SA’s agribusiness sector looking to Africa for business opportunities

Despite the recent economic uncertainty, South Africa’s agribusiness sector is more confident about its prospects for the next 12 months than it was last year, according to PwC’s latest Agribusinesses Insights Survey 2012. “New geographical markets is one of the main reasons that agribusiness leaders are reasonably confident of growth in income this year, with a majority of businesses (71%) indicating that they will consider business opportunities in the rest of Africa,” says PwC National Agribusiness Industry Leader Frans Weilbach.

This is in line with the view of the exploration of new geographical markets as an opportunity for growth. According to the Department of Agriculture for Western Cape, improved political and macro-economic stability is one of the primary reasons behind improved economic growth in Africa.

The PwC Agribusiness Insights study was carried out among a large 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 data to add value to the agricultural industry. The study was completed shortly before the recent strikes in the Western Cape. Earlier this week the Government increased the minimum wages of farm workers by 52 percent to R105 a day from R69 a day.

“Improved communication between worker groups and farmers is vital, particularly in the light of much uncertainty surrounding the issue of land reform. Although land reform is not at the level anticipated previously, extreme caution must be taken to not dispossess successful and productive farmers,” says Weilbach.

Agribusinesses taking part in the study cited government regulations as their main threat to business growth. “This concern has increased over the years, which may be an indication that the industry has tended to become more regulated and that businesses are finding it increasingly difficult to keep up with the demands of compliance,” comments Weilbach.

One of the most prominent regulatory frameworks needing attention is that of Broad-based Black Economic Empowerment. The Draft Sector Code for Agriculture was published for comment in January 2012 and the Revised Broad-based BEE Codes of Good Practice was published in October 2012. These developments require businesses to assess their level of compliance.

Other concerns cited by businesses were increasing energy costs, the vulnerable global market environment, the inadequacy of basic infrastructure and the availability of key skills.

CEOs indicated that there has been a greater focus by the board on long-term key performance indicators, followed by the monitoring of financial soundness and assurance related to compliance with laws and regulations. A significant percentage of participants (86%) indicated that their organisations have a risk committee and a formal risk management strategy that evaluates the effect of changes in the risk environment. Weilbach says many agribusinesses are moving towards King III compliance by having a formal risk management strategy and a risk committee in place.

However, agribusiness leaders 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 incentives or tax deductions to ensure international competitiveness. Furthermore, they state that the Government is not taking sufficient steps to improve the country’s basic infrastructure.

Agribusinesses also identified the amalgamations or acquisitions and new strategic alliances or joint ventures as opportunities for growth over the next 12 months. Financial analysis of the agribusiness sector.

On the financial side most of the larger agriculture businesses did not report a significant change in profitability ratios between 2011 and 2012. What was noticeable however, were again significant changes in the composition of businesses’ income.

The contribution of grain to the total turnover figure declined from 51% to 42% in 2012. It is evident that there is major competition in this market and that businesses are increasingly diversifying to non-traditional agricultural activities in order to create turnover and add value.

As far as trade divisions are concerned, amalgamations and cooperation agreements were entered into in an effort to become more competitive, especially relative to the large traditional retail groups.

The composition of agribusinesses’ net profit also shifted in the sense that the contribution of their operating profit increased significantly from 75% to 93%. This was to the detriment of net financing income and dividends received, which declined from 11% to 2%, and from 14% to 4% respectively. The net profit as percentage of turnover increased marginally from 6.59% to 6.92%. This was brought about by strict cost-management and the preservation of market share.

The unbundling of a number of agribusinesses’ share portfolios, which have now been moved to separate legal entities or are directly owned by the agribusinesses’ shareholders, has partially contributed to the decrease in average dividend income.

This brought about a substantial decrease from 12% to 4% in share investments as a percentage of total assets on the balance sheets of agribusinesses. The distribution of these shares to the shareholders of agribusinesses further contributed to the drop of about 12% in the average equity ratio of agribusinesses.

“Competition in the grain market, especially relating to the utilisation of grain silos, is increasing annually between traditional role players and also as a result of alternative storage methods. This exerts pressure on margins, with the average utilisation of silos amounting to 76% in the past year.”, concludes Weilbach.