Leaders in Managing the Agricultural Supply Chain in South Africa – BKB Grainco

Interview with Ben Vermooten, CEO of Grainco

Despite some challenging circumstances, the South African agricultural sector continues to perform robustly; do investors have good cause to look favourably on South African agriculture?

Yes I do. I believe that the opportunity for further growth in the agricultural sector in South Africa is very good. It is enhanced by a weakening currency for sure but the quality of production especially in the soft fruit side is of very high value. Secondly, our location in the southern hemisphere obviously promotes trade into the northern hemisphere out of cycle.

Is it still really the gate way to Africa?

I believe so. The other countries are opening up more; we are seeing international representation in Zambia and Nigeria. A lot of those companies have South Africans in their senior management. I believe either indirectly or directly, South Africa is the way to go in.

There is a legacy of the sector’s central position to the South African economy. According to Bloomberg, 10 of the top 20 agribusinesses by turnover come from South Africa. To what do you attribute their success?

I think the natural resources play a part in it. Our port facilities also play a major part in it. A lot of the production or out take of agriculture into Zimbabwe and Zambia would have come through South African ports so that would exacerbate the production figures. Then we also have a very well developed infrastructure as opposed to the rest of Africa and so that would be another major cause.

The position of South Africa’s smaller farmers remains one of the key issues still facing the country. How successful do you think South Africa has been in integrating the small holders into the wider agricultural value chain?

It will remain a very difficult issue to address. The reality is that the bigger players are the ones that are growing. Ten years ago South Africa produced 14 million tonnes of grain and there were 40,000 producers. Today, on average the figure is 16 million tonnes, so a growth of 2 million tonnes but the number of producers has halved. The reality is cash: to get economy of scale you need to farm more and use bigger equipment. It is very difficult, you need more cash to carry your business and it is very difficult for a smaller stake holder to participate in that. We do see more international corporations or companies starting to invest in primary farming and we see the bigger farmers performing better.

Ten years ago South Africa produced 14 million tonnes of grain and there were 40,000 producers. Today, on average the figure is 16 million tonnes, so a growth of 2 million tonnes but the number of producers has halved.

South Africa has become a net importer of wheat, importing approximately one-third of its requirements, why has this change come about?

It is because of planting patterns mostly and pricing. I believe at this stage it is most likely closer to 40% or 45% of wheat being imported into South Africa, roughly 2.8 million tonnes of consumption and 1.5 million tonnes of own growth. Lately, this year specifically, we have seen the price of maize getting very close to, and in some instances depending on where in the country, being more expensive than wheat. A farmer would typically get 3.5 or 4 tonnes per hectare of maize versus 2 tonnes per hectare of wheat. So the farmer would rather go and plant maize. It’s a basic matter of return on investment.

Given that most private breeders focus on maize, does wheat constitute an economic opportunity for farmers here in South Africa?

Yes. In two instances, in the Western Cape the terrain means you cannot plant maize because it is very dangerous and difficult so farmers have no choice but to plant wheat and some oil seeds but mostly wheat. There is no alternative. In the irrigation areas they can plant in both seasons and so they rotate the crops, they rotate wheat and maize on an annual basis.

In view of the fact that the population of the continent is expected to more than triple to 3.6bn by 2100, are large South African firms already looking northwards to take advantage of this growing market?

Yes most definitely. Most of the major agriculture companies either have already or are looking to move and expand their operations northwards both in terms of the market and in terms of assisting and developing more commercial farmlands.

What about the local industry? Do you believe they are well placed to take advantage of the growing African market more generally?

The Western Cape in terms of agriculture and especially in terms of grain is a very minor component. We are significant in terms of wheat production but wheat production is about 10% of the total, so the big maize, sunflower and soy production all takes place in the other provinces. We do not have big active farming co-operations for companies in the Western Cape as far as grains are concerned; that is moving up north. In terms of fruit we do have a fair number but I am not qualified to speak on their behalf.

There were a series of strikes by farm workers in the Western Cape, which turned violent in January 2013; do you foresee similar labour unrest affecting the sector?

That has been in the fruit sector, so once again it didn’t affect our type of business at all. It affected soft fruit, table grapes, wine grapes etc. It didn’t have a direct effect on us. It seems to have calmed down at this stage but we are moving towards elections again so we could see a recurrence of that I would think.

