In recent years, the agricultural sector has received more interest from technology companies and innovators, allowing digital advancements to enhance productivity and profitability. You can learn about the industry’s strengths and weaknesses, as well as innovations and advancements in this comprehensive guide.
South Africa’s farmers and food producers continue to play a vitally important role in the country’s economy. Despite the agri sector’s relatively small economic contribution – less than 2.2% in 2016, according the Department of Agriculture, Forestry and Fisheries (DAFF) – 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.
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.
Leading the way in exports
KPMG’s report also 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, clementine’s 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.
A 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.
Related: How to start an export business in South Africa
Dealing with multiple climate zones
Characterised by diversity, the local agricultural sector covers 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 (2008/2009 Global Financial Crisis). The sector has since, though, been hit hard by rising input costs, particularly when it comes to animal feed, fuel, and fertilisers.
Agriculture sector statistics 2015/2016
- Value of agricultural production: R247 098 million
- Contribution to GDP: R72 608 million
- Percentage of GDP 2.2%
- Gross farming income in:
- Horticulture increased by 15.2%
- Animal products increased by 6.2%
- Field crops decreased by 8.9%
- Total gross value of agricultural production increased by 9.1% to R247 098 million.
Key insights on 2016
Employment in agri is on the decline, 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. In 2016, the agriculture industry lost a further 58 000 workers and now sits at a total of 881 000 workers.
Here a few more factors that influenced farming in 2016:
A solid transport infrastructure
South Africa’s transport infrastructure is modern and well-developed when compared to other developing countries on the continent. This allows agribusinesses to easily deliver produce to buyers as well as receive necessary supplies.
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.
The drought that started in 2015 caused the agricultural industry to experience seven consecutive quarters of economic decline, although improvement is underway in terms of output.
Related: Water-wise business opportunities in South Africa
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.
Challenges and opportunities in agriculture
When examining the potential for a new business or product, a SWOT analysis can help determine the most likely risks and rewards. KPMG’s study of the agriculture sector in South Africa for the Small Enterprise Development Agency (SEDA), Research on the Performance of the Agricultural Sector, includes this SWOT analysis of three main products:
- Field crops
- Horticultural products
- Animals/animal products
These results contained in the report are helpful in developing a strong business strategy as they point out the most prominent strengths and weaknesses, as well as the opportunities and threats in the marketplace, when it comes to each agricultural sub-sector.
1. SWOT analysis: Field crop subsector
- Maize is the primary food of 80% of the country’s population and will maintain strong growth.
- South Africa is one of a few countries that produces white maize with significant potential for export.
- Significant maize-yield improvements have resulted from stable production on irrigated land.
- Demand for maize is linked to rising demand in livestock as yellow maize is the main feed-stock.
- Tobacco continues to be in demand in international countries.
- Steady decline in planted area of maize.
- Farmers are financially constrained in the period between planting and harvesting.
- Input costs for farmers are rising.
- Maize prices are volatile.
- Farmers are not cost-competitive when compared to other sugar producing countries.
- Preferential trade agreements and high export tariffs for sugar farmers.
- Declining cotton prices and the perception that the industry is not profitable.
- Increased smoking laws, high tax rates and high input costs are slowing the local demand for tobacco.
Related: How to start crop farming in South Africa
- Creation of biodiesels will improve demand for oil seeds.
- Biodiesels have the potential to lower a farmer’s input costs by using it to meet their energy requirements.
- Sugarcane-based renewable energy could assist Eskom with co-generation of power.
- Cotton farming can create numerous jobs as it is labour intensive.
- South African cotton is one of the world’s finest, giving the country a distinct advantage.
- Tobacco sector and government partnership is helping emerging farmers to enter the commercial space.
- Rising prices of yellow maize places added pressure on the animal feed sector.
- Maize exports need to be monitored to ensure that domestic demand is met.
- Reducing profit margins for farmers may result in a reduction in production to remain profitable
- Competition from cheaper imports may hurt the domestic market.
- Major sugar producing nations subsidise the production of sugar with the overproduction eroding the global price of sugar.
- Crop diseases can severely affect farmers’ production levels and profitability.
