According to Standard Bank, the significant degree to which the agricultural business model is shifting is indicated by the fact that South Africa’s most successful agricultural operations are all younger than five years.
Many of them function at a distance from conventional agricultural and business centres, and provide offerings not previously known to the sector.
“Everything in agriculture is changing, from the types of food consumers want, to the way agriculture acts as custodian of the environment,” says Bertie Hamman, senior manager: secondary agriculture for Standard Bank. “Agricultural entrepreneurs have understood this and are putting together new businesses in ways that ensure farms and factories can be profitable because they are set up to meet the market’s new demands.”
“The days of simply delivering your product to an off-taker or retailer, and the consumer blindly accepting it, are long gone. Today, the consumer dictates what should be on the shelf and the business of agri-business is to ensure it gets there in the most cost effective way,” Hamman adds.
Agriculture has become a demand pulled service sector.
The first fundamental element of sustainability is exemplified by the enterprises that Standard Bank has supported, founding their business models on consumer preferences for convenient access to safe, healthy, nutritious products.
“It’s a straightforward principle, but not easy to execute as consumer preferences shift constantly,” Hamman says. “The key to success lies in aligning with global trends, of which the major one at the moment is ‘naturally functional foods and ingredients’.” The intrinsic health benefits of a food or ingredient are emphasised, without specific health claims having to be made. Providers make the places of origin public, along with their production methodologies such as cold pressed or free range, via packaging and marketing.
It’s easier for new producers with modern technologies and production processes to be responsive to the market in this way, because they are not hampered by the legacy systems and facilities with which longer-established companies are burdened. Older companies are also disadvantaged by product ranges with which consumers are familiar, and of which they are becoming suspicious, because of outdated production processes and assumptions about nutrition.
“A second critical sustainability factor is innovation that makes your operation commercially relevant,” Hamman notes. “The facilities the bank has funded recently are all state of the art, conform to global standards, and have the smallest environmental impact achievable with current technology. This gives them credibility with consumers and also provides the producers with means to be more efficient and, therefore, more profitable.”
However, innovation should always go beyond technology to encompass the entire organisation. “For instance, as a bank we have always advocated the commercial relevance of integrating sector value chains. Done responsibly, with intelligent application of relevant skills sets, you can establish natural affinities along the value chain and therefore, embed demand, supply, and other stakeholder fundamentals far more effectively than what is possible through traditional contractual options.”
3. Financial acumen
The third fundamental for sustainability – financial acumen – seems obvious. Yet, Hamman says, CEOs and CFOs who are not seasoned businessmen are often surprised by the financial implications of their business decisions.
“Choosing to grow revenue through aggressive marketing at lower margins not only impacts the income statement in the form of lower profitability, it also has a material impact on the working capital cycle and, as a consequence, free cash flows. In fact, less experienced entrepreneurs regularly get their estimate of the cash generative ability of their ventures extremely wrong and have to go into fire-fighting mode.”
The fourth fundamental, inclusivity, acknowledges the fact that no enterprise operates in isolation from its social, economic, and environmental milieu.
Hamman notes that the ventures supported by Standard Bank have been built around all their stakeholders – including suppliers, employees, off-takers, local authorities, and the wider business communities within which the enterprises operate. The business plans proactively integrates and aligns stakeholder interests and expectations.
“This is not easy, but the results in terms of support from community leaders, the commitment of employees who also double as shareholders, ISO accreditations from industry, and enthusiastic and unanimous product listing by major retail chains, go straight to the bottom line.”
5. Strong leadership
The final fundamental for an agricultural business being sustainable, is strong leadership and should be a given, but is often hardest to achieve. Every business needs someone in front, selling the vision of the business to stakeholders. The executive team should be keen and quick to understand the business issues as they arise, addressing them in ways that lead to good outcomes. Executives should have excellent knowledge of and insight into the financial, marketing, and operational functions of the business in order to be able to make timely, forward-looking decisions.
Hamman concludes: “Your leaders need to enjoy being challenged continuously. The world of agri-business will never be comfortably static again. It’s all about riding this wave successfully, while you prepare for the one that is just behind you.”