Farmers producing 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, 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 industries, the return on such investment is relatively low, when considered as margins or profit.
“Of course, for many farmers, the emotional return of the farming 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 revenue and profit – and, it can also help spread the risk of your business, 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,” he continues.
“Following suit, many independent large farming operations are getting involved in every aspect of their own value chain – from harvesting, packing, transport, marketing, and exporting all the way through to collaboration with end users.”
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 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. And 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 farmers that are used to being owner operators and making independent decisions, the shift can be difficult.
“This difficulty is not peculiar to agriculture. Collaboration 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 local issues such as land reform and industry transformation are making it imperative,” notes Groenewald.
“At the farm gate, the pressure to form alliances with like-minded operators is just as compelling.”
He advises that farmers take stock of the financial input needed to break into the value chain. Setting up companies or corporate 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.”