2. SWOT analysis: Horticulture subsector
- The climatic diversity of the country is suitable for the cultivation of a wide variety of fruits and vegetables.
- Citrus industry is export-orientated and SA is firmly established as one of the leading citrus producers in the world. Infrastructure and climate is suited to maintaining this position.
- Off-season production suits the European market and ensures demand for South African fruit.
- Small-scale fruit and vegetable farmers do not have sufficient access to credit, transport and storage infrastructure and markets and experience difficulty participating in commercial agriculture.
- Small-scale farmers lack access to advanced farming technologies thus reducing their global competitiveness.
- The sub-tropical fruit industry is cost-intensive and requires high levels of investment required during non-bearing seasons.
Related: Grants, funding and incentives for agriculture in South Africa
- Asia and the Middle-East are forecast to become major markets for South African table grapes.
- Niche markets for rooibos and honeybush tea as well as for essential oils set to increase. especially as people get more health-conscious.
- Increasing demand for organically grown fruits and vegetables.
- Growing market for ornamental and cut flowers.
- Training of emerging and communal farmers to combat crop-related diseases.
- Rising input costs.
- Fruit and vegetable farmers are particularly prone to crops being affected by pests and diseases.
- The citrus industry does face serious international competition and farmers will need to become increasingly cost-competitive.
3. SWOT analysis: Livestock sub-sector
- Livestock farming comprises 40% of the country’s agricultural output and is a major component of the sector.
- Approximately 80% of agricultural farm land can be used for the farming of livestock and as such farmers combine livestock and crop farming.
- Poultry is a fast-growing convenience food and has healthy future demand.
- Help is available for small-scale farmers with financing issues.
- South Africa is an importer of red meat and chicken and with a potential rise in imports expected.
- Small-scale farmers do not have the research and market information needed to commercialise their products.
- There are many financing backlogs.
- Financing options for small-scale farmers have high interest rates and repayments.
Related: Producing livestock feed without mechanisation
- Communal farming has the potential to help local producers meet domestic demand
- Access to viable and affordable financing options.
- Providing small-scale farmers with the technical skills and information to tap into commercial markets.
- Influx of cheap poultry will reduce production levels for local producers.
- Rising feed prices are likely to affect local producer costs.
- Avian flu’ could deter growth in the industry and would affect both poultry and ostriches.
- Foot and mouth disease is a concern.
Opportunities and threats impacting supplier value chains
Agriculture business owners are participating in the full agricultural value chain, which is arguably bringing exponential returns for those that are doing the right things. Simply put, the need for a business approach to farming is more important than ever. Farmers producing at commercially viable levels are inevitably confronted with the need to make decisions about expanding beyond the farm gate into the rest of the agricultural value chain.
Primary production is a long-term activity, calling for substantial investment of financial, human, and technology resources, both upfront and during production cycles. Compared to most other industries, the return on such investment is relatively low, when considered as margins or profit.
Of course, for many farmers, the emotional return of the farming lifestyle and the building of a family asset that will serve many future generations is a powerful incentive for staying on the land. But, being stuck in a financial holding pattern decade after decade is neither appealing nor particularly practical.
However, integrating along the value chain is one way of increasing both revenue and profit – and, it can also help disperse any risk.
Maximising the value chain
To integrate in the up and downstream activities of the value chain, consider the following:
- All the former co-ops have realised the benefit of doing this and have become fully-fledged agribusinesses passing back to their members the financial benefits of being involved in product storage, distribution, and processing.
- Following suit, many independent large farming operations are getting involved in every aspect of their own value chain – from harvesting, packing, transport, marketing, and exporting all the way through to collaboration with end-users.
- Others are forming groups in which they collaborate on their own production of inputs such as fertilisers for use within the group. In this case, they’re cutting costs at one end of the value chain to boost margins at the other end.
Related: Supply chain management for business growth
Know when to make the move
It’s time to make your move when you can extract no further efficiencies from your operation, even when you’ve diversified. There’s a financial and environmental limit to how much extra land you can buy, how many additional crops you can put in over different seasons, how much additional livestock you can manage, and how much technology is needed to ensure that you run at peak performance.