You see more industrial action in the run up to elections?

Again, in our business, no. We are unionised so we haven’t seen any of that happening to us.

The African National Congress-led government set a target of transferring 30% of the agricultural land to black owners by 2014. Thus far only 8% of this land has been transferred and approximately 90% of farms transferred to black farmers are no longer productive. Can you see this issue returning to the national agenda?

I am certain it will be returned and it will be constant. The intention makes sense. It is up to us to give workable solutions that will be sustainable so that we will not have a 10% success rate but a 100% success rate. We have made a large investment in lucerne or alfalfa for export and that typically would be the situation of farm land dedicated to black development. There are a number of hectares and irrigation hectares within the position of previously disadvantaged people where commercial institutions like BKB can give assistance. We can give a market and we can give the knowhow in terms of farming in assistance with other producers. We can also give dollar based guarantees for the product once harvested and I think through that you can build sustainability. We have engaged with the IDC specifically in terms of developing and identifying this, both for balance sake and for the country´s sake. Those kinds of initiatives succeed and it is our responsibility to work on it.

So it has been left unproductive for what reason?  Is it lack of human capital?

It is lack of knowledge. I haven’t been there yet. We approached the IDC and they approached us. We haven’t had the opportunity to go and investigate but they claim to have 2000 hectares in terms of irrigation crops so at 20 tonnes a hectare that is a significant amount of potential harvest. I do not have a specific figure of what it is currently producing but I am led to believe that it is quite low. The reasons for that are difficult to extrapolate.

Can you talk about your concerns regarding your clients? Maybe you can talk about what exactly you can provide them, the producers and the farmers?

We run a major agriculture business in South Africa and a business needs to have a sure business plan and we need to be able to address our concerns and opportunities in a way that will benefit our shareholders. For that, a big concern currently in South Africa is the uncertainty of the currency and on the whole a weakening of the currency. That can actually provide certain opportunities and specifically in the agricultural sector it facilitates the export of product and makes it quite profitable. The major benefit would be in unprocessed forms so for example soft fruit i.e. the export of table grapes and various other fruits such as citrus, apples and pears which are doing significant volumes. The second thing is the export of alfalfa. We have made a significant investment in terms of getting a static base from the States which is the first in Africa. We are looking towards exporting in excess of 100,000 tonnes in the next 2 years to various countries in the Middle East and China. This is generating revenue and foreign currency for the country and I believe it is sustainable. Doing it in the proper ways with the stakeholders and producers including PDIs, it will grow more hectares and hopefully we can extend it to southern Africa and not just keep it here in South Africa once we have access to the markets and the processes established.

Excellent. Can you talk about the opportunities in processing food?

Processing of food at this stage is mostly limited to the local market. We do not have the volumes yet and I don’t think it has been explored in great detail to take value added fruit out. We have a mill that is generating the base kernel for breakfast cereal. It is called flaking grit. We have exported some to Angola and New Zealand. There is no reason not to add to that if the market and pricing favours us. That could happen. I am pretty sure that on the fruit side in terms of fruit juices and concentrates and other processed fruit products, the same could happen. The more beneficiation that we do, obviously the more employment we create. That is the major responsibility that we have.

To conclude, this is an appeal: you have an opportunity here to talk to the world but also to talk exactly to the person you want to reach. What would you like to say to your potential clients or investors?

South Africa to start off with is a fantastic country and a nice place to come to for doing business. Our service industry and infrastructure is amongst the best in the world and the ethics in doing business are very high. The opportunity for the industry that I am in is in agricultural commodities for export in the right cycle and secondly in terms of the quality of product and GMO freedom which is one of the rarities in the world. I would also see it as a gateway for further production to go from here into the other southern African countries and to develop sources from there. The disadvantage for us is like the saying in China: “you do not know what you do not know.” Five years ago we had a healthy alfalfa production for the local market; we had no idea that it was needed internationally at favourable prices. We now know it and we have invested our money in the infrastructure and we believe it will be a significantly good investment. Customers worldwide with specific requirements for agricultural products I think would be well placed to visit South Africa and engage with people like myself and investigate further investment opportunities and make sure that the end sellers of the end product in their respective countries link up with knowledgeable companies in South Africa that can give access to primary producers and facilitate the local process.

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