Agbiz Perspective: Best approach to agro-processing development initiatives

Agbiz Perspective: Best approach to agro-processing development initiatives John Purchase, Lindie Stroebel & Tinashe Kapuya National Agro-Processing Forum 25 November 2015

For today. 1. Overarching considerations 2. Current global trends observed 3. SA Agro-processing trade analysis 4. Enabling inclusive growth

Overarching considerations 3 things that can t be controlled : Movement of people Movement of capital Movement of information What drives investments? Ease of doing business Return on Investment Certainty Observed through 3 current global trends 1. Global value chain development 2. Systems theory 3. The global investor

For today. 1. Overarching consideration 2. Current global trends observed 3. Story from SA trade analysis 4. Enabling inclusive growth

Current global trends observed: 1. Global Value chain

Current global trends observed: 1. Global Value chain Value generated at consumer level and ultimately provides for ROI downstream Value creation Value capture Supermarket phenomenon

Current global trends observed: 1. Global Value chain What s going for SA? Increased purchasing power Source: BFAP Baseline 2015

Current global trends observed: 1. Global Value chain What s going for SA? Perception of market growth 2004 2008 2010 2012 2014 Crime Aids Cost of doing business 3 2.5 2 Labour Infrastructure Labour policy 1.5 1 Capital Land reform policy 0.5 0 Technology Trade policy Market size Local suppliers of primary Electricity supplies Scientific research Financial institutions Market growth Source: WEF GCI 2014/2015 Source: Agbiz Agribusiness Executive Survey 2014

Current global trends observed: 1. Global Value chain What s NOT going for SA? 1. Policy uncertainty 2. Losing competitiveness in industry 3. Low economic growth outlook 4. Ease and cost of doing business

Current global trends observed: 1. Global Value chain What s NOT going for SA? - Policy uncertainty Source: BER/RMB Business Confidence Index, Quarter 3, 2015 To be sure, given how weak the economy is right now, and made even more vulnerable by increased uncertainty around political, economic policy and labour developments, it wouldn't take much of a setback to actually push it over the edge", said Ettienne Le Roux, chief economist at RMB Source: Agbiz/IDC Agribusiness confidence index Quarter 3, 2015

Current global trends observed: 1. Global Value chain What s NOT going for SA? - Losing competitiveness.shifting investment elsewhere. Primary agriculture Secondary agriculture Source: Agbiz trade competitiveness report, with NWU input

Current global trends observed: 2. Systems theory

Current global trends observed: 3. The global investor

For today. 1. Overarching consideration 2. Current global trends observed 3. Lessons from SA trade analysis 4. Enabling inclusive growth

Agro-processing trade balance (2001-2014) Negative trade balance during the food price crisis

Agro-processing exports as a share of total exports (%)

Top 10 agro-processing imports (2014) Rank Code Product Description Value of exports (US$ mil) Share of total exports (%) 1 '151190 Palm oil and its fractions refined but not chemically modified 350 9.1% 2 '230400 Soya-bean oil-cake & other solid residues, whether or not ground or pellet 254 6.6% 3 '220830 Whiskies 251 6.5% 4 '210690 Food preparations nes 177 4.6% 5 '240120 Tobacco, unmanufactured, partly or wholly stemmed or stripped 132 3.4% 6 '150790 Soya-bean oil and its fractions, refined but not chemically modified 130 3.4% 7 '151211 Sunflower-seed or safflower oil, crude 126 3.3% 8 '170113 Raw cane sugar, (see subheading note 2.) 124 3.2% 9 '160413 Sardines, sardinella & brislg o sprats prep o preserved, whole or piece ex minced 110 2.9% 10 '220300 Beer made from malt 88 2.3%

Top 10 agro-processing exports (2014) Rank Code Product Description Grape wines nes, including fort & grape must, unfermented by add 1 '220421 alc in ctnr <=2l Grape wines nes, including fort & grape must, unfermented by add 2 '220429 alc, in ctnr > 2l Raw cane sugar, not containing added flavouring or colouring 3 '170114 matter (excl. 1701 13) Value of exports (US$ mil) Share of total exports (%) 507 10.9% 245 5.3% 235 5.1% 4 '210690 Food preparations nes 191 4.1% 5 '170199 Refined cane or beet sugar, solid, without flavouring or colouring matter 171 3.7% 6 '240220 Cigarettes containing tobacco 159 3.4% 7 '220710 Undenaturd ethyl alcohol of an alcohol strgth by vol of 80% vol/higher 108 2.3% 8 '110313 Maize (corn) groats and meal 100 2.2% 9 '230990 Animal feed preparations nes 99 2.1% 10 '200990 Mixtures of juices unfermented & not spirited whether o not sugared o sweet 96 2.1%

