If there is one economic sector in SA in need of financial support and development assistance it is undoubtedly the agricultural industry. Farmworkers began streaming to the cities well before the country's transition to democracy, and since then the migration from rural to urban areas has picked up speed.
Those left behind face rising impoverishment and joblessness, a situation that has not improved with the uncertainty created by large-scale land claims on agricultural properties. As a result much-needed private-sector investment is staying well clear.
WHAT IT MEANS
 Few funders venture into agriculture
IDC has to balance development with profitable investment
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As the Industrial Development Corp (IDC) wears an ever-heavier developmental and empowerment mantle, primary agriculture is a natural target for its new investment profile.
"One investment in the sector often creates hundreds of jobs and even though they are at relatively modest wages they make a huge impact and difference to these communities," says Rian Coetzee, head of the IDC's food, beverage & agri-industries strategic business unit.
But the drive for developmental targets has to be commercially viable, and balancing the two has not been an easy task in recent years. "The stronger rand and generally lower agricultural commodity prices since 2001/2002 have definitely put the squeeze on debt levels of commercial farms," says Coetzee. "Large export farmers, who would be natural operating partners for our many projects, simply did not have the financial capacity to participate in our projects," he adds.
"When we provided debt or equity support to some projects five years ago, the rand was trading at around R10/US$. That's what we budgeted for and when the rand turned against us and our partners, many exporting sectors had to re-strategise and cut costs to ensure their profitability," he says.
The situation has changed markedly over the past year and with it the IDC's lending strategy. In the 2005/2006 financial year the unit disbursed R245m in funds, compared with R158m the previous year. The unit's total book is more than R1,4bn - 86% of which is exposure to primary agriculture. It has an equity stake in 45 agricultural ventures, but has also launched innovative debt products, such as the "pro-orchard" scheme, which provides debt funding at prime minus 2,7 percentage points for up to 15 years and a five-year capital moratorium.
Coetzee notes that the farming sector has become far more financially savvy in recent years. "They are not family businesses anymore, but have started to move along the value chain into areas such as marketing and financial derivatives."
The new farmers are also mitigating risk by, among other strategies, diversifying the products they grow, entering ventures with other southern hemisphere producers to ensure a longer product season, as well as marketing and supplying directly to large customers, such as supermarkets in Europe, the Middle East and the Far East.
The health of the farming community is vital to the IDC, says Coetzee. "Apart from funding we have found that the lack of operational experience is the biggest obstacle to black economic empowerment (BEE) businesses wanting to enter the sector," he says. "Farmers can assist and many have already prospered from their co-operation with BEE companies or by bringing their farmworkers in as equity partners."
One of the IDC's oldest investments - its relationship with Upington grape farmer Piet Karsten, which goes back to the 1990s - illustrates this approach. Karsten Group Holdings (formerly Karsten Boerdery) is a diversified holding company that cultivates and sells a wide variety of fruit from grapes to dates and berries and turns over "a couple of hundred million rands, both locally and overseas," says Coetzee. The company has made its farmworkers shareholders in many of its ventures.
Employment has mushroomed. Last year alone Karsten increased the number of permanent workers from 1 200 to 1 400 and seasonal workers from 2 800 to 3 800. Funding from the IDC and other financial institutions has helped the group to set up fruit farming ventures in Ceres, Western Cape; grape orchards in Egypt; and a direct marketing office in the UK, among other ventures.
The IDC's other, more recent, large investments include:
- The Kenaf Development Project, in which the IDC has not only backed the farming of kenaf, a relatively new crop used in the production of fibre, but also invested in two kenaf processing facilities. The three projects will create at least 2 500 jobs, the bulk of them in Winterton in northern KwaZulu Natal (KZN). This is where kenaf will be grown by commercial and emerging farmers and supplied to a fibre production facility, also in Winterton. From there it finds its way to the Pinetown factory of Brits Automotive Systems, which has large off-take agreements with SA's car manufacturers.
Both the Winterton processing venture and the Pinetown plant are co-owned by the JSE-listed Seardel group, which is also the operating partner. The IDC's shares in these ventures was secured through a R56m investment and the corporation is also warehousing shares on behalf of the Kenaf Trust, which includes kenaf growers.
