South Africa’s agricultural sector continues to play a vitally important role in the South African economy. Despite the sector’s small economic contribution – less than 3% in 2013, according the Department of Agriculture, Forestry and Fisheries – it remains an important component of the national economy, with strong ties to other economic sectors.
In a report that KPMG conducted for the Small Enterprise Development Agency (Seda) in 2012, it was stated that 8,5 million people are directly or indirectly dependant on agriculture for income and employment, which is why robust initiatives and support for the sector are needed now more than ever.
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Titled “Research on the Performance of the Agricultural Sector”, KPMG’s study found that only 12% of South Africa’s surface area is suitable for crop production with the biggest challenge being the availability of water.
Most of the land surface (69%) is only suitable for grazing, which is why livestock farming remains the largest agricultural sector.
A major exporter
The report found that South Africa remains a major exporter of agricultural produce and ranks highly in this sector.
It is currently the world’s leading producer of avocados, clementines and ostrich products. However, the country’s position as a major exporter is being challenged by the availability of farming subsidies in the European Union and the United States, which are South Africa’s major export destinations.
The decline in global trade and fluctuating exchange rates have had a negative impact on the sector, according to the report, as has the failure to implement fair trade policies around the world.
Multiple climate zones
Characterised by diversity, the agricultural sector includes crop production, horticulture, animal production, dairy farming, fish farming and game farming.
Production is widely distributed across the country as a result of environmental and climatic diversity. The report notes that the country contains all seven climatic zones, with agricultural produce therefore including everything from summer and winter cereals to subtropical fruit and livestock.
Agricultural demand is relatively stable and therefore less vulnerable to economic conditions. The report found that production actually grew by 13.7% between 2008 and 2009 to R126.3 billion, despite the recession. Nevertheless, the sector has been hit hard by rising input costs, particularly with animal feed, fuel, and fertilisers.
Key Statistics 2012
The report includes the following important statistics which provide further insight into the sector:
- Gross farming income - R131,5 billion
- Current expenditure - R98,7 billion
- Capital expenditure - R80,5 billion
- Book value of farming assets - R11,7 billion
Employment has declined considerably with the sector shedding 20% of its jobs between 1988 and 1998. This was largely because of the increase in casual labour, and the ongoing mechanisation of farming processes.
A solid transport infrastructure
South Africa’s transport infrastructure is modern and well-developed when compared to other developing countries on the continent.
Scarce water supply
South Africa is classified as a ‘water stressed’ country because of both climatic conditions and human settlement patterns. The country’s low annual rainfall and high evaporation rates result in only 8% of SA’s rainfall being converted to runoff, placing ongoing pressure on the water supply.
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Electricity costs and supply
Rising electricity prices continue to have a big impact on the economy as do ongoing supply disruptions in energy intensive sectors. The report warns that these could result in lower than expected growth in the future.
Agriculture, unlike mining and manufacturing, has relatively few barriers to entry. Rural communities, for example, are able to plant for food and sell the surplus. The problem arises when it comes to moving beyond subsistence farming.
Writing in the Business Day in September 2014, Xhanti Payi, lead researcher and economist at Nascence Research Insights, noted that support is needed when it comes to funding and infrastructure, as well as markets.
“When discussing South Africa’s economic issues, we often talk of a need for "quick wins",” she said.
“The agricultural sector has particular promise in this regard. There is clearly a shift in economic structure across the continent, as there should be. Mining and extraction are unstable and contentious; agriculture is less so, and has immense potential for job creation and poverty alleviation. If leading scientists have changed their minds about what diets work and don’t work, economists and policy makers have to do the same about solutions to the persistent problems we face.”
Common small business challenges
However, a 2012 study by the Small Enterprise Development Agency (Seda), titled “Analysis of the Needs, State and Performance of Small and Medium Businesses in the Agriculture, Manufacturing, ICT and Tourism Sectors in South Africa”, found that there were a number of barriers to entry and challenges to operations and growth in the agriculture sector, all of which need to be considered by anyone wanting to start a business in this sector.
The report pointed out the following:
- Lack of business planning during start-up
- Difficulty accessing finance
- Difficulty accessing markets or meeting industry requirements or standards
- Lack of experience among owners and managers
- Lack of sector-specific expertise
- Inconsistencies in cash flow
- Lack of entrepreneurial skills and mind-set as well as business acumen
- Lack of capacity to undertake market research, resulting in a lack of understanding of market needs and characteristics
- Skills shortages, particularly with respect to technical skills and business management skills
- Fragmented and uncoordinated support from entities tasked with providing assistance
- Lack of innovation and creativity
- Difficulty accessing land or securing operating premises
- Red tape and cumbersome regulatory processes and procedures
While these are common challenges in many small business operations, the Seda study identified several issues relating specifically to SMEs in the agriculture sector:
- A lack of planning capacity
- Inconsistent cash flow
- Adverse climatic conditions affecting production
- Difficulty gaining access to arable land
- High cost of agricultural inputs and machinery
- Difficulty accessing target markets and linking into supply chains of retailers
- Shortage of technical skills and capacity
- Difficulty adopting new methods of production
- Poor quality of supporting infrastructure
- Competition from large enterprises
On the plus side, Seda’s study also found that there were a range of opportunities available to expand the presence of SMEs in this sector, more than others, where there is scope to engage in value adding processes.
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The study shows that in the agriculture sector, specific market and value chain opportunities for SMEs include:
- Agro-processing activities to produce products such as fruit juice, essential oils, dried fruit, bio-composites, bio-fuels and medicinal products
- Packaging, transport, distribution and logistics services for agricultural produce
- Provision of warehousing and storage facilities and services
- Production of organic foods
In short, these are where agricultural entrepreneurs should be focusing their efforts in order to have the greatest chances of success.
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KPMG and Seda