Top 10 agro-processing exports (2014) Rank Code Product Description 47% - Europe 17% - USA 15% - Far East Value of exports (US$ mil) Share of total exports (%) 1 '220421 Grape wines nes, including fort & grape must, unfermented by add alc in ctnr <=2l 507 10.9% 2 '220429 Grape wines nes, including fort & grape must, unfermented by add alc, in ctnr > 2l 245 5.3% 3 '170114 Raw cane sugar, not containing added flavouring or colouring matter (excl. 1701 13) 235 5.1% 4 '210690 Food preparations nes 191 4.1% 5 '170199 Refined cane or beet sugar, solid, without flavouring or colouring matter 171 3.7% 6 '240220 Cigarettes containing tobacco 159 3.4% 7 '220710 Undenaturd ethyl alcohol of an alcohol strgth by vol of 80% vol/higher 108 2.3% 8 '110313 Maize (corn) groats and meal 100 2.2% 9 '230990 Animal feed preparations nes 99 2.1% 10 '200990 Mixtures of juices unfermented & not spirited whether o not sugared o sweet 96 2.1%

Top 10 agro-processing exports (2014) Rank Code Product Description 83% - EU 9% - Africa Value of 2% -Middle East exports 2% -(US$ Asia mil) & Far East 4% - Others Share of total exports (%) 1 '220421 Grape wines nes, including fort & grape must, unfermented by add alc in ctnr <=2l 507 10.9% 2 '220429 Grape wines nes, including fort & grape must, unfermented by add alc, in ctnr > 2l 245 5.3% 3 '170114 Raw cane sugar, not containing added flavouring or colouring matter (excl. 1701 13) 235 5.1% 4 '210690 Food preparations nes 191 4.1% 5 '170199 Refined cane or beet sugar, solid, without flavouring or colouring matter 171 3.7% 6 '240220 Cigarettes containing tobacco 159 3.4% 7 '220710 Undenaturd ethyl alcohol of an alcohol strgth by vol of 80% vol/higher 108 2.3% 8 '110313 Maize (corn) groats and meal 100 2.2% 9 '230990 Animal feed preparations nes 99 2.1% 10 '200990 Mixtures of juices unfermented & not spirited whether o not sugared o sweet 96 2.1%

Top 10 agro-processing exports (2014) Rank Code Product Description 49% - Asia & Far East Value of exports 34% - Africa (US$ 10% mil) - USA 4% - Australia 2% - Others Share of total exports (%) 1 '220421 Grape wines nes, including fort & grape must, unfermented by add alc in ctnr <=2l 507 10.9% 2 '220429 Grape wines nes, including fort & grape must, unfermented by add alc, in ctnr > 2l 245 5.3% 3 '170114 Raw cane sugar, not containing added flavouring or colouring matter (excl. 1701 13) 235 5.1% 4 '210690 Food preparations nes 191 4.1% 5 '170199 Refined cane or beet sugar, solid, without flavouring or colouring matter 171 3.7% 6 '240220 Cigarettes containing tobacco 159 3.4% 7 '220710 Undenaturd ethyl alcohol of an alcohol strgth by vol of 80% vol/higher 108 2.3% 8 '110313 Maize (corn) groats and meal 100 2.2% 9 '230990 Animal feed preparations nes 99 2.1% 10 '200990 Mixtures of juices unfermented & not spirited whether o not sugared o sweet 96 2.1%

