* Higher productivity needed to free workers from land

* Industrial ambitions rely heavily on cheap labour

* Challenge to change practices used since biblical era

By Edmund Blair

ADDIS ABABA, Feb 2 (Reuters) - Ethiopia's ambition to become a manufacturing hub may hinge on Khalid Bomba's ability to transform small-scale farming just as much as it relies on new railways, roads and other more obvious signs of change in a nation once brought to its knees by famine.

The 46-year-old one-time investment banker is now chief executive of Ethiopia's Agricultural Transformation Agency (ATA). His task is to boost output from a sector that employs 85 percent of the workforce, most of them tilling plots of less than two hectares.

"The cheap labour for industrial manufacturing is going to come from the rural areas," he told Reuters in an interview at the Addis Ababa headquarters. "You are not going to have people coming off the farm if productivity levels don't increase."

Ethiopia boasts some of the highest economic growth in Africa, at 8 percent or more a year, much of it fuelled by a huge state infrastructure programme that includes a new railway to Djibouti's port, a city metro in the capital and vast hydro-electric dams, all aimed at attracting industrial investment.

But agriculture still accounts for more than 42 percent of gross domestic product, high even in Africa. The level is about 30 percent in next-door Kenya. Yet, Ethiopia still has to import some basic foods to feed its population of 96 million.

The challenge for Bomba and his team at ATA, which launched in 2011, has been to work out better planting, fertilising and harvesting techniques, while ensuring adoption by farmers whose practices have sometimes barely changed since biblical times.

One of the first areas targeted by ATA was production of tef, a grain that is the main ingredient in Ethiopia's national dish "njera", a kind of sour flat bread. Yields at 1.2 tonnes per hectare were half or less that of other grains in Ethiopia.

"The way that tef has been planted and grown has not changed for hundreds, if not thousands, of years," Bomba said. "The fact of the matter is that Ethiopia's farmers had been planting too much seed."

HABITS OF A MILLENNIUM

Typically, farmers scattered 30 to 50 kg of seed per hectare. But using just 3.5 to 5 kg, alongside planting in rows and using a particular seed variety, boosted output by 50 to 70 percent, said Bomba, who was born in Ethiopia, studied in the United States and Britain, and spent 10 years with JPMorgan investment bank.

Initially, just two farmers were willing to work with ATA, but take-up of the new practices has steadily increased. In 2014, 2.1 million farmers adopted the techniques, although the rest of 5 million trained were still too wary to employ them.

Rising output has driven down market prices of tef to the equivalent of about $60-$75 per 100 kg from $85-$100. Higher yields also mean farmers can switch some of their land to other crops or even grow a second crop of pulses on the same tef land.

Exports of tef, which are banned to avoid domestic shortages, could start on a small scale by the end of 2015 or 2016, Bomba said, although safeguards would be in place to protect local supplies.

Yields of wheat, maize and other crops have also improved. Wheat production has climbed almost 8 percent a year since 2006, and reached 3.9 million tonnes in the year 2013/2014, meeting more than 85 percent of domestic needs. ATA is also studying the nation's soil to improve fertiliser use.

Reflecting the strong hand of state in other areas of the economy, spreading better practices has relied on a government network of 60,000 so-called "extension workers", who help with training. ATA is also spreading ideas by mobile phone.

Just as Ethiopia's industrial drive has drawn heavily on Asia's experience, ATA was created after studying how nations such as Malaysia and South Korea grew. Bomba led that study when he was working at the Bill & Melinda Gates Foundation, a philanthropic organisation that still partly funds ATA.

Roads and railways were the "shiny objects" that often captured the world's attention, he said, "but at the end of the day the backbone of this country remains the agricultural sector." (Additional reporting by Aaron Maasho; Editing by Dale Hudson)