Attitudes toward agribusiness investment is changing
Corporate social and environmental responsibility now driving investment
An understanding is developing that the more conventional asset classes developed during an era when environmental issues, climate change, and the influence of emerging economies on the global financial landscape simply didn't exist. Food security was taken for granted, certainly in developed economies. Now, the new global concerns are creating new markets, from both a demand and supply perspective.
At the same time, the greening of economies is giving investment a social conscience it didn't have before. Where return on investment used to be the main and sometimes the only consideration driving investment decisions, it is being superseded by corporate social and environmental responsibility as consumers become more sensitive to production practices. The emphasis today is therefore on impact investing, in which measurable social and environmental impact ranks alongside traditional financial returns.
Agriculture as preferred investment destination
"All of these trends point towards agriculture becoming a preferred investment destination," says Bertie Hamman, Senior Manager: Secondary Agriculture at Standard Bank. "By investing in agriculture, you lay the cornerstone of all economic and social upliftment initiatives by helping to ensure that food security becomes a reality for everyone."
"In addition, in most countries, agriculture is the custodian of the bulk of natural resources, making it a crucial partner in the greening of economies. As just one example, agriculture is a major source of renewable energy - in the form of biomass. It can, therefore, make a significant contribution towards mitigating climate change."
"For all these reasons, investing in agriculture is true impact investing. It creates an impact at all levels of importance to human endeavour."
As the cherry on top, agriculture is a vast new investment frontier with virtually unlimited growth potential. The major governments of the world are pouring funding into agricultural operations inside and outside of their national borders, all aimed at securing food supply for their citizens. So, by investing early in an appropriate investment vehicle, investors can ensure a rapid and high rate of return," Hamman says. "We believe that such investments are also sustainable over the longer term."
Value chain linkages
"However, potential target companies look for more than capital from investors. Their objective is to grow and to deepen integration into the value chain. So, non-listed companies will consider investors only if they can assist in making value chain linkages and add value beyond that of a mere shareholder."
Historically, investing in agricultural was deemed risky mainly because of volatility in primary production. The emergence of a strong agro-processing sub-sector and the consequent aggregation of commodity and processed product flows have removed much of the volatility. Also, more robust information systems that improve planning have reduced risk significantly.
The potential of agribusinesses as investment vehicles
Itau Milling, a Standard Bank customer for the past 20 years, exemplifies the potential of agribusinesses as investment vehicles. A major supplier to retailers of high quality maize and wheat products and a supplier of animal feed products to farmers and agricultural outlets, the company has built a brand that is trusted by consumers and farmers alike.
As one of the largest and most modern facility of its kind in central South Africa, Itau Milling supplies the Free State, Eastern Cape, and Northern Cape, and exports to Angola and Lesotho. The animal feed production plant produces 48 different products for cattle, sheep, horses, pigs, poultry and other livestock, giving it a dominant share of the livestock market in the regions it covers. It is both HACCP and ISO 22000 certified, ensuring food safety throughout the food chain - from the animals that are fed Itau Milling products to the people that consume the resulting animal products.
Itau Milling's internal processes are vertically integrated, with the animal feed processing facility located next to the sorghum, wheat and maize mills. This eliminates transport costs, making all the end products more affordable. Automation of the movement of commodities within the milling and processing environments removes food handling errors and, therefore, increases food safety.
A bespoke and highly sophisticated technology platform boosts production efficiencies and provides an audit trail that enables the company to trace the source of every item in its products. Duplicate milling plants provide redundancy, ensuring business continuity in the case of breakdown in one or other facility. An electrode boiler and other energy efficient technologies minimise the mills' and processing plant's environmental impact.
Although certain components of the various plants were sourced overseas, installation was done locally, as is all maintenance, with small businesses deriving significant income from Itau Milling.
The company's rapid expansion from milling into processing, including an additional plant that will come on stream next year, has created new jobs in the area. All employees are trained in the specialised skills needed to maintain the quality and safety of the products, deepening South Africa's knowledge base. As far as possible, the grains used in Itau Milling products are sourced from Free State farmers, giving them security of offtake.
Value and impact
Fanti Hattingh, the managing director, believes that an organisation such as Itau Milling holds considerable value for prospective independent impact investors. "The national players are, mostly, listed on the Johannesburg Stock Exchange. So, returns would be steady but not spectacular."
"By contrast, smaller agribusinesses with trusted brands and the loyalty of local communities have much greater growth potential. Because they make such a significant difference in those communities, their impact is more relevant."
"As we have migrated from being a small business into progressively bigger leagues, the bank's insight into agriculture in general and the specific history and culture of our business has added value for us that goes well beyond the finance they have made available for our expansion."
Helping agribusinesses grow
"So, while we do absolutely believe that the agricultural sector is a prime investment destination and that many agribusinesses would be looking for investment rather than taking loans from a bank, for us, independent investors would have to demonstrate that they can proactively help us grow, either through the contribution of intellectual capital or by opening up new markets for us."
There are a number of private equity firms in South Africa and the rest of the continent that do take a hands-on role in investee businesses. Several of the firms proactively drive synergies through the relevant value chain. In the agricultural context, for example, they would link supermarket chains with up and downstream agri-players in which the investors have an interest.
"Such innovative investment models are simply a reflection of the changing times," Hamman says. "Business and financial agility are critical ingredients for sustainability, whether in investment or agriculture. The point is that new investment vehicles, in the form of agribusinesses, abound. If investors get in on the ground floor, the social, political, ecological, and food security returns will be unprecedented."
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