Top 10 agro-processing exports (2014) Rank Code Product Description Value of exports (US$ mil) Share of total exports (%) 1 '220421 Grape wines nes, including fort & grape must, unfermented by add alc in ctnr <=2l 507 10.9% 98% - Africa 1% Europe (France) 1% USA 2 '220429 Grape wines nes, including fort & grape must, unfermented by add alc, in ctnr > 2l 245 5.3% 3 '170114 Raw cane sugar, not containing added flavouring or colouring matter (excl. 1701 13) 235 5.1% 4 '210690 Food preparations nes 191 4.1% 5 '170199 Refined cane or beet sugar, solid, without flavouring or colouring matter 171 3.7% 6 '240220 Cigarettes containing tobacco 159 3.4% 7 '220710 Undenaturd ethyl alcohol of an alcohol strgth by vol of 80% vol/higher 108 2.3% 8 '110313 Maize (corn) groats and meal 100 2.2% 9 '230990 Animal feed preparations nes 99 2.1% 10 '200990 Mixtures of juices unfermented & not spirited whether o not sugared o sweet 96 2.1%

Top 10 agro-processing exports (2014) Rank Code Product Description Value of exports (US$ mil) Share of total exports (%) 1 '220421 Grape wines nes, including fort & grape must, unfermented by add alc in ctnr <=2l 507 10.9% 2 '220429 Grape wines nes, including fort & grape must, unfermented by add alc, in ctnr > 2l 245 5.3% 3 '170114 Raw cane sugar, not containing added flavouring or colouring matter (excl. 1701 13) 235 5.1% 96% - Africa 1% - UK 1% - Japan 4 '210690 Food preparations nes 191 4.1% 5 '170199 Refined cane or beet sugar, solid, without flavouring or colouring matter 171 3.7% 6 '240220 Cigarettes containing tobacco 159 3.4% 7 '220710 Undenaturd ethyl alcohol of an alcohol strgth by vol of 80% vol/higher 108 2.3% 8 '110313 Maize (corn) groats and meal 100 2.2% 9 '230990 Animal feed preparations nes 99 2.1% 10 '200990 Mixtures of juices unfermented & not spirited whether o not sugared o sweet 96 2.1%

Top 10 agro-processing exports (2014) Rank Code Product Description Value of exports (US$ mil) Share of total exports (%) 1 '220421 Grape wines nes, including fort & grape must, unfermented by add alc in ctnr <=2l 507 10.9% 2 '220429 Grape wines nes, including fort & grape must, unfermented by add alc, in ctnr > 2l 245 5.3% 3 '170114 Raw cane sugar, not containing added flavouring or colouring matter (excl. 1701 13) 235 5.1% 4 '210690 Food preparations nes 191 4.1% 5 '170199 Refined cane or beet sugar, solid, without flavouring or colouring matter 171 3.7% 98% - Africa 1% - Middle east 1% - Others 6 '240220 Cigarettes containing tobacco 159 3.4% 7 '220710 Undenaturd ethyl alcohol of an alcohol strgth by vol of 80% vol/higher 108 2.3% 8 '110313 Maize (corn) groats and meal 100 2.2% 9 '230990 Animal feed preparations nes 99 2.1% 10 '200990 Mixtures of juices unfermented & not spirited whether o not sugared o sweet 96 2.1%

High growth agro-processing exports (2010-2014)

Low growth agro-processing exports (2010-2014)

Summary of agro-processing exports The top 10 agro-processed exports constitute 40% of total agroprocessing exports Six of the top 10 products are growing at above 1.6% levels of growth; and these are referred herein as high growth exports These include grape wines (>2l), food preparations, refined cane sugar, maize groats & meal, animal feed preparations, unfermented juices etc. Four of the top 10 products are experiencing negative growth rates between 2010-2014, and these are referred to as low growth exports There include grape wines (<=2l), tobacco cigarettes and under-natured alcohol. High concentration of export markets in agro-processing exports means that there is scope for market diversification Focus on market development is critical.

High growth agro-processing imports (2010-2014)

Low growth agro-processing imports (2010-2014)

Summary of agro-processing imports The top 10 agro-processed imports constitute 45% of total agro-processing exports Five of the top 10 products are growing at above 1.6% levels of growth; and these are referred herein as high growth exports These include food preparations, sunflower oil, sardines, refined sugar and animal feed preparations. Five of the top 10 products are experiencing negative growth rates between 2010-2014, and these are referred to as low growth exports There include soybean oil cake, whiskies, tobacco, soybean oil and fractions, and malt beer Sharp declines in soybean oilcake and soybean oil + fractions is reflective of the expansion of soybean processing capacity Is there import substitution potential for whisky, tobacco and malt beer?