When you’ve finally optimised everything, the only way to keep improving your returns is to turn to options outside the farm.
The importance of collaboration
It’s important to understand that participating in the value chain becomes a corporate activity that requires collaborating with other directors and shareholders, working towards consensus on strategy, and allowing others to manage day-to-day operations.
For many farmers that are used to being owner-operators and making independent decisions, the shift can be difficult. It’s not a difficulty peculiar to agriculture. Collaboration is a pre-condition for growth, whatever the industry. However, agriculture hasn’t been structured for collaboration until very recently. From a big picture perspective, global issues such as food security and environmental sustainability, along with local issues like land reform and industry transformation are making it imperative. At the farm gate, the pressure to form alliances with like-minded operators is just as compelling.
As a farmer, take stock of the financial input needed to break into the value chain. Setting up companies or corporate structures can be costly. If processing or storage facilities need to be built, capital will be required. Specialist capabilities, such as those in marketing or exporting, may have to be acquired.
Barriers to entry can be high and it can take several years to reap the benefits. Do your homework to ensure that the business case stacks up and that you will indeed gain the desired multiplying effect of up or downstream activities and that the venture you choose will produce at a level that makes a game-changing contribution to your bottom line.
Innovation and Disruption within the agriculture sector
Technology and innovation is impacting agriculture as much as any other industry, from crop monitoring technology to useful and informative mobile apps to aid farmers in planting drought-resistant crops and precision agriculture.
As the need for food security increases and the population continues to explode agribusiness owner’s face exponentially increasing their yield per square meter of land. As this isn’t always possible, innovators in this sector have begun coming up with options to solve this planetary problem.
A start-up in Abuja, Nigeria can grow the same amount as a football field and a half in a shipping container. This company, Fresh Direct NG, is planning to disrupt the African agriculture industry.
Another start-up, Verdant, connects stakeholders and major players in the agricultural value chain under one platform. This involves not only the farmer, buyers and the agri-industry but also research agencies, donor organisations, governments and financial institutions.
Considering the drought that’s ravaging the agriculture industry in South Africa, agribusinesses are turning to sustainable farming practices, taking into account that they won’t be able to rely on the rain. Renewable energy is growing in popularity to sustain farms and improve agri-processing too. This includes using wind and solar generation along with converting bio-waste into energy.
Related: Transforming Africa's agriculture
Factors that affect SA’s agricultural sector
1. Weakening Rand
With the longer cycles in the wine industry, for example, it makes it difficult to make a profit with the volatile rand. The disadvantage of the weak rand is that it can lead to short-term discounting of foreign price points, which results in lower foreign sales prices.
On the other hand, other sectors are becoming highly competitive as they are delivering high-quality products for a fraction of the price of competitors.
2. Political landscape
The land reform issue and its implications for the private sector, farmers and emerging farmers will add to instability and uncertainty for the industry. Volatility will result in further reduced foreign direct investment into the industry as it increases its risk.
3. Potential Ratings Downgrades
A sharp decline in foreign direct investment would result if South Africa were to perform any worse on the AT Kearney’s FDI confidence index. This would impact the economy and growth, as well as cause current investors to sell their stakes in the country and invest elsewhere. This would impact agriculture as it relies on foreign investment.
4. United States presidency
During Trump’s campaign, he promised to implement protectionist trade policies that could result in tougher future trade negotiations for South African manufacturers. Those trading with the United States of America will either have to find alternative buyers/sellers or they will have to settle for the tougher trade options. If Trump delivers on his early threats it will be exporters that will be negatively impacted most.
With the rising need for food security, agriculture is developing and transforming to become even more productive than it’s ever been before. Agribusinesses across the globe are using technology to achieve this feat along with innovative ideas.
Agriculture is sensitive to environmental conditions, which is evident from the 2015/2016 drought, and to ensure this incident doesn’t repeat, farmers are now incorporating sustainable and drought-resistant arming techniques. Overall, despite the volatile situation caused by political reforms, the agriculture industry continues to yield high-quality produce and continues to evolve to remain competitive and keep up with rising demand.