The new face of commercial agriculture in SA is cooperation and amalgamation

With smaller players having to merge into large commercial groups in their efforts to survive, Nedbank’s Daneel Rossouw believes there’s place for expansion through integration.
Farmers are joining forces to establish packing facilities or grouping into consortiums to handle logistics. Image: Supplied

According to the Competition Commission’s August 2021 Essential Food Pricing Monitoring Report, the commercial agricultural value chain in South Africa is showing increasing levels of concentration for inputs and outputs.

The report states that there has been a 73% decline in producer numbers in the dairy sector, from about 3 900 farmers in January 2007 to 1 050 in January 2021 (see figure below).

Source: Milk SA Lacto Data reports (based on Milk Producers Organisation data)

Daneel Rossouw, functional head of Agriculture at Nedbank, believes the conditions for economic viability are a contributing factor to this decline.

“The bigger guys just keep getting bigger and the smaller guys are getting eaten up by them,” he says. “We are also seeing, on a primary level, that a number of farmers are working together in a consortium, buying new properties together. Commercial farmers are also expanding horizontally by diversifying into other production areas – for example, Mpumalanga farmers buying land in the Western Cape to add berries to the production line-up.”

This ‘large-scale or nothing’ trend in South African agriculture is adding to the price squeeze on producers, especially the smaller ones who have not yet joined forces with partners or have been amalgamated into larger groups.

“The sharp decline in the number of commercial farms highlights the difficulties smaller farmers face in reaching the necessary economies of scale to decrease costs and maintain profitability,” the Competition Commission report reads.

“We either see cooperation or amalgamation,” says Rossouw.

Price takers vs price makers

Rossouw argues that farmers traditionally stuck to their guns, focusing on the production side on the farms and leaving the processing, marketing and selling to other parties. Before 1994, the agricultural sector had marketing boards that controlled the distribution, marketing and price negotiations of agricultural products.

When farmers only focus on production, they can lose control over a part of the value chain and lose out on value.

“They in effect become price takers only,” says Rossouw.

However, with some of the more progressive bigger farmers, especially in the fruit industry, there are indications that these producers are now actively trying to shorten the value chain.

“They are joining forces to put up packing facilities or grouping themselves into consortiums to handle logistics.”

For small-scale farmers on the African continent, vertical integration – where two or more stages of the value chain are operated by the same company – has proven helpful for inclusion and access to market.

A recent article by Ernst & Young highlights the impact this has had on agri-processing and the food production industry, with examples taken from the United States.

The article discusses how retailers such as Walmart, Costco and Amazon have started a process of backwards integration – that is, taking some steps out of the value chain by owning their own dairy or poultry farms.

Rossouw says Nedbank has seen examples in South Africa where primary producers (the more progressive farmers) are starting to shorten the value chain: for example, fruit producers who set up packhouses and grain producers who now own silos and do the milling and even manufacturing of grain products themselves and sell directly to consumers.

“It is a good strategy to shorten the value chain and keep profits within one company, but not all primary producers have the ability to do it,” he says.

“Sometimes it is just too expensive, or they simply don’t have the human resources and skills to move into the processing side of the business. It is still early days, but it can benefit primary producers – that is a fact,” Rossouw says.

The value of partnerships

Just as farmers can benefit from cooperation in partnerships, so too can they benefit from the partnerships their financial services providers offer.

Nedbank, for example, has invested in Aerobotics, a South African data-analytics company that uses drones and artificial intelligence to provide insights and yield data for growers of, among others, citrus trees.

“We are looking at a system where we can potentially use the company’s data in our risk assessments,” says Rossouw.

“It is still early days, but Aerobotics now adding yield estimates to their available data gives us a view from a cash-flow perspective that we have not had before.”

Another partnership that Nedbank believes can add value to the farmers that bank with them is the long-standing relationship with the World Wildlife Fund South Africa (WWF SA).

“Nedbank has had a long-standing partnership with WWF SA and in 2012 we specifically partnered with them on their sustainable agriculture programme, which has seen us focus on a number of different projects over the last 10 years,” says Rossouw. “Some of the projects we work on can help farmers with sustainability, and to increase their profits.”

Brought to you by Nedbank Agri.

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