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Building a sustainable agricultural processing base

The agricultural sector is the quintessential example of the principle of swings and roundabouts: it can go phenomenally well or disastrously badly in a single season, largely because of a host of mostly uncontrollable factors.

Given that agriculture is a mainstay of the South African economy, it cannot be left to the vagaries of such disruptive forces. So, in trying to mitigate potential negative impacts, the Industrial Development Corporation's agro-processing business unit is a significant investor in the sector to develop and support sustainable production capacity.

"By creating agro-processing capacity in South Africa, it means we can actually process our surpluses locally into higher-value products," said Rian Coetzee, head of this strategic business unit. "If we do that, we are less dependent on the commodity cycle."

The unit has a sizeable portfolio of investments that have helped to establish new industries such as those for table grape, berry and canola production. It has supported empowerment initiatives and promoted the active participation of emerging farmers, communities and co-operatives.

The agro-industrial sector represents about 18% of South Africa's manufacturing gross domestic product and about 20% of jobs in the manufacturing sector. But the vast majority (70%) of the industry rests in the hands of a small number of large, vertically integrated and diversified agro-processing groups. The remaining 30% of the market is contested by an estimated 7 000 smaller-scale non-integrated processors that are often outside the formal retail chain.

The IDC's R5-billion investment in these smaller businesses is therefore a significant helping hand for farmers or producers wishing to set up or expand their production capacity.

Coetzee stressed that investments were made only into processing capacity or facilities that support agro-processing. Primary farming activities and investments such as the purchase of land and equipment fall outside the IDC's mandate.

"We focus on secondary agriculture and sometimes do integrated projects where, if there is a pack house with a farm, we view it as processing. But because we can't give money to small farmers, we give it to the Land Bank or an intermediary and they then lend it to the farmers, usually at more concessionary terms than our normal loans," he said.

To realise its objectives, the unit has adopted a five-pronged strategy that seeks to improve the internationalisation of the sector through exports and physical expansion, value addition, import replacement, developing new industries and building linkages with resource-poor communities and farmers.

"We don't want to compete with commercial banks, so the projects we get involved in are not your typical blue chip clients," said Coetzee. "But what we are trying to do is address the market failure of commercial banks and even other development finance institutions so that if we see something that has a potential financially and developmentally, we see what role can we play to make it bankable.

"Therefore we often get involved in project development, meaning the business case hasn't been proven bankable yet, so we do feasibility and prefeasibility studies. It's tough to operate in the market-failure environment, but that is also where the interesting stuff comes from."

Some of these "interesting stuff" projects include studies into developing new industries in marine aquaculture, bamboo and rice. Admittedly, not every bet pays, as was experienced when the IDC tried to develop the tree-nut industry.

"We wanted to establish a tree-nut industry and participated in projects in cashews, pistachios, macadamia, pecan and walnuts," said Coetzee. "Cashews didn't work because we couldn't compete with Mozambique's cheap labour and subtropical growing conditions. Pistachios didn't work, but walnuts, pecans and macadamia worked."

He added that the IDC was still the biggest player in the local macadamia industry through its equity in farms and the 600-hectare walnut farm in Aliwal North in the Eastern Cape was reaching maturity and should start yielding returns.

"A tree takes 10 years to reach maturity, so you need really patient capital. We were the first to establish many of these crops in South Africa. That differentiates the IDC from others because we can really look over the long term, meaning we are exposed and we have to wait for dividends, sit on the boards and try to make it work."

Empowerment is a core focus of the IDC's deal-structuring and often results in it holding equity to exercise greater control over the investment. This is the case in up to 50% of its current investments.

"In all our projects and initiatives we build in black economic empowerment components, whether that is ownership, worker or community trusts or farmer trusts that can involve communal farmers," said Coetzee.

Such structures also engender a greater sense of responsibility in the entire value chain, thereby building stronger linkages between the producers and the processors. A typical example of how the IDC achieves this is to promote procurement from communal farmers while supporting measures that improve these farmers' ability to meet quality standards.

"We do not fund farmers directly and have therefore devised a system whereby we use the agro-processor as a conduit to provide funding. It's a much more efficient way of delivery because we are struggling to institutionalise our delivery mechanisms as a state, so why not use these entities?

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