees charged in exchange for what they perceive as inadequate service provision, and the managerial complexity of nucleus farms often leaves farmers out of decision-making processes. This contributes to the phenomenon of side-selling, whereby farmers renege on their promise to sell produce to the nucleus farm and instead sell to others who offer more, or quicker, cash.
These are just some of the important problems faced by the agro-processing industry in Uganda today.
Farming plots, Uganda. Photo credits: flickr user Rod Waddington
Weaknesses of existing agro-processing plants
As noted earlier, widespread underutilisation of capacity of installed processing facilities is a crucial concern. The World Bank (2012) reported that most agro-processing facilities operate at under 50% capacity. More recently, Onward Resources International (2016)found that the facilities it reviewed operated at just 20-30% capacity (as shown by Figure 4 below) and Munu (2019) found that the two textile factories in Uganda operate at less than two-thirds of capacity, and ginneries at less than 40%.
Figure 4: Interviewees’ processing utilization, 2014
Source: Fowler and Rauschendorfer, 2019, quoting Onward Resources International, 2016.
There are a number of potential explanations for this underutilisation. The World Bank identifies high transport and electricity costs and unreliable electricity supply as major impediments to full-potential production. But the fact that processing facilities are lying empty and that average farm harvests are below half of their potential clearly points to low agricultural productivity as another major explanatory factor.
An additional possible explanation for such low raw material production relative to processing capacity is that the projected raw material supply available to the processing plant was too high to begin with, meaning that the installed capacity should in fact have been lower from the start. As shown in Figure 8 below, extracted from the 2017 UBOS Statistical Abstract, the projected growth in raw material supply for a number of agro-processing value chains is very ambitious.
Figure 8: Projected growth in crop production
Source: EPRC (2018)
A partial explanation for such erroneous or exaggerated projections may be the lack of agricultural production data. Indeed, data scarcity means that researchers and policy-makers are unsure of actual processing costs, profit margins, production volumes, losses, marketing patterns, local consumption levels, and other factors. As a result, estimating optimal capacities for the construction of new plants becomes more an exercise in “guesstimation” than precise planning. Data scarcity also hinders the development of accurate industry assessments and relevant policy recommendations.
Additionally, constraints on access to capital limit the possibility for investments in improving agro-processing capacity utilisation and commodity value chains. Ntungire (2018) further shows that most finance that is available for the agricultural sector has gone towards the marketing of processed products instead of to improving production capabilities.
Encouragingly, a number of initiatives, such as AgDevCo, the Yield Uganda Investment Fund and the Agribusiness Initiative, are aiming to fill this gap. For example, Yield Uganda is committing €20 million in equity and grants for investments to increase soybean, egg and moringa production, boost coffee exports and improve processing, storage, and agricultural laboratory facilities.
Ugandan farming thatched houses. Photo credits: flickr user David Larson
How to address these weaknesses?
Addressing the issue of capacity underutilisation in agro-processing must take priority, before any other investments in expanding agro-processing facilities are made. Inadequate production relative to capacity is the result of a variety of factors, but the common solution lies in increasing the productivity of the agricultural sector.
Data collection should be a precursor to the development of any policy aiming at enhancing capacity utilisation in agro-processing. The analysis of production data will allow for the identification of the most binding constraints to agro-processing capacity utilisation, which can in turn be used to inform the appropriate policy response mix to these constraints.
The current Agriculture Sector Strategic Plan (ASSP) 2015/16 – 2019/20 acknowledges the need for improved data collection mechanisms, and aims to implement a National Food and Agricultural Statistics system to address this issue. Other planned interventions include helping farmers form farmer groupings and cooperatives, organising farmer training on the topics of agricultural production, agro-processing, post-harvest handling, etc., creating a platform for farmers to communicate their needs to the Ministry of Agriculture, and investing in agricultural research for increased productivity, disease and climate-change resilience of crops. Efforts are also being made to improve irrigation systems, support agricultural mechanisation, and distribute better quality seeds and fertilisers to farmers. However, the World Bank reports that there is a large gap between stated policy and actual implementation. Increased investments in building the capacity of the Ministry are needed, as is improved coordination between the various ASSP implementing bodies to ensure effective policy delivery. Indeed, there is a large discrepancy in the agricultural value chains (VCs) targeted by the 8 different Ugandan government strategy documents (which target various combinations of more than 25 different VCs). Streamlining these and maintaining a more strategic focus on prioritising investments in selected VCs would likely also improve the efficiency of government initiatives. Rebalancing of the budget allocated to direct input distribution compared to training farmers on how and when to use these inputs, and investing in the integration of smallholder farmers into agro-processing value chains, is also recommended.
The government could also play a greater role in facilitating access to finance at acceptable terms for farmers, whom research has shown to be very risk averse. This would allow them to generate the capital necessary to make their own productivity-enhancing investments. In addition to facilitating access to capital, the government could promote the implementation of specific insurance schemes (weather-based insurance for instance) to mitigate the losses linked to the unpredictability of farming yields, thus making investments less risky. Work on this is just getting underway.
Maintaining a focus on supporting smallholder farmers is crucial to attaining the inclusive part of structural transformation promised by agro-industrialisation. So far, government’s focus appears to have been on developing large-scale agro-industries. However, including small and medium enterprises in its plans would bring the government’s actions closer in line with its rhetoric of wanting to promote inclusive development.
This Insight post is based on a recent (November 2019) IGC working paper: Martin Fowler and Jakob Rauschendorfer, ‘Agro-industrialisation in Uganda: current status, future prospects and possible solutions to pressing challenges.’
 Inclusive, in the sense of benefitting a broad segment of the population, notably the poor and rural segments.
 See for example the Republic of Uganda’s Second National Development Plan 2015/16 – 2019/20, the Economic Policy Research Centre (2018)’s Fostering a sustainable agro-industrialisation agenda in Uganda, and the World Bank (2018), Closing the potential-performance divide in Ugandan agriculture.
 The World Bank defines International Dollars as: “An international dollar would buy in the cited country a comparable amount of goods and services a U.S. dollar would buy in the United States. This term is often used in conjunction with Purchasing Power Parity (PPP) data.”
Feature Image by flickr user Mountain Partnership at FAO
Ester Kovandova is a CDA Fellow, currently also studying towards her Masters degree in International Economic Policy at Sciences Po, Paris. Before joining CDA, Ester was part of the Programme Management team of UNCDF’s Mobile Money for the Poor Programme in Brussels. She interned as well at the German Marshall Fund of the United States as an economics research assistant, and at the European Parliament as an assistant to a MEP.
Martin Fowler is an agricultural economist with 42 years of experience across Africa, Asia and the Pacific. Martin has been based in Uganda since 2001, and has carried out a vast range of research, project design, policy and programme review and evaluation, and policy and strategy advisory work for the largest donor agencies, the Ministry of Agriculture, and other key stakeholders. He is currently the Agriculture and Livelihoods Adviser at USAID Uganda, where he provides support to the senior management of the Economic Growth Office in all areas relating to agricultural development in Uganda. He has extensive experience working on agro-industrialisation in Uganda.