Author (s): Goodman AMC,

Goodman AMC LLC is Africa’s leading management consulting firm

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Introduction

Agriculture provides employment to 50% of Africa’s labour and is the main source of income for its rural population, which represents 64% of the total population (Africa Competitiveness Report, 2015). However, the sector is currently characterized by a high percentage of rain-dependent small holder farms (c.80%), cultivating low-yield staple food crops and declining contribution to GDP, primarily due to limited value addition and low productivity. Post-harvest loss across Africa is about 30% (approximately USD 4 billion).

The sector’s contribution to GDP is slim, coming in at 15%, according to the World Economic Forum Africa Competitiveness Report, 2015. Value-added agriculture’s share in GDP comes in at just 11% for Sub-Saharan Africa, compared to 30% in ASEAN economies. It is disappointing that despite its vast resources, Africa’s food staple imports are in the region of USD 25 billion per year. However, this also lays emphasis on the huge economic void for commercial farming and value- added agriculture.

GHANA: Structural Transformation

Ghana has seen a reallocation of economic activity from agriculture into the services sector over the last ten years. Resource allocation, particularly labour, has shifted from agriculture and value-add agriculture and directly into services. Employment in agriculture declined from 62% in 1992 to 42% in 2010; implying that more than half of the country’s workforce, which used to be in agriculture, is gradually shifting from agriculture to the service sector, bypassing the manufacturing sector.

As a result, Ghana’s economic transformation has by-passed manufacturing and moved straight into services. Manufacturing sector contribution to GDP has steadied over the past 6 years, averaging at a 6.25% growth annually. In 2014, manufacturing accounted for just 5.9% of GDP in Ghana. There are reasons for this, chief among them being restrictively high energy charges and operating overheads, low level financing from the financial services sector, comparatively high cost of credit, an infrastructural deficit, and a blind dependence on imports.

For example, agricultural value-added share in GDP has decreased remarkably in the past 10 years (from 41.5% in 2004 down to 19.9% in 2014), whereas service sector contribution has increased, accounting for 51.7% of GDP in 2014 (from 49.2% in 2009).

Progressive governance, enabling technology, a narrowing infrastructural deficit, and broad strategic initiatives that seek to encourage lending to the primary sector will transform Ghana’s agriculture and agro-processing sector in the medium to long term. One initiative that seeks to steer the course of labour flow back into agriculture and agroprocessing is the Youth in Agriculture Programme, a Government of Ghana agricultural sector initiative aimed at encouraging the youth to take up farming and / or food production as a commercial venture.

Ghana: A Favorable Investment Destination for Agro-Business

Despite its current energy challenges, Ghana ranked number 11 in Sub-Saharan Africa (“SSA”) among 47 economies covered in the World Bank 2016 Ease of Doing Business Report and the best business destination in West Africa. Ghana’s growth rate has been forecasted to recover to 5.9% in 2016 (versus 4.6% for SSA; 3.3% World) and 8.2% in 2017 (versus 5.0% for SSA; 3.2% World). Intensified oil and gas production, private sector investment, upgrades in public infrastructure, progressive governance and accountability, and political stability underline these growth projections.

This report seeks to explore the merits of value addition to agricultural commodities, and focuses primarily on the tomato processing industry in Ghana. This is an especially interesting micro segment to analyze because of the following:

Ghana is estimated to consume in excess of 100,000 metric tonnes of tomato paste annually at a cost of more than $100 million. A tomato processing factory, set within reach of local farmers, which operates throughout the year has the potential to increase the income of farmers by over five times; and. Approximately 90,000 farmers are involved in tomato production, and more than 300,000 individuals are engaged in both retail and wholesale of raw tomato and processed tomato products in Ghana. Ghana has the right topographical and agro-ecological conditions, and one of the biggest agricultural dams in West Africa (the Tono Dam, situated in a tomato farming region, can be used to produce tomato all year round).

