PROPOSED AGRIBUSINESS MODEL FOR RURAL COMMUNITIES IN THE EASTERN CAPE OCTOBER 2008

simpiwe@asgisa-ec.co.za | cell: 071 603 4704 | tel: 043 735 1673

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1 Background In order to achieve its economic development objectives, Asgisa-EC plans to formulate and implement a functional Agribusiness Model commencing in the 2009 agricultural season. Depending on its performance, the Agribusiness Model would be piloted in selected areas and expanded throughout the Eastern Cape Province. Asgisa-EC is to establish beneficiation or value adding activities through the processing of agricultural produce of the rural communities in the Eastern Cape Province. Asgisa-EC (Proprietary) Limited was created facilitate the implementation of high impact priority programmes initially focusing in the Mzimvubu Development Zone.

The basis of creating a company that would facilitate the roll out of Asgisa-EC’s vision is premised on the realisation that a corporate structure is more flexible and would be more amenable to create and manage an investment fund that would focus on economic development initiatives in the Eastern Cape Province.

Asgisa-EC vision is: a vibrant and sustainable rural economy that improves livelihoods and unlocks the dormant potential of the land and the people of the Eastern Cape.

2 The Proposed Agribusiness Model

2.1 Approach

The Agribusiness Model is to be implemented in phases to allow for modifications to the model based on the practical knowledge and experience gained during the pilot phase. The pilot phase of the proposed Agribusiness Model, to be rolled out during the 2009 agricultural season, will focus on providing support for strategic crops mainly identified by communities and with a strong market presence. Maize and soya beans cropping programmes form part of the initial crops identified.

The crops earmarked for support will be expanded to include high value cash crops targeting both the local and the export markets. The introduction of high value, high yielding cash crops is expected to significantly transform the present agricultural practices that are based on seasonal farming to all season farming activities that will further enhance household food and financial security throughout the year.

2.2 Methodology

The Agribusiness Model is premised on Asgisa-EC establishing formal relationships with key constituencies along the value chain of the identified agricultural activities such as:

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• Outgrowers (co-operatives) who are the emergent farmers who would sign up with Asgisa-EC for technical and input assistance in return for a specific yield of the cash crop they produce.

• Strategic partners comprising of established businesses, banks, Black Economic Empowerment groups who have a vested interest in agribusiness on an outgrower basis. Participants may also include entities involved with agribusiness who view involvement in this venture as a way of securing a market, such as seed and farm implement companies.

The Agribusiness Model can be expanded to incorporate ancillary business ventures where, for example, Asgisa-EC will become involved with local communities in establishing milling facilities on a commercial basis. Asgisa-EC will seek to establish formal relationships with each of the identified players in the stated constituencies in the form of memorandum of understandings, business contracts and service level agreements.

2.2.1 Asgisa-EC

In order to enhance accountability and efficiency of the Agribusiness Model, Asgisa-EC will seek to establish a special purpose entity to be incorporated under the Companies Act premised on the need to:

• ring fence the business risks associated with its agricultural support activities;

• enhance accountability within the agribusiness programme;

• make future equity participation by target groups possible through the establishment of a legal entity; and

• facilitate the smooth operation of the Agribusiness Model through the creation of legal capacity to enter into normal business relationships and contracts.

2.2.2 Outgrowers

Under the Agribusiness Model, the beneficiaries of Asgisa’s input, field and technical support activities will be outgrowers or local co-operatives located in the rural communities of the Eastern Cape Province. The outgrowers will have aspirations of becoming emergent commercial farmers who possibly currently produce a surplus and whose yields could be improved through technical assistance. In turn, this will also have a positive impact on their economic base. Under the Agribusiness Model, Asgisa-EC will:

• provide business and technical support to the participating famers;

• provide local communities with input support including fertilisers, pesticides and herbicides;

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• make the necessary arrangements to outsource any business and technical support activities with reputable strategic partners in instances were such skills are presently unavailable in-house;

• enter into formal written arrangements with the participating farmers;

• agree beforehand the costs attributed to any of the support provided to the participating farmer. It is envisaged that Asgisa-EC will be able to procure various agricultural inputs efficiently through negotiating for discounts and rebates on bulk purchases;

• facilitate the marketing of the produce of the participating famers;

• recover certain or all of the operating costs incurred by AsgiSA-EC directly and objectively attributed to each participating farmer from the gross proceeds on the sale of the produce of such farmers.

