Farming competitively – it can be done!

Despite facing serious challenges, South African agriculture can nonetheless increase its competitiveness, both locally and internationally. Prof Gerald Ortmann, head of Agricultural Economics at the University of KwaZulu-Natal, explores some of the options.

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South African farmers have all, to varying degrees, experienced the effects of globalisation – the rapid change in the global economic and trade environment. The World Trade Organisation has promoted this concept to a great extent, starting with the Uruguay round of agreements in 1994. Here, a strategy was initiated to liberalise agricultural trade worldwide to stimulate economic growth.

South Africa has also experienced considerable change, both economically and politically. Since 1994, the country has seen the deregulation of local markets, increased global competition, land reform, agricultural black economic empowerment (agriBEE), fairly inflexible labour legislation, minimum wages, property taxes, agricultural extension being focused on small-scale farmers, power outages, and a volatile and depreciating currency.

South Africa’s commercial farmers have probably been among the most affected as they are at the coalface of these changes.

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At present, South Africa’s global competitiveness position leaves much to be desired. In 2011, the country was ranked 50th out of 142 countries analysed by the World Economic Forum (WEF). In 2013, it had dropped to 53rd out of 148, and in 2014 it was ranked 56th out of 144. The WEF uses 12 pillars to thoroughly and objectively measure a country’s competitiveness, which it defines as “the set of institutions, policies and factors that determine the level of productivity of a country”.

Of these, four pillars comprise the basic requirements for a country to be competitive. They are: health and primary education (SA: 132nd, ‘very poor’); macroeconomic environment (SA: 89th, ‘poor’); infrastructure (SA: 60th, ‘average’); and institutions (SA: 36th, ‘good’). The next six pillars are considered to promote the efficiency of a country’s competitiveness. They are: market size (SA: 25th, ‘good’); technological readiness (SA: 66th, ‘average’); financial market development (SA: 7th, ‘very good’); labour market efficiency (SA: 113th, ‘very poor’); goods market efficiency (SA: 32nd, ‘good’); and higher education and training (SA: 86th, ‘poor’).

The remaining two pillars are innovation (SA: 43rd, ‘above average’) and business sophistication (SA: 31st, ‘good’).
Unfortunately, our government has reduced its spending on research and development in agriculture. But much of the slack has been taken up by the private sector, including agricultural commodity organisations. South Africa seems to be doing quite well in this regard, and there are a number of world-class businesses in the country.

The all-important question is: how can South Africa’s farmers improve their competitiveness in a ‘globalised’ world, given the great challenges – some of them unique – faced
by the country?

Key factors
Much research has been conducted in the field of competitiveness. In a nutshell, farming competitiveness involves producing commodities at a lower cost per unit than one’s competitors. Alternatively, a farming business can add value to its produce to achieve higher prices. By combining these two aspects, a farming business can generate even greater profits. Being able to do this sustainably over time makes a farming business truly competitive.

In all this research, a key element stands out: the need to increase productivity as the basis for improved competitiveness. This means increasing the productivity of all resources: land, labour and capital. Another important aspect is the environment created by governments for businesses and investors. Good governance reduces the cost of doing business, thereby improving competitiveness. All the countries that are highly-ranked in competitiveness, according to the WEF’s criteria, have high good governance rankings.

The South African government in particular needs to ensure the effective protection of private property rights, promote and enforce the rule of law, and reduce the uncertainty around issues such as land reform, AgriBEE, labour policies and Eskom’s power production problems. Good governance in South Africa can also be achieved through significantly reducing corruption, substantially improving transport infrastructure, and promoting education, research and skills training.

These goals can be achieved only through economic and political transparency.

Working together for improvement
Organised agriculture and the private agribusiness sector are doing a great deal behind the scenes to try to improve South Africa’s agricultural competitiveness. These entities are powerful in their own right and have a vested interest in the success of the country’s agriculture sector. It is therefore essential that government and individual farmers work with organised agriculture and the private agribusiness sector to find innovative solutions to challenges such as land reform, labour policies and water rights. It is also important that the agriculture sector is proactive in dealing with these challenges so that it can become more competitive.

Building blocks
Individual farmers can do much to improve the competitiveness of their own businesses and that of South African agriculture as a whole. Prof Kent Olson, of the University of Minnesota in the US, explains that competitive advantage has four building blocks:

Superior efficiency
This requires using inputs in the most productive way to increase efficiency and reduce costs. Improving crop yield and productivity of livestock is one example. Overall, superior efficiency improves a farming business’s input to output ratio.

Superior quality
This involves meeting or exceeding customers’ expectations and can be achieved by producing products in an environmentally and socially sustainable way as well as producing safe and quality food. A South African farming business could differentiate its products from those of its competitors by registering with and being audited by organisations such as GlobalGAP and the Forest Stewardship Council. If it wanted to export its products, it would be obliged, in any case, to register with quality control organisations such as these. Ultimately, individual farmers need to be aware that it is the customer who defines the desired product quality, not the farmer.

Super customer responsiveness
South Africa’s farmers need to ask themselves how quickly they respond to their customers’ requirements. To learn what these requirements are, it is important that farmers familiarise themselves with international trends, as these directly affect the local market.

Farmers should know what their customers require from them and how to satisfy those needs. Effectively meeting these needs can achieve higher product prices for farmers and increase their products’ market share. If meeting customer needs requires individual farmers to work more closely with commodity groups, they should do so.

Superior innovation
This includes advances in product, production and marketing processes, management systems, business structures and strategies. In short, it means anything novel that reduces production costs and increases product prices relative to those of competitors.

Going even further
Some additional efforts that can help South African farmers improve competitiveness include close attention to detail in production processes, compiling budgets, keeping detailed physical and financial records to improve decision-making, finding and utilising relevant information from reliable sources, and adopting and adapting relevant new technologies. These might include, for example, biotechnology, more efficient machinery and equipment, precision farming methods, or minimum tillage.

Farmers should find out what successful producers are doing, both nationally and internationally, and then evaluate the expected benefits against the costs and risks of adopting these techniques. Benchmarking is widely utilised in countries with competitive farming sectors. It involves comparing one’s own farming business with high standards based on the best practices achieved by other top farming businesses.

I recommend that every South African farmer join a study group for his/her commodities and study national and global trends for measuring performance in farming businesses. Further initiatives individual farmers can undertake to improve their competitiveness include increasing the size of their farming operations where possible to take advantage of economies of scale and reduce the cost per unit of production, finding new markets, being ‘climate smart’ and environmentally sustainable, and being socially responsible. – Lloyd Phillips

Adapted from an address presented at the Omnia Farmers’ Information Day in Hilton, KZN, on 12 June. Phone Prof Gerald Ortmann on 033 260 5492 or email
[email protected].