SA's agribusiness upbeat about growth

South Africa’s agribusiness sector is confident about its growth prospects over the next few years amidst a raft of regulations, wage negotiations, land reform and the global economic uncertainty, according to PwC’s latest ‘Agribusiness Insights Survey 2013/2014’. “The main reason for growth expectations of agribusinesses as indicated by CEOs is new joint ventures and strategic alliances,” says PwC National Agribusiness Industry leader Frans Weilbach.

This sentiment is also echoed in the Confidence Index of the Agricultural Business Chamber (Agbiz) and the Industrial Development Corporation (IDC). This index indicated a further increase in the agribusiness confidence levels in the fourth quarter of 2013.

CEOs of agribusinesses are also very positive towards the possibility of expansion into the rest of Africa. 70% indicated that they would pursue such opportunities. Africa is increasingly becoming a preferred investment destination and is said to represent the last frontier in global food and agricultural markets with its large percentage of uncultivated fertile land and sufficient water resources, according to a recent report issued by the World Bank. The report calls on governments to work side-by-side with agribusinesses, and to link farmers with consumers in an increasingly urbanised Africa.  “South African agribusinesses are in a perfect position to pursue such opportunities,” says Weilbach.

The PwC Agribusiness Insights survey was carried out among a group of agribusinesses with operations that are mainly focused on delivering agricultural and related services to primary producers. The aim of the survey is to provide the insights of business leaders and the benchmarking of their financial data to add value to the agricultural industry. Like last year, government regulations, energy costs and an inadequacy of basic infrastructure are perceived to be serious challenges for business growth by CEOs.
This year, respondents also indicated that labour unrest and land reform may affect their business growth. Other concerns cited by businesses were climate change, financially stretched producers, the volatility of exchange rates, and the availability of key skills, price competition and an inability to finance growth.

Agribusiness leaders also feel that the Government is not doing enough to support businesses in the sector, particularly when compared with their global counterparts. For instance, businesses are of the view that the Government does not offer sufficient tax incentives to ensure international competitiveness. Furthermore, they state that the Government is not effectively helping to develop skilled workers and that the regulatory burden on agribusinesses is still to onerous.

Business leaders indicated that they have maintained their focus on risk management, with the majority of participants having a risk committee and a formal risk management strategy in place to evaluate changes in the risk environment. Risk management is one of the cornerstones of corporate governance and the most important responsibility of the board of directors, according to the King III Report on Corporate Governance.  CEOs indicated that compliance with transformation targets and recruitment of suitable personnel with appropriate skills were again the two most challenging human capital matters. This emphasises the importance of training and development in this sector. In general agribusiness seems to struggle to attract suitable Employment Equity (EE) candidates into managerial levels.

On the financial side, most of the larger agriculture businesses did not report a substantial change in profitability ratios between 2012 and 2013. As expected, businesses rely heavily on grain sales (50%) and trade division (21%) as the key contributors to turnover. The increase of 16% in grain sales is mainly due to good harvests in large parts of the country and higher prices. Revenue from the trade divisions remained constant with a slight increase of 4% in 2013.

The asset turnover rate increased for the first time in three years, which might indicate that the effects of a sluggish global and local economy are starting to improve in the sector. It is evident that although agribusinesses remain focussed on the core divisions such as grain, they are also diversifying and exploring other opportunities.

Weilbach concludes: “The continuing weakness in the global economy, the continued volatility in soft commodity prices and the Rand exchange rate,  might still result in a challenging year in the South African grain industry. Exporters of agricultural produce, on the other hand might wish for a prolonged weakness of our currency.”

 

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Sanchia Temkin
Senior Manager, PwC South Africa
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