The nature of support extended by AsgiSA-EC to each emergent farmer will be dependent on the particular circumstances facing each of the intended beneficiaries, including access to land. In regard to the special purpose entities to be created in order to facilitate certain of its business activities, AsgiSA-EC’s long term desire is to ensure greater equity participation in these entities by the rural communities supporting the activities of a particular agribusiness programme. AsgiSA-EC will not provide cash loans or grants to participating farmers. The Agribusiness Model will ensure that participating farmers enjoy the convenience of accessing critical agricultural inputs without making immediate cash outflows associated with the purchase of such inputs. In order to ensure the long term success of the Agribusiness activities, AsgiSA-EC will seek to establish good rapport with the participating famers through an efficient and effective communication strategy.

AsgiSA-EC may wish to limit potential abuse of its inputs by avoiding bulk disbursements of the inputs at the beginning of the farming season. Instead, participating farmers may be progressively issued with their inputs and such disbursements may be tied to actual performance on the ground. Official reports of the technical officers on the ground may form the basis for making further disbursements to the participating farmers.

The sustainability of the Agribusiness Model will largely depend on the level of trust between AsgiSA-EC and the beneficiaries. Some of the participating farmers may fail the test and fall by the wayside resulting in significant write-offs, especially in the first farming season. However, AsgiSA-EC’s ability to screen future beneficiaries under the Agribusiness Model based on past performance will enhance the sustainability of the programme as some beneficiaries would exhibit better commitment and a entrepreneurial flair than others.

2.2.3 Strategic partners

• Business

AsgiSA-EC will also seek to establish formal business relationships with key market players aimed at securing sources for critical agricultural inputs and a

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ready market for the produce of the participating farmers. Such relationships will be in the form of bulk procurements and supply contracts with suppliers and buyers. Further, service level agreements will be entered into with key service providers such as transporters.

• Financing and investment

The success and expansion of AsgiSA-EC’s activities may require a commensurate increase in sources of funding. In order to ensure sustainability of the funding arrangements in support of the Agribusiness Model, AsgiSA-EC will seek to enter into strategic financing and investment relationships with preferred developmental partners. These will include developmental banks, bilateral and multilateral financial institutions and donor agencies. Further, AsgiSA-EC plans to eventually seek increased equity participation by individuals and or community groups in the Eastern Cape Province.

2.2.4 AsgiSA-EC Value Adding Activities

AsgiSA-EC’s medium to long term goal is to promote and accelerate skills development and economic prosperity through the establishment of value adding activities relating to the processing of the agricultural produce of the farming activities of the communities of the Eastern Cape Province. Where relevant infrastructure is identified, AsgiSA-EC will seek to accelerate the introduction of value adding activities through the acquisition and rehabilitation of such infrastructure.

Apart from establishing in-house agricultural processing capacity, AsgiSA-EC will also seek to harness the knowledge and expertise of current players in the agricultural processing industry by entering into business partnerships and possible joint venture arrangements. In furtherance of this critical objective, it may be necessary to create special purpose entities in order to house the economic activities such as milling and packaging. Both local and export markets will be targeted under the proposed value adding activities.

3 Mechanics of the Agribusiness Model In pursuit of its rural communities developmental activities, AsgiSA-EC will seek to partner with other stakeholders including tertiary educational institutions (involved in agricultural training) for technical support, provincial and central government functionaries, business communities (input suppliers, buyers, and other services providers).

Set out below is a proposed Agribusiness Model targeted for roll out as a pilot project. The expansion of the programme will be dependent of the results of the pilot project and future roll out may require further modification of the model, taking account of the results of the pilot project.

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