MODELS FOR DEVELOPMENT AGRICULTURE: RISK SHARING

1. MODELS FOR DEVELOPMENT AGRICULTURE: RISK SHARING MOJI MOGARI AFGRI OPERATIONS LIMITED

2. CONTENT • INTRODUCTION • BACKGROUND • GENERAL ISSUES OF CONCERN • OPPORTUNITIES • POSSIBLE MODELS: AFGRI AND OTHER AGRI-BUSINESSES • BETHLEHEM FARMERS TRUST APPLE FARM • CONCLUSION

3. INTRODUCTION • 60,000 commercial “white” farmers down to 40,000 in 15 years • Less than 3,000 dairy farmers down from 13,000 • Over 450,000 subsistence / emerging farmers supplying less than 5% of the market (number largely stagnant over past 15 years) • 1,0 million ha of land released from production bringing total land under (un) utilised to over 3,5 million ha – primarily dry-land and most in homelands • Surplus maize stocks since 1992 (consumption of 9mt/years vs. production of 12.5mt 07/08, 11,2 mt 08/09) • Net wheat importer (producing less & less of own needs) • SA GDP spend on agriculture and land reform declined to less than 4% of total spend (less than 10% as agreed by AU) • 45% of SA population remains in rural areas ( Source : Andrew Makenete - ABSA Agri-Business)

4. BACKGROUND • SEVERAL AGRIBUSINESSES AND COMMERCIAL BANKS TOOK PART IN THE FINANCING OF BLACK FARMERS AND COMMUNITY TRUSTS ; • LAND BANK PROVIDED MANY PRODUCTION LOANS , AND OTHER BEE TRANSACTIONS TO BLACK FARMERS AND COMPANIES; • GOVERNMENT FUNDED MANY AGRICULTURAL LAND ACQISITION TRANSACTIONS , ON PRO-ACTIVE BASIS FOR LAND REFORM • GOVERNMENT HAS MADE SOME PROGRESS ON LAND RESTITUTION AND THE PROCESSING OF ALL OUTSTANDING CLAIMS.

5. BACKGROUND (cont) Commercial Banks and Agribusinesses lost or have provided for Millions E.g. AFGRI ABSA FNB (Among others) Over 500 farmers ( most of them black) have defaulted on Land Bank loans IDC has over 80 farms in work out recoveries

6. General Agricultural Issues of Concern • Constrained competitiveness and profitability • Lack of confidence and growth in the sector • Lack of investment in the sector – both from public and private sector • Global financial crisis (exports and credit risk) • Implementation of Strategic Plan for SA Agriculture, including equitable participation • Food security risk: globally, continentally, regionally, nationally, and last but not least, at household level.

7. BACKGROUND (cont) Reasons for Failures ( FARMERS PERSPECTIVE) • No timeous access to seasonal funding • Vulnerability to weather and climate: Dry land • Limited extension support • No good market access • Lack access to equipment • Lack group cohesion: competing interests

8. BACKGROUND (cont) Reasons for Failures ( AFGRI’S PERSPECTIVE) • No collateral • Vulnerability to weather and climate: Dry land • No timeous access to proper equipment • Bad agricultural practice • Distance from the market • Unscrupulous contractors and project managers • Weak institutional governance and complex group dynamics

9. OPPORTUNITIES • DEVELOPING PRODUCTION CAPACITY ON LAND REFORM FARMS • CREATING DEDICATED EXPORTS MARKETS TO COUNTRIES THAT HAVE NO ADDITIONAL PRODUCTION CAPACITY • LOOKING AT OTHER VIABLE AND HIGH VALUE PRODUCTS : E.G.HERBS AND PLANT OILS • LOOK ALTERNATIVE MARKETS • INCORPERATING EXISTING HEADS OF LIVESTOCK INTO FORMAL MARKETS • POULTRY CONTRACT GROWING • WASTE MANAGEMENT AND BY PRODUCTS • ALTERNATIVE MARKETS

10. MODEL OBJECTIVES • IDENTIFYING UNUTILIZED PREVIOUSLY PRODUCTIVE LAND • CREATE A HIGH TECH MULTI-PARTNERSHIP ARRANGEMENT: GOOD AGRICULTURAL PRACTICE ( FERTILIZER SUPPLIERS, SEED SUPPLIERS, INFRASTRUCTURE SUPPLIERS). • TEST THE RISK SHARING MODEL WITH THE VARIOUS INPUT SUPPLIERS. • TEST AND ADOPT A RISK SHARING MODEL WITH FINANCIAL INSTITUTIONS. • NEGOTIATE FAVOURABLE OFF TAKE ARRANGMENTS.