Any scope for import substitution? Rank Code Product Description Import Growth Export Growth 1 '151190 Palm oil and its fractions refined but not chemically modified 0.4% 42.7% 2 '230400 Soya-bean oil-cake&oth solid residues,whether or not ground or pellet -6.4% 16.3% 3 '220830 Whiskies -1.1% -5.8% 4 '210690 Food preparations nes 7.9% 4.0% 5 '240120 Tobacco, unmanufactured, partly or wholly stemmed or stripped -7.5% -24.4% 6 '150790 Soya-bean oil and its fractions, refined but not chemically modified -14.9% 13.8% 7 '151211 Sunflower-seed or safflower oil, crude 6.7% -27.5% 8 '160413 Sardines,sardinella&brislg o sprats prep o presvd,whole o pce ex mincd 10.0% 4.9% 9 '220300 Beer made from malt -10.7% 17.1% 10 '170199 Refined cane or beet sugar, solid, without flavouring or colouring matter 35.7% 9.2%

For today. 1. Overarching consideration 2. Current global trends observed 3. Story from SA trade analysis 4. Enabling inclusive growth

Identifying priorities for development Economic Imperatives Social and Political Imperatives Identification of economic themes and trends National priorities Identification of social themes and trends Macro-economic picture Sector size and growth rate Global, national opportunities National priorities (Economic growth, Infrastructure, Skills Development, BEE, Competitiveness, etc) Geopolitical landscape TOP DOWN Millennium development goals Political priorities via electoral mandate Medium term strategic framework Economic, social, political landscape Democracy Political, economic & social stability Identification of investments with potential PORTFOLIO OF PRIORITY PROJECTS Identification of investments with impact Gross margin Feasibility metrics (ROI, NPV, Payback, etc) Strength of business idea and potential of brand Management capability Recurring revenue Risk Porter Five Forces for segment attractiveness Bio-resource capability Access to inputs, infrastructure and markets BOTTOM UP Local priorities Empowerment Transformation Employment creation Education Health & Safety Poverty alleviation Social cohesion Promotion of equality Source: KZN Agro-processing strategy (2015)

Criteria for product / value chain selection Criteria Agro-processing potential of raw material (feedstock) Potential contribution to agricultural GDP Unmet Export Market Demand Unmet Local Market Demand Growth Potential Ability to Differentiate from International Competitors Description The conversion of primary agricultural products into other commodities for market Evidence that the agro-processing value chain can make a significant contribution Evidence of strong effective demand for products being produced Demand for products exceeds supply Potential for import replacement Potential for market expansion (low risk of decline) Potential in the short, medium, and low term Products are competitive with existing and potential suppliers from other countries (lower cost, better quality, etc.) Feedstock procurement - reliability Potential for Employment Generation Potential number of SMEs Favourable Business Environment Institutional Mandates Lack of emerging producers who might offer more competitive products Potential for enterprises (large and small) to create new employment opportunities Potential number of SMEs participating in the value chain Existence of policies/regulations that support the value chain Level of support and commitment of the industry stakeholders Source: KZN Agro-processing strategy (2015)

Agro-Processing support platform Feasibility Study Feasibility criteria Business Plan Agro-Processing Support Platform Site Infrastructure Technology Business models Ownership models Financing Funding Incentives Insurance Technical and managerial capacity Compliance Upstream, downstream and horizontal linkages Business development services Essential enablers Important enablers Useful enablers Source: KZN Agro-processing strategy (2015)

Example of Agro-processing development incentive, support and funding Agro-processing Incentives, Support, Funding Public Incentives Public Support Public Development Finance Private Support Private Finance Donor funding DTI SEDA IDC The Business Place Commercial banks DFID Khula DBSA CSI programs Private equity investments USAID Provincial, Municipal Development Agencies Landbank Venture capital investments CIDA National and Provincial Goverment Departments National Empowerment Fund etc Source: KZN Agro-processing strategy (2015)

Conclusion Global value chains & Supermarket phenomenon: market dictates Many factors that determine success in the development of agro-processing Complex! Agro-processing a high skilled, capital intensive and scale of economy business Level of government intervention a concern: - Can crowd out private sector investment - Can undermine competitiveness of currently competitive players

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