In this first of a series of blogs entitled Agriculture en Vogue, I explore why agriculture is increasingly becoming sexy to investors and other unrelated industries, such as the hi-tech and pharmaceutical industries.
Despite achieving en vogue status, capital flow into agriculture still faces many challenges and seemingly unbridgeable roadblocks.
During the past 5 years through my involvement in promoting agricultural activities, one challenge rears its head time and again, being access to working capital.
In this weeks blog I look at the challenges SME’s in agriculture face globally in accessing working capital to manage their enterprises in a sustainable manner.
‘The biggest obstacle to global development is the lack of working capital for business enterprise’ Jerome Yazbek, Chairman Farm Limited
It is commonly quoted that more than 70% of small medium enterprises (SMEs) globally, fail, simply because they do not have sufficient access to working capital in the development phases of their business. Although they have come a long way in the past 5 years traditional lending institutions are not structured to finance development and with the introduction of new banking regulations through Basel 3 more and more establishments find it increasingly difficult to finance agricultural development and other SME’s.
In recent years, governments, development agencies, institutions and multi-nationals have taken an interest in the development of Africa for its potential to contribute to global food security. During this time many capital investment funds have been established to bolster agricultural infrastructural capacity in Africa through direct investment into individual pieces of the value chain.
Although capital investments are an essential part of the establishment of a viable and sustainable sector, it is only one aspect of finance required, and does not address the issues around the ongoing financial management and development of local business enterprise.
A farm is like any other SME or business enterprise and can in many ways be compared to a factory or standard processing plant. The ‘factory’ established on productive land needs to purchase inputs or raw product material at an affordable price to produce an output to be sold for more than the value it cost to produce. These are basic concepts in any form of manufacturing or production. The ‘factory’ or farm requires free flowing working capital, season on season depending on the geographic location of the farm and type of crop in order to maintain sustainable production.
Purchasing inputs, cultivating a crop and selling a final product require tailored and timely working capital throughout the season, at each stage of production from soil to shelf.
In the past 10 years institutions such as the World Bank, traditional banking institutions for example Standard Bank and private equity funds such as Phatisa have experimented with different funding models for both rural farmers and SME enterprises with relatively limited exposure in relation to actual demand. Structured working capital models, easily adaptable to agriculturally specific needs that are broadly applied in Africa are yet to be seen.
In the meantime limited lending mechanisms for basic inputs and insurance products are being offered to farmers through more unconventional players, such as multinational inputs suppliers. The question still remains, will this be enough to enable these agricultural business owners to grow their businesses effectively? A good example of this is where a miller in East Africa can access development funding for the establishment of his plant or inputs financing for the seed to grow his corn. His choices are either limited or non-existent when looking for working capital to purchase, manufacture and sell stock required on a seasonal basis. There are countless examples globally of how in other more traditional processing industries financing mechanisms exist to facilitate financed production, however these mechanisms have yet to be adapted to the needs of agricultural activities.
Who will fill the gap? The answer is still very much being debated, nevertheless one answer should be clear to all, agriculture may be sexy to capital investors like the Chinese government, but without working capital mechanisms there will be no sustainability in terms of long term profitability with this trend.