11. AFGRI DEVELOPMENTAL FINANCE INSTITUTIONS/ COMMECIAL BANKS ENTERPRISE DEVELOPMENT SPV GOVERNANCE AND NCR COMPLIANCE LEASE OF LAND WITH OVER 60% UNDER IRRIGATION BLACK COMMERCIAL FARMER(S) BUSINESS MODEL (Cont.) AGENCY WHOLESALE ARRANGEMENT PROFIT SHARE BLACK COMMERCIAL FARMER(S) BLACK COMMERCIAL FARMER(S)

12. STRATEGY: VALUE CHAIN LOGISTICS PRODUCER SERVICES FOODS DIRECT SUPPLIERS RETAIL TRADING LOGISTICS OIL & PROTEIN ANIMAL PROTEIN PRIMARY INPUTS RETAIL FINANCIAL SERVICES BROKING CAPITAL

13. OPERATIONAL MODEL (TECH) 35% 65% PRE-INVESTMENT PHASE CUSTOMER SELECTION CLIMATE SURVEY CUSTOMER FIN DUE DILIGENCE WEED SPECTRUM ANALYSIS AGRONOMIC DUE DILIGENCE ( BY FERTILIZER COMPANIES) LAND PREPARATION SEED SUPPLIER SIGN OFF SEED BED, AND GUARUNTEES 90% GERMINATION FOR 100% PAYMENT POST EMERGENCE SEED SUPPLIER PAID ON GERMINATION RESULTS MULTI PERIL CROP INSURANCE YIELD ESTIMATION PLANTING PLANTING PROGRAM

14. BUSINESS MODEL OUT GROWER SCHEME OBJECTIVE • UTILIZE INDIVIDUAL AND FAMILY OWNED LAND • IMPROVE PRODUCTIVITY BY SUPPLYING REQUIRED INPUTS • CREATION OF DEPOTS AND COLLECTION POINTS FOR THE PRODUCED PRODUCTS • CREATE ECONOMIES OF SCALE • ESTABLISH MECHANIZATION CENTRES FOR RENTED USE IN THE COMMUNITIES

15. BUSINESS MODEL OUT GROWER SCHEME : RESTRAINERS • PROXIMITY TO ESTABLISHED MARKETS • ESTABLISHED MARKETS MIGHT SATURATE QUICKLY LEADING FALLING PRICES. • ADDITIONAL INVESTMENT MAY BE REQUIRED FOR PRODUCT BENEFICIATION

16. BUSINESS MODEL OUT GROWER SCHEME : ENHANCERS • CHOICE OF GOOD VAIBLE PRODUCT • BBBEE PREFERENTIAL PROCUREMENT IN THE LOCAL MARKET • CREATION OF SEASONAL LABOUR AND OTHER REQUIRED SERVICES • LOCAL AUTHORITIES CAN PLAY A PART IN TERMS OF INFRASTRUCTURE AND SERVICES.

17. Business structure of the Bethlehem Farmers Trust Funds invested DLA R1,74m DOA R7,75m IDC R11,3m DBSA R11,2m AFGRI Management Technical support/ Skills transfer Manage, technical support and training Financing TERM LOANS Farmers Trust Farmers (94) Product Seasonal Financing Four cultivers of Apples for local and overseas market LANDBANK

18. BFT : Harvest tons

19. BFT : LESSONS LEARNT • DEVELOP AN APPROPRIATE FUNDING MODEL • PRE-SCREEN THE BENEFIARIES PROPERLY • DEVELOP A COMMERCIAL OPERATIONAL MODEL AND NOT A SOCIAL ONE • BE REALISTICS ABOUT BUDGET PROJECTIONS AND OUTCOMES • MANAGE EXPECTATIONS • HAVE A REPRESENTATIVE MANAGEMENT STRUCTURE

20. CONCLUSION THE DEVELOPMENT OF RURAL AGRICULTURE MAY NOT FOLLOW THE SAME PATH AS COMMERCIAL AGRICULTURE OVER THE PAST DECADES. BUT IT MIGHT REQUIRE A DIFFIRENT APPROACH