in the Potato Sector Linking Farmers to Finance and Markets Andrew Makenete Musa Group

Transcription

1 in the Potato Sector Linking Farmers to Finance and Markets Andrew Makenete Musa Group

2 Total Veggie and Potato Market in 2012/13: Volume = 4.8m tons & Value = R23bn Veggie Market size in '000 tons excl. potatoes TOTAL Potato market size in 000 tons Other Carrots Pumpkins Cabbages Green beans & sweet corn Onions Tomatoes / / / Veggie market excl. potatoes declined (4.3%) to 2.6m tons (Value grew by 12%) Market dominated by a few players (e.g. ZZ2 in Tomatoes, Rugani in Carrots, but 5 7 major potato producers including Du Toit, ) Source: Trends in Agriculture 2013: DAFF

3 Myth or reality? It is an often said that the root cause And lack of development and progress Of small holder farmers is The lack of access to finance and Markets

4 It is said Our key barriers to creating wealth and jobs through vegetable farming Afasa conference Poor road/rail & farming infrastructure Lack of farming & management skills No access to viable markets Lack of and access to funding

5 Is the myth reality? Myth 1 The Market Anecdotal evidence would say to us - That SA and SSA are ideal suited markets and growth markets for Potatoes. We know it as fact that potatoes are increasingly becoming A staple diet for most house-holds interestingly both the rural / urban poor and for middle to higher income households Yes Chips and potatoes in the various guises and forms are effectively replacing Papa after all you can t package papa as you can chips. So anecdotally the market should be there. JFPM and al other markets are crying out for more and more chips, I&J, McCains, Simba, Tiger, Pioneer, and all around people want chips either raw and for processing. We have not even started to talk of talk of the market for Potato starch, easily more profitable and bigger than the corn starch market.

6 Is the myth reality? Myth 2 Finance The government at national, provincial and local level say there is money The National Development plan says there is money for agriculture in particular growth sectors which as spelt out in the APAP, clearly talks to vegetables / potatoes especially under irrigation as growth sectors due for increased investment The Jobs Fund of Treasury targeted high growth agricultural sectors with R2,0bn fund The Landbank says there is funding The private sector buyers are out there issuing contracts and buying orders (retailers, wholesalers, processors and manufactures etc..). Promise to buy everything delivered to them.

7 So what is the problem? The markets and the ability to finance production are not in synch. Ultimately the issue is that the money / funding does not reach those with the means and ability to produce potatoes for a ready market why? 1. The inability of New Marketing Dispensation Marketing Act on 1994 to have accommodated the needs and conditions of smallholder growers; 2. Similarly, the changes and transformation that has taken place in the financial markets and especially in agricultural finance have spectacularly failed to solution or provide sustainable / practical solutions to financing new and upcoming smallholder / emerging farmers; 3. The policy and legislative regime especially around land and water rights have failed by and large to be transformative and ensure that smallholders are indeed empowered, in fact in most instances leading to the reverse; and 4. Lack of appropriate investments in the requisite infrastructure plus a misplaced and misguided view to what is a sustainable unit to support production making the production costs for smallholder prohibitive and therefore uncompetitive.

8 The Market 1. Open and transparent markets are general efficient and robust (allocated resources but unfortunately very cruel; 2. Markets in SA very sophisticated and constantly evolving but dominated by few market players at the top end creating a skewness that was not the intention of the opening of markets; 3. Producers are simply price takers and the new markets dictate that the consumer is king. When producers are not organized or having scale they lack the power to have any influence on either prices, markets or other market determinants (quality, form, standards etc..). Smallholders are most exposed to the ravages of the market; 4. The producer space increasing dominated by fewer players due to the inherent high costs of production, and shortage of key resources of which water is a major factor (broader agro-climatical conditions); 5. Logistics and the costs of moving product from producers to consumers very high and require significant economies of scale; and 6. Scarcity of contracts (fixed term / priced contracts) means pricing generally real time and discriminatory against producers in favor of the buyers.

9 Finance and funding 1. Smallholder farmers have no security / where land used as an instrument of security; 2. Vegetable farming / high value crops not financed by the traditional financiers due to a number of reasons: i) No hedging or non balance sheet instruments; ii) Lack of insurance or high cost of insurance; iii) contracts are un-secured not contracts per se but planting programs, so cannot be used as a basis for securing funding. 3. High risks and input costs associated with planting potatoes including impact on the soils mean that planting potatoes not for the faint hearted. 4. Potatoes are a scale dependent crop to produce since the support infrastructure, harvesters, pack-houses, etc..