The Case for Agriculture

Ghana is heavily reliant on food imports, and this continues to impact the country’s accounts. Ghana’s imports for Q1’2015 came in at USD 3332.50 million from USD 3826.50 million in the fourth quarter of 2014. This is very high, given the resource wealth of the country and its vast supply of arable land.

Industry and agriculture together constitute 28.4% of the economy. However, growth in the agricultural sector has been slow (peaked at 5.2% between 2010 and 2014) due to a resource shift into services over the last decade.

Ghana’s agriculture sector contributed 21.5% of Ghana’s GDP in 2014 and 19% as of September 2015, dropping at a shocking rate of 12.8% in seven years (31.8% in 2009 to 19% in 2015). But yet still, agriculture continues to be the largest employer, employing just over 40% of the country’s workforce (about 50% of the population live in rural areas and are mainly dependent on farming).

Ghana attracted agricultural investments worth more than USD 4.23 billion in 2011, representing a 70% increase over the 2010 figure of USD 2.490 billion. However, only 57.6% (7,846,551 hectares) of its 13,628,179 million hectares of arable land is cultivated. The sector remains under tapped, and requires smart management to unleash its full potential.

 Ghana currently produces less than 30% of the raw materials needed by its agro-based industries. Agro-processed exports in Ghana alone increased from USD 181.1 million in 2004 to USD 902.5 million in 2011, representing 398% growth (Oduro and Offei, 2013). Further, agro exports accounted for 7.4% of total merchandise export earnings in 2004, plummeting only to 4.9% in 2011.

Ghana’s fast growing middle-class is a ready consumer base for locally-processed foods. But since local food processing remains too small to satisfy local demand, high-value food imports have risen quite considerably, despite government incentives (tax holidays) which have been put in place to promote the local agro and food processing industry.

Fresh Tomato: The Red Gold Creating Wealth

By industry estimates, Ghana produces over 300,000 metric tonnes of tomatoes, 90% of which is consumed locally. Tomato is a staple ingredient in the daily diet of Ghanaians, and accounts for 38.0% of total vegetable expenditure in Ghana. Popular varieties grown in Ghana include Roma VF, Laurano, Raki, Chocó TP, Power Reno, Rasta, Italy Heinz and Petomech, which are mostly suitable for processing.

The daily demand for tomato products continues to increase across all regions of the country, as it is a dietary staple in every household, hotel and restaurant. With the growth of Ghana’s middle-class, and Ghana’s population increasingly becoming urbanized, consumers have grown an insatiable appetite for convenience foods. As a result, the demand for tomato paste used for the preparation of a broad range of both local and foreign cuisines has increased. This demand for tomato paste (in quantity and quality) is also spreading in the sub-region and could provide a meaningful consumer base for locally-processed tomatoes.

But, unfortunately, the tomato processing industry in Ghana remains small and relies heavily on imports. Ghana is estimated to consume in excess of 100,000 metric tonnes of tomato paste annually at a cost of more than USD 100 million.

Tomato production in the Upper East region of Ghana alone employs about 11,728 farming families with an average family size of 5 persons. It is estimated that 58,640 persons benefit from its production as noted in a survey report by Trade Aid Integrated. According to the Ghana National Tomato Producers’ Federation, Ghana produces 510,000 metric tonnes of tomato each year, while it imports up to 7,000 tonnes per month from its neighbors, alongside 27,000 tonnes of processed tomato from Europe. Ghana has the right topographical and agro-ecological conditions, and also has one of the biggest agricultural dams in West Africa (the Tono Dam, situated in a tomato farming region, can be used to produce tomato all year round).

The scarcity and high cost of tomato during the dry and minor seasons in Ghana is what accounts for the excessive imports of tomato paste and products into the country. For instance, industry data suggests that total production of tomato doubled between the 1970s/80s and the 1990s, but slid from 100,000 tonnes per year to around 50,000 tonnes per year in the 1970s and early 1980s respectively. Then in the late 1980s, production reverted back to around 100,000 tonnes, and expanded during the 1990s, averaging around 200,000 tonnes per year by the end of the decade. Notwithstanding this fact, during the 2000s, production fell gradually.

