PricewaterhouseCoopers’ fourth Agribusiness Benchmarking Survey reflects excellent results for agribusinesses

Last year, South African agribusinesses delivered a sound performance in the midst of rising commodity prices, interest rates and fuel prices, with increases of 37% in profitability and 38% in turnover. This was achieved despite a 19% increase in the production price index of agricultural products, which put the management of companies under considerable pressure in that assets increased, mainly due to the growth in debtors.

These are some of the findings from the PricewaterhouseCoopers’ fourth Agribusiness Benchmarking Survey, undertaken for the 18 months to September 2008.

“The enhanced profitability resulted from an increase in the price of agricultural products together with a diversification in the products and services offered, which went a good way towards hedging the companies’ against cyclical weather patterns. An increased need to finance debtors resulted in a greater emphasis on credit management in order to convert those profits into cash.” said Kobie Bekker, National Leader Agri Industry Group at PwC.

Due to the global food shortage, grain and oil seed prices increased significantly during the period, enabling farmers to whittle down their debt burden somewhat. These positive circumstances made it possible for all agricultural sectors to continue its growth in turnover from the previous period. The increases in the turnover of trade items (25%), spare parts (21%), implements (60%) and grain transactions (42%) jointly contributed to the considerable improvement.

Agricultural conditions could be described as having been fairly favourable, owing to the good rainfall, but the alarming rise in input costs and erratic prices for agricultural products combined to bring greater responsibility for the boards of agricultural companies to assist the producers under constantly changing circumstances.

“According to the country-wide survey, the prices of fertilizers and sprays increased by 72% and 103% respectively during 2008, mainly due to the critical increase in fuel prices. This is one of the main reasons why agricultural producers cannot be expected to decrease product prices immediately in response to a decline in fuel prices. Producers should be given the opportunity to first recover these cost increases. Processors of products and the retail sector are now in a better position, however, to adjust prices downwards in the short term.” said Bekker.

From an investment point of view, agricultural companies with their enhanced profitability now offer good alternative investment opportunities within the food value chain, with expectations of higher yields.

Competition in the market for agricultural services and materials has increased sharply, following the disappearance of the traditional service areas. Alternative storage facilities and price competition in respect of trading stock have resulted in companies having to constantly adjust their management styles to expand markets. The forming of alliances with financial services groups has also become the order of the day.

A good many business opportunities have opened up for agribusinesses, especially as the prices of agricultural products appear to have evened out somewhat, ongoing rationalisation is being undertaken and these companies are best placed to add value within the food chain. The creation of niche markets by way of vertical integration, and entry into the fertilizer industry are some of the opportunities that are available in the industry at present.

Nonetheless, agricultural companies should gird themselves for difficult times. Credit management, the risk of non-compliance with grain contracts, cheaper storage facilities, the realisation of expensive stock recently bought and political and socio-economic responsibilities are sure to keep the boards and management of agricultural companies on their toes in the immediate future.