10 Policy and legislative regime 1. Land size holdings must be at a scale and size to enable farmers to produce commercialize; 2. Land tenure arrangements must change to allow the farmers enough tenure to be able to securitize; 3. Water rights must be secure and transferable and priced properly 4. Funding from government especially state grants must be more targeted and used discriminately. 100% grants in production are un-productive especially at a small scale. Rather provide grants to leverage.

11 Infrastructure - Investments 1. Lacked appropriate new investments in infrastructure especially meant for smallholder farmers; 2. Bulk infrastructure spending especially dams, water infrastructure, irrigation dams etc.. been either misspent or the work not complete 3. False notion that smallholders are all the same and want to operate in a static same format on un-economic units. 1, 2, 5, 10 ha units are not economic. The issue is not the quantum of farmers but the quality of farmers who can be independent and sustainable; 4. Roads and bulk infrastructure not linked with growth areas. Government spent lots of money of so called rural markets but these do not work any longer as designed. So a relook at the market systems a must; 5. Lowering the costs of distribution means the logistics infrastructure must be targeting (where is cold storage, where a pack-houses etc.).

12 Solutions: Linking the market to finance 1. The contractual / purchasing power mechanism must be reformed; 2. The financing structure must allow flexibility and accommodate the fact that smallholders need non traditional forms of security; 3. The key security instrument is the purchase instrument from all buyers including the main buyers (McCains, Simba, Tiger, etc.). This instrument must be allowed to be collateralized.; 4. That means the instrument must serve as security be priced, be volume determined, be quality determined, and be transferable; 5. The discounting of pricing for smallholder produce must be dis-continued. It is common practice that smallholders can paid the least, can paid last. 6. True ED / BEE / procurement spend means that an effective transfer price must take place meaning an effective premium to smallholder farmers 7. More contributions from input suppliers as input financiers and government must provide subsidies / grants at this level

13 Establishment of new funding models 1. Funding must target high growth areas and high potential lands e.g. Eastern Cape 2. Funding (grants) must be leveraged when used in production no 100% grants for production; 3. Funding must be used to back anchor farmer leaders, anchor farms, committed to developing smallholder farmers as mentors, coinvestors, mentors etc. 4. Funding must be allocated over three- five year time-frames not single year terms 5. Significant investments in infrastructure bulk irrigation, roads, storage, pack-houses, fridges, etc.

14 Solution: Managed Partnerships between: 1 Government Seed Funding & Political will 2 Smallholder farmers & rural communities Active involvement in incubation programs 3 Commercial farmers Willingness to impart skills, resources & create access to markets Management Consortium to source funds and co-ordinate activities between the above parties

15 VEGETABLE CROPS Value Proposition 1 2 The Big Idea: Optimising land use through 5 to 10 year lease agreements aimed at equipping PDI farmers with skills and give them access to markets 5 to 10 year lease agreements Minimum land size = 10 ha Tractors & implements Irrigation systems Land preparation Storage & Transport Seeds Fertilisers Labour Pesticides Farm infrastructure development Monthly rent per ha 3 Farming skills Early Childhood Development Guaranteed off-take of products Management & Financial skills Disabled groups Competitive prices Mentorship Unemployed Youth 10% of profits to communities Up/Downstream Business development

16 Entity types Responsibilities Effective separation of responsibilities to accelerate sustainable potato farming development in rural communities National or Regional Management Consulting Entity SPV (Consulting Company) Land Owners entities Incubator Companies Market Insights Strategic direction Business plan development Apply for funding Identify credible incubators Identify opportunities Manage Land Owner trustees and incubators Drive achievement of results Custodianship of land Community liaison Rental & lease negotiations Profit share negotiations Management of Community projects (social welfare) Government liaison on land issues Day to Day Ops Management Skills transfer/mentorship Building of Infrastructure Maintenance of farm HR management Production Logistics Liaise and report to Management Consulting Company Consortium consisting of commodity champions and business experts Representation of Land custodian through a trustee, CPA or Business company Sector-based companies to partner with landowners and source 75% of staff from local communities