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Participating in the agricultural value
chain can bring exponential returns
– the need for a business approach to farming
is more important than ever
P
roducers who are produci g at commercially viable levels
are inevitably confronted with the need to make decisions
about expanding beyond the farm gate into the rest of the
agricultural value chain.
So says Standard Bank Head of Agribusiness, Mr Nico Groenewald.
“Primary production is a long-term activity, calling for substantial
investment of financial, human, and technology resources, both
upfront and during production cycles. Compared to most other in-
dustries, the return on such investment is relatively low, when con-
sidered as margins or profit.
“Of course, for many producers, the emotional return of the farm-
ing lifestyle and the building of a family asset that will serve many
future generations is a powerful incentive for staying on the land.
But being stuck in a financial holding pattern decade after decade is
neither appealing nor particularly practical.
“Integrating along the value chain is one way of increasing both re-
venue and profit – and, it can also help spread the risk of your busi-
ness,” says Groenewald.
“One can integrate in the up- and downstream activities of the value
chain. All the former co-ops have realised the benefit of doing this
and have become fully fledged agribusinesses passing back to their
members the financial benefits of being involved in product storage,
distribution and processing.
“Following suit, many independent large farming operations are get-
ting involved in every aspect of their own value chain – from harvest-
ing, packing, transport, marketing and exporting all the way through
to collaboration with end-users,” adds Groenewald.
Others are forming groups in which they collaborate on their own
production of inputs such as fertilisers for use within the group. In
this case, they’re cutting costs at one end of the value chain to boost
margins at the other end.
Groenewald says that whichever value chain activity you choose;
the revenue increases can be significant. “Before you reach the stage
of entering the value chain, however, there’s some planning to do
and a shift in mindset to be achieved.”
The first step in your planning is knowing when to make the move.
Groenewald says it’s the point at which you can extract no further
efficiencies from your operation, even when you’ve diversified.
“There is a financial and environmental limit to how much extra
land you can buy, how many additional crops you can put in over
different seasons, how much additional livestock you can manage,
and how much technology is needed to ensure that you run at
peak performance.
“When you have finally optimised everything, the only way to keep
improving your returns is to turn to options outside the farm.”
It is important to understand, however, that participating in the value
chain becomes a corporate activity that requires collaborating with
other directors and shareholders, working towards consensus on
strategy and allowing others to manage day to day operations.
For many producers that are used to being owner operators and
making independent decisions, the shift can be difficult.
“This difficulty is not unique to agriculture,” says Groenewald. “Col-
laboration is a pre-condition for growth, whatever the industry. It’s
just that agriculture hasn’t been structured for collaboration until
very recently. Now, from a big picture perspective, global issues
such as food security and environmental sustainability along with lo-
cal issues such as land reform and industry transformation are mak-
ing it imperative. “At the farm gate, the pressure to form alliances
with like-minded operators is just as compelling.”
Groenewald advises that producers take stock of the financial input
needed to break into the value chain. Setting up companies or corpo-
rate structures can be costly. If processing or storage facilities need
to be built, capital will be required. Specialist capabilities, such as
those in marketing or exporting, may have to be acquired.
“Barriers to entry can be high and it can take several years to reap
the benefits. Do your homework to ensure that the business case
stacks up and that you will indeed gain the desired multiplying effect
of up- or downstream activities and that the venture you choose will
produce at a level that makes a game-changing contribution to your
bottom line,” concludes Groenewald.
STANDARD BANK
Mei 2015
22
It is important to understand that participating in the value chain
becomes a corporate activity that requires collaborating with other
directors and shareholders.