Food security focus opens doors

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Agriculture has become progressively more commercialised as players have understood the business benefits of the economies of scale and efficiencies to be gained by integrating value chains. Also, says Hamman, consolidation in the industry has created some substantial agribusinesses capable of controlling the value chain in their particular area of agriculture, all the way from the farm to the table.

However, Statistics SA's figures for the country's second-quarter gross domestic product show that while the economy as a whole has contracted by 1.3%, agriculture is down by 17.4%. As expected, margins in the sector are notoriously low and investment has been conservative. Much of the negative perception has been ascribed to government's economic policies in general and to the uncertainty in the security of land ownership and land reform policies in particular.

New frontiers for agriculture investement

Hamman concedes that the emphasis on food security is uncharted territory for agriculture and investors. "But, as always on new frontiers, higher than average returns are eminently possible" he says, noting that since 2014 margins in the sector have been steadily increasing, with equity return close to 20%. Better yet, in an era in which social impact investing is gaining momentum, investors can make a real, positive difference to the way the world feeds itself by taking a stake in the new agriculture that must develop to meet food security needs.

"In my view, there are no greater risks than those associated with innovation in general. For one thing, food goes beyond other commodities in that it can be produced, processed - and also eaten. It doesn't have to be processed. So, as a commodity, it offers a third value chain, in addition to production and processing, that goes directly to the market. In financial language, it can be consumed, traded or processed and then traded. You can spread your risk."

Hamman points out that the lack of firm policy frameworks is not unique to agriculture. Despite what may be considered an ambiguous environment, land values are at a high and capital expansions are taking place. "The explanation probably lies in the fact that experienced participants in the sector can weigh up its macroeconomic fundamentals against policy uncertainties and find an appropriate way to make informed risk-return investment decisions. I, therefore, suggest that investors partner with experienced industry players. There are no greater risks than those associated with innovation in general."

Making the unfarmable, farmable

Hamman is equally upbeat about other constraints, such as the lack of suitable land and water scarcity.

"Technological advancement makes it possible to farm where no farming was previously possible. We nowadays see avocado orchards in mountainous regions previously not accessible to agricultural production. Marginal cattle farms have been transformed into prospering game farms. Similarly, marginal wheat production regions have been transformed into high yielding soya regions."

He accepts also that technological advancement can lead to unemployment, at least in the short term. But, he says, technology makes the sector efficient and globally competitive and, therefore, sustainable. "Such sustainability should see the sector growing which, in turn, requires labour, but labour with an appropriate skill set. The focus should, therefore, be on skills training and not labour laws and the like which keep stale operational practices in place."

The supply chain evolution

Another factor is the change in consumption patterns that have resulted in product preferences shifting, making it possible to profitably farm commodities previously in low demand. "As global demand and supply change and evolve and are better researched, new opportunities emerge," says Hamman. "The biggest constraint currently is probably the lack in infrastructure and other sectors, such as mining, competing for the same, scarce resources."

Also, he says, agriculture is said to be the world's largest industry and is growing at a rapid pace. "While it is notoriously difficult to put a price tag on its size, many analysts, including Standard Bank, believe agribusiness may constitute up to 10% of global gross domestic product. Taking backward and forward linkages into account, the industry probably contributes 12% to SA's gross domestic product or roughly R50bn.

"At an employment level, it provides sustainable jobs to more than 600,000 people of which more than 200,000 are employed in agro-processing alone. The flow-through impact on the number of South African citizens it supports financially is even bigger."

Lack of infrastructure an opportunity for investment and expansion

Another apparent constraint to investment is the lack of infrastructure, including water supply and electricity, yet this represents an opportunity for investors to trigger expansion in the sector, says Hamman, especially in the field of renewable energy and the relatively new methodology of precision farming, which is underpinned by technology.

Introducing technology at all points in the value chain plays into the hands of astute investors, he says, thus enabling tighter integration of value chains, making them more efficient, stable and resilient and offering more attractive investment vehicles. It also increases the value chain stakeholder base, creating more linkages that can be profitably funded. As the value chains become larger and more influential, so the calibre of management and governance within them improves, providing comfort for investors.

"The trends and signals for the agricultural sector indicate a step change in its significance from that of an understated, undermanaged, and underperforming area of economic activity to one that will become a proactively dominant force in world economics," says Hamman.

Source: Business Day