Profit for purpose is the way to change the farming landscape
We need to find innovative ways to leverage challenges, shifting from ‘profit above all’ towards community inclusion and social value creation
According to the recently launched “Bureau for Food and Agricultural Policy (BFAP) Baseline Agricultural Outlook 2019–2028”, SA’s agricultural sector needs to do more to support the targets of transformation, jobs, growth and land reform that have been set by the National Development Plan (NDP).
Prof Ferdi Meyer, a board member of the BFAP, has said that the future of the country’s agriculture sector will be dependent on the government and industry making the right policy and investment choices. Critical policy issues include land reform and farmer support; infrastructure and technology, including water infrastructure; increasing access for local farmers to major international agricultural markets; and developing statistical baseline information to understand activity within SA’s agricultural sector in terms of the entrants of small, black farms and transformation.
There has been very little activity in terms of the development of significant transformative initiatives in the sector. Although policy certainty may have put the brakes on the sector’s willingness to invest in transformation initiatives, there are a number of other challenges:
- An acceleration in the trend towards larger, mega-farmers as the only real sustainable agricultural business model, which can be to the detriment of the larger communities within which they operate.
- The ongoing challenges for small agri-enterprises (whether in primary production or services) to compete or collaborate meaningfully with larger enterprises and remain sustainable.
- The need for scale as the prevailing competitive advantage to enable commercial farmers to get through the adversities of droughts, floods, market excess and many other unpredictabilities.
- A limited pool of large, well-known, black institutional investors in the agricultural industry to provide a credible voice about what sustainable transformation in the sector should look like.
- Radically reduced predictability of cash flows and income due to continual environmental, market and climate changes.
- Limited opportunities for local communities (arguably having to choose between participating in the trend towards urbanisation, or remaining unemployed and in poverty with a dependence on social grants).
The market responds to these challenges by homing in on specifics and finding solutions for a particular aspect. For example, a common perception is that although commercial banks are providing support for small “black entrepreneurs”, arguably this might not lead to broader social and economic sustainability given that support is for smaller projects. Furthermore, there is no distinction between the evaluation of sustainable agri-products that require sophisticated skills, infrastructure and large amounts of starting capex, and other agricultural initiatives that are less capital-intensive. This could lead to many missed opportunities.
Collectively there is the need to lean into the current realities of farming in SA and find innovative ways to embrace and leverage these challenges; shifting from “profit above all” towards broader community inclusion and social value creation.
‘Profit for purpose’
The “profit-for-purpose model” becomes a compelling alternative, referring to businesses that are led by a mission to achieve social, community and environmental benefit through trading and by channeling a portion of their profits towards their mission. This is the business model that has been applied in a partnership initiative called Project Change in Limpopo, between family-owned farming enterprise Schoonbee Landgoed and black-owned investment firm, Thebe Investment Corporation.
Project Change consists of two recently developed farms with existing income, as well as a further acquisition of just less than 400ha of land with recognised water rights for further citrus and grape development; and three primary healthcare and educational facilities for the surrounding communities that will be deployed by mid-2020. It is anticipated that more than 1,200 new jobs will be directly created through the initiative with an estimated impact on 8,000 jobs throughout the complete value chain in the country. Significant funding via the Land Bank supports the project.
Addressing the primary healthcare and education needs of the communities was never conceptualised as a corporate social initiative initiative separate to the business but “baked” into the forecast commercial model. While this could foreseeably put pressure on the short-term financial returns to the shareholders, it ensures long-term sustainability for all stakeholders.
The project’s profit-for-purpose model has the potential to provide an innovative, long-term model for partnering between established white commercial farmers and black institutional investors
What becomes important is to recognise that the concept does not compromise profitability and is not charitable in its format but seeks to be to share the value created in a specific way to address social needs in a sustainable way. This means that the funding mechanisms are — and should be — more aligned with the developmental strategy and nature of these projects.
Project Change will have access to the local and international retail markets that partner Schoonbee Landgoed currently services. About 70% of the project’s volumes will be earmarked for export to 60 countries. As a share of global trade, SA exports of citrus and grapes have been increasing over the past decade, with the citrus market share growing from about 4% in 2001 to more than 10% in 2018, followed by table grapes from 5% to 7% for the same timeframe.
The project’s profit-for-purpose model has the potential to provide an innovative, long-term model for partnering between established white commercial farmers and black institutional investors, while empowering local communities and supporting new entrants (including small holder) farmers in achieving financial viability.
The concept proved successful in a smaller forerunner project called the Rahlagane Co-operative, otherwise known as Peace Table Grapes, which is a small-scale, predominantly female farming initiative. Originally initiated by the Limpopo department of agriculture and rural development, the project was brought into Schoonbee Landgoed’s existing network so as to leverage the technical support, packaging, market access and logistics of the company at a zero-management fee.
Being able to market and sell the grapes to premium retailers locally and internationally, while receiving the same logistics rates and service quality that Schoonbee Landgoed receives, had a significant impact on the commercial viability of the initiative.
Peace Table Grapes provided key lessons on how to partner with a different entity, which were then applied when shaping the legal and business model of Project Change. It also proved that small farmers can collaborate meaningfully with large commercial farmers. It is anticipated that the project will be a catalyst for more small farmers to use such opportunities to collaborate in a similar way.
The profit-for-purpose model is a deliberate shift away from a singular focus on the wealth of shareholders to the long-term health of the company when looking at its well-being through the different lenses of financial, social and environmental perspectives. Because these aspects are critically interlinked, the agricultural sector’s task is develop holistic business models where these challenges converge into one practical and workable solution. Without this, it will be difficult to ensure the broad and sustained transformation that SA’s agricultural sector needs.
• Schoonbee is co-owner of farming company Schoonbee Landgoed.