Despite South Africa’s citrus sector growth in recent years, the sector was currently facing a perfect storm of challenges, according to Nico Groenewald, the Head of Agriculture (SA) at Standard Bank.
He said that global supply chain disruptions and market volatility, domestic logistics decay and increased shipping costs have combined with energy constraints, phytosanitary challenges, oversupply, and hail and other climate impacts, all of which were presenting formidable threats to solvency in the sector.
Groenewald said over the past decade southern Africa’s citrus industry expanded exponentially, increasing hectarage from 60 355 in 2012 to 99 697 last year.
He said the sector was also extremely active in adding new cultivars, modernising practices and technologies, and building the structures to promote and ship products globally.
“Thanks in large part to these efforts, South Africa is today the world’s second-largest exporter of citrus, after Spain.”
He said the annual Citrus Growers’ Association of Southern Africa Summit, which has already been held this year, presented an important platform on which to unite as a community, take stock, and focus on “understanding how to ensure financial sustainability by building balance sheet resilience in tough times”.
According to the CGA, citrus exports are expected to grow by 10 million (15kg) cartons per year for the next decade, hitting 260 million cartons by 2032.
Currently, the sector sustains 140 000 jobs and brings in R30 billion in export revenue annually.
The CGA said the industry could potentially sustain a further 100 000 jobs and generate an additional R20 billion in annual revenue should the 10-year, 260 million carton projection be achieved.
While in good times balance sheets are inevitably geared to maximise future financial gain, when market conditions turn, balance sheets were often unable to sustain these gearings. Instead, the golden rule was to balance optimism for the future with a disciplined approach to building or maintaining balance sheet stability.
Groenewald cautioned that growth strategies that were too fast, too large, and too one-dimensional unfortunately often resulted in depressingly high and unsustainable costs over time.
He advised that instead, the size, intervals and time frames on which investment decisions were made today should also hold in less favourable cycles. This was especially so in agriculture, which, by its very nature, was unpredictable. Since uncertainty equals risk, “agricultural production needs to build risk resilience into long-term plans so that balance sheets can retain their relevance under less favourable conditions”.
By balancing growth with hurdle profitability rates while setting in-house requirements around cash reserves in lean times, for example, producers would be in a stronger position to leverage the next big growth opportunity when the cycle turns.
Despite the challenging outlook, Groenewald believed that it was in difficult times that the best decisions were made.
“Certainly at the individual farm level there is a lot that can be done to mitigate adverse external conditions in negative cycles. On-farm efficiencies, and especially cost management and targeted capital expenditure, can be refined. Where needed, cultivars can be replaced. Plans can also be developed for the next positive cycle that will pace the rate of expansion in tandem with market insight and individual producer balance sheet and cashflow positions.”
However, he said one certainty in agriculture was that it was cyclical. Just as citrus producers had been under balance sheet pressure for the past two seasons, “we can be certain that in time things will improve”.
Groenewald said the moment cashflows became a challenge, it was essential to “reassess quickly so that you can continue to grow and invest in the right things”.
The key goal should be for every citrus producer to have a clear view of the balance sheet ratio they need to achieve now to maximise the next positive cycle. Understanding that a healthy balance sheet doesn’t only deliver profits, but also “optimises cashflow through disciplined cash management in line with a strictly enforced recovery strategy is critical to saying no to opportunities that don’t support that strategy”.
Beyond the individual farm level, however, the current perfect storm in the citrus sector highlighted the need for producers and the wider citrus value chain to broaden their frames of reference.
He said that beyond balance sheets, cashflows, cultivars, farming techniques, fertilisers, transport and markets, the sector also needs to take energy availability and costs into account, both for themselves and for their broader value chains, especially transport, logistics and energy-vulnerable pack houses.
Groenewald said broader systemic challenges were best tackled through collaboration, working through organisations like the Citrus Growers Association of Southern Africa and their broad stakeholder ecosystems, including research associations, auditors and financial service providers.
“In addition, most large banks can bring their financing and risk management platforms, as well as their cross-border reach and global ability to the table, assisting producers with the crafting of integrated long-term balance sheet strategies sufficiently disciplined to support resilience and sustain through-the-cycle growth,” Groenewald said.