Currently, approximately 321,000 metric tonnes of tomatoes are cultivated annually, valued at USD 118 million, whilst 75,000 metric tonnes is imported annually to augment the shortfall. This short fall necessitated the importation of processed tomato worth USD 112.1 million in 2013 alone according to the Ministry Of Food and Agriculture. Also, despite this shortfall, farmers are still experiencing gluts and high post-harvest losses during major raining seasons. Out of over 510,000 metric tonnes of fresh tomato produced annually in Ghana, the country loses about 153,000 metric tonnes, representing about 30% of the entire year’s produce.

Tomato Paste Industry: Ghana’s Neglected Goldmine

In the early 1960s, the Government of Ghana set up two tomato processing plants; the TOMACAN and the Pwalugu Tomato Processing factories. According to Robinson and Kolavalli, 2010, during the 1980s, both factories collapsed due to a mixture of structural reforms promoted by the World Bank and IMF; frequent breakdowns resulting from a lack of spare parts and obsolete machinery; lack of technical competence and financial management; and poor marketing. This resulted in the closure of these factories. The Government of Ghana has since made several attempts to revamp these factories into large scale tomato processing plants but to no avail. President John Dramani Mahama’s recent visit to the tomato district in Parma, Italy was an attempt to draw large scale tomato processors into Ghana.

In 2014, Techiman Processing Complex, an agro processing company, through a PPP agreement with the government of Ghana and a GHS 200,000 financial support from the Export Development and Agricultural Investment Fund (“EDAIF”) established a tomato processing factory. The plant had halted operations for some time due to lack of raw materials for production. According to TEPCOs CEO, the company is still in the process of sourcing extra financing for its operations.

According to the FAO, Ghana has a total processing capacity of 1400 tonnes of fresh tomato per day (500 tonnes at Trusty Foods and Northern Star, 200 tons at Afrique Link Ltd in Wenchi and TEPCO in Techiman). If these three tomato processors were even operational at full capacity, they would be able to process 438,000 tonnes of fresh tomato, the equivalent of 54,750 tonnes of tomato paste each year (assuming a paste of 36-38% brix, requiring 8 tonnes of fresh tomato per tonne of paste), which is still a deficit to the annual demand of tomato paste in Ghana (in excess of 100,000 tonnes a year).

Government Incentives for Agro-Processors

Tax Incentives under Export A corporate tax rebate allows any manufacturer or any person engaged in agricultural production, exporting part or all of his production, to claim tax rebates of between 40% and 75% of his/her tax liability. A Custom Duty Drawback also allows exporters to draw back up to 100% of duties paid on material imported to produce goods for export.

Transferability of Capital, Profits and Dividends Subject to the Foreign Exchange Act, 2006 (Act 723) and the regulations and notices issued under the Foreign Exchange Act, an enterprise shall, through an authorized dealer bank, be guaranteed unconditional transferability in freely convertible currency of dividends or net profits attributable to the investment made in the enterprise. This allows for the full repatriation of earnings in the currency of investment.

Double Taxation Agreements Ghana also uses Double Taxation Agreements to rationalize tax obligations of investors who come from global tax sourced jurisdictions with a view to saving the investors the incidence of double taxation.

Government Policy Supporting Agro-Processing

Ghana Trade Policy This policy is set within the context of Ghana’s long term strategic vision of achieving middle income status and becoming a leading agro-industrial country in Africa. The policy provides clear and transparent guidelines for the implementation of government’s domestic and international trade agenda.

The government’s trade policy, under the sectoral development of the agro-processing industry, stipulates that the expansion and diversification of production of goods and services are necessary to develop sufficient trade capacity to take advantage of export market opportunities and satisfy domestic market requirements. It further emphasizes that agriculture is by far the most important sector of Ghana’s economy upon which most Ghanaians depend, and that agro-processing will play a central role in the diversification of Ghana’s economy.

Risk Analysis

Tomato processors; Trusty Foods, which sources most of its tomato from farmers in the Upper East Region of Ghana paid each farmer an average amount of GHS 154 per tonne. This is below the price at which farmers sell to fresh tomato sellers.