- The IDC's 2003 funding of the worker-controlled Sun Orange Farm, a large citrus farm in the Eastern Cape's Sundays River valley. At full production in 2009 Sun Orange is expected to sell 800 000 cartons of citrus a year and employ 135 staff, excluding seasonal labour.
The IDC has lent R10m and arranged support funding to ensure that 80% of the venture is owned by a workers trust, with the remainder held by established farmers, who also provide the operational expertise.
- The IDC is also close to finalising two large berry projects - one near George and the other on restituted land in Charlestown, on the Mpumalanga-KZN border. "We like these projects because they yield relatively quick results and they are very labour intensive," says Coetzee. He expects the ventures to create more than 450 job opportunities in George and 800 in Charlestown, for a combined investment of less than R30m. Once again, some of the IDC funds will be used to create workers' trusts, while established farmers will manage the berry projects.
One of the biggest disappointments for the IDC was the 3 000 job losses at its tea plantations in Magoesbaskloof, Limpopo province, some years ago, when it was an investor in the Sapekoe plantation with Linton Park of the UK.
"But it taught us that we need to plant crops that are internationally competitive. At the time we were growing tea at a cost of R14/t whereas it could be imported from neighbouring states at half the price," Coetzee explains.
Meanwhile, the Sapekoe leases on the Tzaneen estates have been cancelled and land claims on them are being concluded. Sapekoe is currently involved in high-yielding macadamia cultivation. The IDC is also working together with the Land Claims Commissioner to develop business plans for some of the estates.
Coetzee sees future investment opportunties for the IDC coming from a number of areas. "There are a lot of opportunities arising from the BEE charter programmes in mining and other industries, as well as normal corporate social investment initiatives," he says.
He cites the Living Gold rose project as an example. Launched by the Gold Fields mining group as part of its charter obligations a few years ago, the venture, in which the IDC has a 40% stake, is now SA's largest rose exporter.
Though the project's profitability has been affected by the strong rand, Gold Fields is planning to expand the concept to other agricultural investments, both in SA and in Ghana.
Most importantly from the IDC's development perspective, says Coetzee, is that Living Gold provides jobs for more than 300 women in Khutsong, an impoverished township on the Gauteng/North West boundary.
Similary, Coetzee sees the burgeoning biodiesel and bioethanol industries as a growth opportunity, given that current high oil prices make investments in alternative fuels viable. Furthermore, these fuels have environmental benefits.
"With government support, these industries can be viable," he says.
While ruling out subsidies for the industry, Coetzee says the IDC will work with the Central Energy Fund's Energy Development Corp to "be the primary driver in the bid to commercialise biofuels projects in SA".
In its recent budget government made biodiesel dutiable, but gave the fledgling industry a 40c/litre rebate as part of its strategy to encourage a minimum 5% blend of biodiesel with mineral diesel by 2014. Government has also allowed the industry a substantial tax write-down on investment in developing biofuels.
Coetzee stresses that the primary focus will be on utilising the most energy-efficient crops in a specific area for ethanol production. In deciding the suitability of crops, Coetzee says the IDC will look at crop productivity, energy efficiency and the relative cost of the crop. "For example, we will use lower energy efficient crops, such as maize, as a complementary raw material only and would prefer to stay away from crops used for higher-yield agricultural products. Instead, crops such as sugar cane and sweet sorghum should be considered," he says.
The IDC expects total initial funding requirements for six to eight bioethanol projects of up to R700m/plant, comprising debt and equity in equal amounts. "We see ourselves facilitating these investments, but also ensuring that emerging farmers and BEE firms get their share of these projects," he says.
Another area of future growth for the IDC is in Africa, which already accounts for about 20% of its total exposure. In its 2006 financial year the group invested US$6,5m in a Kenyan greenfield sugar project that will eventually create about 3 000 jobs. The IDC also has investments in Mozambique (a sugar mill), Namibia (grapes) and Malawi (nuts).
Though primary agriculture dominates its portfolio, the unit also has significant investments in food and beverage projects. The IDC last year exited its investment in food group Foodcorp to facilitate the BEE deal that gave Pamodzi control of Foodcorp.
Also last year the IDC backed the BEE deal by Phetogo Investments for wine producer KWV.
