Harvesting transformation opportunities in the agricultural sector

by Evon Jeewan

This article highlights the need for sector-driven transformation initiatives in the agricultural space, in light of the funda-mental challenges and uncertainties in govern-ment’s land reform programme.

 

It is perhaps unsurprising that South Africa’s agricultural sector has seen a lack of significant transformation initiatives over the last year. With an uncertain land reform policy, in combination with economic and environmental challenges, farmers and investors alike have adopted a “wait and see”

DealMakers - Q3 2019 

Evon Jeewan

approach.  Bucking the trend is Limpopo-based citrus and grape farmer, Schoonbee Landgoed, which recently concluded a large-scale transaction with equity partner, Thebe Investment Corporation.  The family-owned company took a critical decision to lean into the challenges faced by the agricultural sector, and to use these as opportunities to develop a sustainable transformation model.

 

For the agricultural sector, it has been a long year since the appointment of an advisory panel in September 2018, to support the Inter-Ministerial Committee (IMC) on Land Reform. When the advisory panel released its final report in July this year, it cautioned that the controversial aspect of land reform, namely expropriation without compensation (EWC), could not alone fix South Africa’s land challenges. (A constitutional amendment to Section 25, the property clause, is currently in progress to enable expropriation without compensation, with finalisation anticipated by March 2020.)

The report was criticised in some quarters as glossing over the deep structural and systematic challenges inherent in the current land reform processes, such as the slow evaluation and finalisation of land claims, of which there is a backlog of around 20 000 cases.   

The IMC is chaired by Deputy President David Mabuza and provides political oversight on the implementation of measures aimed at accelerating the process of land reform in South Africa.  As well as the abovementioned “Presidential Advisory Panel Report on Land Reform”, the IMC must also consider the “Draft National Spatial Development Framework”, the “Integrated Plan for the release and strategic utilisation of government-owned land”, the status of land claims, and the integrated model for farmer support. What is required is a concerted effort to harmonise and consolidate the different objectives and processes of each plan and report.  

Last month, Mabuza said that the government was ready to start its land reform programme, which includes the expropriation of land without compensation, and which process he assures us will take place within the confines of the law. So far, government has identified 278 pieces of land which have been earmarked for redistribution. Mabuza also said that not only was the state looking into ways to accelerate the restitution of farmlands, but also redistributing land to emerging farmers including state-owned land.

According to an article by journalist and farmer Bheki Mashile in Noseweek earlier this month, a number of black farmers in Mpumalanga in August received official letters entitled “Termination and Non-Renewal of Lease Agreement” citing an “underutilisation” of the properties. Mashile states that many of these farmers have had leases under consideration since 2014, with the result that they have struggled to raise the necessary capital to work the farms, given that financial institutions (including the Land Bank) simply cannot provide loans or grants without lease agreements.  

It is small wonder then that many farmers and investors are less eager to implement transactions in the current environment that lacks assurance and clarity on the future of commercially-farmed and privately-owned land.   

Despite this, Gert Schoonbee, co-owner of the farm Schoonbee Landgoed, says that there is the need to collectively lean into the current realities of farming in South Africa and to find innovative ways to embrace and leverage these challenges.  “What is required is a substantial mind shift.  The sector needs strategies that move away from a profit-above-all stance towards broader community inclusion and social value creation.”

Schoonbee Landgoed, the family-owned and -run business which has been operating in the Loskop Valley for the past 75 years, embarked on a transformation process to become a corporatised business based on shared-value principles. Over a period of two years, the company intensively developed a profit-for-purpose concept with the objective of creating shared value. After much consultation with various stakeholders in the surrounding communities, the Schoonbee family concluded that the social impact could be maximised in the area by addressing three specific social needs. The first was to provide employment for people living in the Loskop Valley and surrounds.  The second was to support worker and wider community health by providing primary healthcare facilities and services, and the third was to unlock human capability and break the systemic cycle of poverty through the provision of education and training opportunities to farmworkers, their children and budding entrepreneurs in the surrounding communities.  

For black-owned equity partner Thebe Investment Corporation, this provided a compelling investment and partnership opportunity. With two existing operational farms contributed by Schoonbee Landgoed, equity provided by Thebe Investment Corporation for the establishment of additional citrus and grape developments, and senior debt and mezzanine funding raised through the Land Bank to fund the developments, the majority black-owned farming initiative known as Project CHANGE was formed.  In addition to the two recently developed farms with existing income, a further acquisition was made of just under 400 hectares of additional land with recognised water rights for further citrus and grape development.  Three primary healthcare and educational facilities for the surrounding communities will be deployed by mid 2020. 

It is anticipated that over 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. 

The CHANGE initiative 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 entrant (including small holder) farmers in achieving financial viability.

What is important about this model is that the funding mechanisms are aligned with the developmental strategy and nature of the project, which neither compromises profitability nor has been developed as a charitable or CSI initiative. Schoonbee says that the primary healthcare and education needs of the community were “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.  

From a business perspective, the initiative will have access to the local and international retail markets that partner Schoonbee Landgoed currently services. Around 70% of CHANGE’s volumes will be earmarked for export to 60 countries. This is a critical aspect of the initiative, given that access to markets is one of the key challenges for smaller farms and new entrants into the sector.  As a share of global trade, South African exports of citrus and grapes have been increasing over the past decade, with the citrus market share growing from around 4% in 2001 to more than 10% in 2018, followed by table grapes from 5% to 7%.  

Government’s ability to successfully implement land reform remains challenged by poor oversight of the land reform process, in combination with inefficient processes, poor planning and implementation. Initiatives such as Project CHANGE are critical as they acknowledge that the responsibility for investigating new and different models to become transformative and inclusive must be sector-driven. These can be further harnessed by others in the sector as models for replication.  As Patrice Motsepe, the chairperson of Africa Rainbow Capital, succinctly put it during an announcement of his intention to launch a multibillion-rand fund for emerging black farmers: “We need black farmers to be part of sustainable, commercially viable and profitable enterprises. When we do that, we will build a future for all of our people.”
 
Bravura acted as exclusive financial advisor to the Gert Schoonbee Beleggings (Pty) Ltd (“Schoonbee”) group of companies. 

Jeewan is a Corporate Finance Principal at Bravura.