Interestingly, Trusty Foods offers the highest price than any other tomato processor in Ghana, and this does not even meet the price at which fresh tomato sellers are willing to pay for a crate of tomatoes from the farmers, hence compelling the farmers, (who encounter high cost of production and sometimes difficulty in obtaining credit) to sell to fresh tomato sellers for profit, making it difficult for local tomato processors to compete with imported tomato paste, which comes in at a lower price to the local option.

Farmers mostly supply tomato factories during the peak period, when the pre-agreed processor price is higher than the fresh market price, but eventually divert to the fresh market price, as tomato becomes scarce during the dry season and the price for fresh tomatoes increase above the processor price.

The Irony: Imported tomato paste is more expensive than locally processed tomato paste in Ghana

Market analysis on the Ghanaian tomato paste industry shows that there are several tomato paste brands on the Ghanaian market, most of which originate from Europe and China. Key tomato paste companies include:

1. Conserveria Africana, which produces the GINO and POMO brands of tomato paste;
2. Olam, which produces Tasty Tom;
3. Trusty Foods, which produces LA BIANCA tomato paste; and 4. Centro Esportazione Conservati, which imports SALSA from Italy

Tomato paste imports currently amount to over 78,000 tonnes of paste per year, 12,000 tonnes of which are exported after repackaging. In Ghana’s tomato paste retail market, the 210 gram tin tomato paste is the most popular. Interestingly, LA BIANCA tomato paste, which is produced by Northern Star and packaged for marketing by Trusty Foods locally, is sold at a cheaper rate on the Ghanaian market, compared with SALSA tomato paste which is imported from Italy, and is the most expensive tomato paste product on the Ghanaian market.

Import charges on foreign products have risen to an all-time high recently, resulting in the spike in tomato paste prices on the Ghanaian market and rendering imported brands more expensive than locally-produced tomato paste. This means that the marginal cost of paying above-the standard market prices for tomato paste produced in Ghana is lower than the marginal cost of importing tomato paste into the country, thus allowing locallyprocessed tomato to keep its gross margin at the minimum required to cover the cost of raw material inputs, operating costs and overheads, and to turn a reasonable profit.

Causes of the high cost of imports in Ghana

he growing middle-income bracket (about 5 per cent of the population) could provide a significant consumer base for locally-processed foods. But as local food processing remains too small to meet local demand, high-value food imports have been increasing (Wolter, 2008).

In 2013, Ghana exported USD 18.8 billion and imported USD 15.4 billion resulting in a positive trade balance of 3.39 billion. These exports are led by gold, which represents 29.6% of the total exports from Ghana, followed by cocoa beans, which account for 26.8%. Imports decreased to USD 3332.50 million in the first quarter of 2015 (from USD 3826.50 million in the fourth quarter of 2014).

Italian Tomato Paste Imports Dwindling Due to high cost of imports Italy is one of the largest exporters of tomato paste to Ghana (Ghana is the eighth-largest buyer of Italian paste from Italy). However, Italian tomato paste delivery to Ghana is shrinking gradually. According to an article by Agra-net in 2015, Italian tomato paste deliveries to Ghana peaked in 2012 at 28,898 tonnes. Exports then slumped by 10,000 tonnes in 2013, and dropped further to 6,321 tonnes in 2014. Shipment to the African continent was close to or above 20,000 tonnes in recent years, and over 30,000 in 2004. Deliveries in YTD 2015 show a strong decrease against previous years. At 1,721 tonnes between January 2015 and April 2015 shipments were down 71% in 2014 and 84% in 2013. High import costs partially account for the reduction into Ghana.

Recommendation

A core objective for any investor who wants to invest in the tomato processing industry should be: 1. to focus mainly on improving livelihoods and generating long term sustainable income for local farmers and the communities where they operate; 2. to provide training and support that will help farmers improve farming practices; and 3. to give competitive, guaranteed minimum prices through contracts with farmers, assuring them that their produce will be bought, in spite of seasonal fluctuations in market prices.

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