The South African agricultural market: Unlocking growth through focused infrastructure investment

Even with its various challenges, agriculture plays a critical role in South Africa’s economy through its contribution to food security, employment and our gross domestic product from exports.

In addition, agriculture can be utilised to make a lasting impact, with alignment, on both primary and secondary agriculture, to the United Nations Sustainable Development Goals (SDGs), such as those illustrated below. These combine - when done correctly - to drive the promotion of rural development, creation of jobs, improvement of food security and contribution to long-term economic growth.

Global demand for South African products is high and continues to rise, particularly in the European, Asian and US markets. South Africa generated a record-breaking $13 billion1 of agricultural exports in 2023. General market sentiment points to a sector that has delivered both globally and locally despite significant headwinds.

Market commentators also expect that the South African agricultural sector will benefit from a recent cut in the repo rate (with more cuts expected), a reduction in the petrol price (which affects other input costs) and some regulatory support with the Government of National Unity providing a more stable political outlook after the last elections.

South Africa’s agricultural exports

Source: Trade Map and Agbiz Research

However, it is critical that we address the infrastructure gaps in the sector if we want to realise continued export growth. These include but are not limited to effective cold storage along the value chain, efficient water infrastructure, and adequate and dependable road, rail and port infrastructure – all of which enable the delivery of a high quality product to the end consumer and enhance the competitiveness of our products on the global stage.

In contrast, a lack of infrastructure leads to increased operational costs, higher risks and limited scalability. Beyond limiting export growth, these shortcomings make it harder for investors to commit to agricultural ventures. Improved agricultural infrastructure would also lower the barriers to investing into primary agriculture — a critical segment involving crop and livestock production — by helping to reduce risks and provide investors with commensurate returns.

How developed infrastructure supports the investment case for a more resilient and profitable primary agricultural venture

Beyond the benefit of vertical integration, agricultural infrastructure drives on-farm and downstream efficiencies:

1. Water efficiency: Increased climate volatility and resultant water scarcity calls for prudent use of this precious resource. Efficient and reliable water availability increases yields and stabilises production, making primary agriculture returns more predictable and dependable for investors.

2. Reduced post-harvest losses: Maintaining the cold chain is essential for preserving the quality of perishable goods for export markets that tend to demand a flawless product. Better logistics ensure that products reach markets in the required condition, increasing farming profitability and investor confidence.

3. Enhanced market access: Infrastructure facilitate access to both domestic and global markets, ensuring that agricultural products are delivered efficiently and at competitive prices. For investors, a greater opportunity of offset of local product provides for a better growth prospect for primary agricultural ventures.

4. Lower transportation costs: Agricultural hubs in South Africa are often far from export markets, creating logistical challenges. Investment in roads, railways and port facilities can reduce transportation costs and the risk of delays that can spoil perishable products. A strong transport network enhances profitability by ensuring timely delivery to markets, thus making primary agricultural ventures more secure and attractive for investors.

5. Scalability and efficiency: the benefits above allow for an increase in margins which provide confidence to investors looking to support primary agriculture. The additional investments will allow farmers to drive scale thus benefiting from the lower cost per unit of production which in turn further supports overall profitability.

Private debt as a driver of infrastructure development

Given South Africa’s fiscal constraints, Futuregrowth has looked to support the South African agriculture theme by finding viable solutions to financing agriculture and agricultural infrastructure. These include investing in vertically integrated farming practices, and also deploying funding into infrastructure that supports the success and resilience of primary agriculture. Some of our notable private debt transactions include:

• Building and acquisition of cold storage;

• Investment in and upgrades to transportation networks;

• Increasing scale, improving farming methods, technological advancements in various agricultural ventures; and

• Supporting ventures with a focus on the effective use of water to advance crop yields.

A virtuous cycle

Infrastructure that aims to increase product quality and reduce input costs and post-harvest losses allows for increased margins. This provides confidence to investors looking to support primary agriculture. The additional investments allow farmers to drive scale and benefit from the lower cost per unit of production, which further supports overall profitability.

Agricultural infrastructure is required to unlock South Africa’s agricultural potential and make primary agriculture more attractive to investors. Futuregrowth is dedicated to fostering a sustainable and resilient agricultural sector by investing in opportunities that pave the way for a more competitive market. This includes supporting associated infrastructure, enabling domestic farmers to compete effectively in the expanding global agricultural market, and driving economic growth on a macro level.