Diversification Is Key To Sustainability Of Agri Operations

As we enter the full quarter of 2022, Agri-entrepreneurs across Africa are hard at work assessing what the next year will hold and how the sector will not only survive but thrive. Sector and industry specific sustainability is a key theme for all stakeholders.

The fallout from the COVID-19 pandemic and events in Ukraine are beginning to have a real-and-direct impact on major Agri economies, with Europe experiencing energy shortages which is translating into record inflation. They join the US who are struggling with their own inflation coupled with rising interest rates and both Europe and the US are expecting to slip into recession territory in 2023.

Worldwide there have been serious disruptions to supply chains, increased trade barriers and agricultural input and commodity prices significantly higher than 18 months ago – so much so that we are seeing demand destruction in many developing and underdeveloped countries.

It is not easy operating in the primary or agro-processing sectors at the moment. Fortunately, our farmers and their Agri-sector stakeholders are a tough bunch and aren’t prepared to let grass grow under their feet, with many seeking out new markets while trying to ensure ongoing sustainability. How can one do this without “betting the farm”?

One of the business strategies to consider is that of diversification. As a sizeable funder of agricultural businesses across Africa we have seen the benefits and pitfalls of diversification strategies on our client base.

As a strategy, it can be both a source of risk and opportunity and the following should be considered:

Geographical diversification

If you are a producer of crops dependent on rain, diversifying and growing into areas with more stable water supply is an obvious benefit. Not only will risks such as water dependency be addressed, but also other weather relating factors such as the risk of hail and frost can be mitigated.  Risks but also a possible opportunity to this strategy would be your financial and operational capabilities.

Diversifying your client base

This not only extends to your local customers but also your export clients. The citrus industry in SA is a good example. We are now seeing that we must diversify our export base to new markets – we are too dependent on the European Union. This does not signal the EU must be downscaled, merely that new markets are required for our growing exports.

On a micro level a producer must ask if he is dependent on 1 or 2 clients – what do you do if one of these clients fall on hard times or start to misuse your dependence on them?

Diversification of your supply chain

COVID-19 economic lockdowns and the Russian war has brought this principle very much to the fore.

Not only are businesses and countries re-assessing their supply chains over the short to medium term, but there is also an expectation that there will be more emphasis on shorter and regional supply chains in the future.

At a micro business level this entails asking simple questions such as: “Where do I buy most of my fertilizer, seed, and chemicals from?”, “Am I comfortable that my suppliers are of good standing and able to supply in the future or are they themselves vulnerable?”

Diversification of your business model or product

This is perhaps the strategy that holds the most risk.

Put simply, an excellent fruit farmer is not necessarily an excellent wheat, dairy, or poultry farmer. We have seen spectacular successes and failures with this strategy, and a principle that has been proved very strongly is that clients should try and diversify into their core competence. If you are good in growing grains, diversifying between maize, soy and sunflower is not such a big stretch as diversifying into avocados!

Our experience has shown that it is important to diversify from a position of strength if geographical and business model diversification is considered.  If your current business is strong it serves as a springboard and anchor to your diversification efforts, whatever they may be. Should this not be the case, you run the risk of adding complexity with a new initiative on a business already not performing optimally.

As one of the leading funders of agriculture projects across the African continent, we have been very fortunate to be able to work with some of the top businesses in the sector. This has given us extensive industry knowledge and insights to the changing business environment and while it is a challenging time for businesses across the globe, we believe that we give our clients a competitive advantage as they try and build sustainable, globally competitive operations.