By Thulasizwe Mkhabela
JOHANNESBURG - The agribusiness, commonly referred to as agrifood system has been undergoing fundamental change that is transforming traditional marketing relationships in response to changing consumer needs.
The agribusiness supply chains and networks, which were once characterised by autonomous and independent actors, are rapidly becoming more globally interconnected with a wide array of complex relationships.
The ongoing Covid-19 pandemic has added a spanner in the works in that shorter value chains have become even more important.
In Africa, agribusiness is a burgeoning sector of local economies and continental economy. The sector has been receiving unprecedented attention from policy makers and private sector investors alike, with increasing favourable policy interventions and private capital investments from both large multinational food and agribusiness companies and up and coming local food companies.
Governments in Africa have been devoting much effort and resources to creating an environment conducive to the take-off and success of the agribusiness sector.
The World Bank (2013) further purports that if the increased attention received by African agriculture and agribusiness were to be matched with more electricity, irrigation, smart business and trade policies and a dynamic private sector that works hand in hand with governments to link small-scale farmers with consumers in an ever-urbanizing Africa, the sector could contribute $1 trillion (R17 trn) by 2030.
In economics, moral hazard occurs when one person takes more risks because someone else bears the cost of those risks. A moral hazard may occur where the actions of one party may change to the detriment of another after a financial transaction has taken place. Moral hazard and adverse selection are often used interchangeably although, strictly speaking, they are not synonymous.
On the one hand, adverse selection occurs when there is lack of symmetric information prior to a deal between a buyer and a seller. On the other hand, moral hazard occurs when there is asymmetric information between two parties and when change in the behaviour of one party occurs after a deal is struck.
Both expressions are used to describe situations where one party is at a disadvantage compared to the other. There is no doubt that trade liberalisation and globalisation have brought about stringent sanitary and phytosanitary requirements and this is attested to by both experience and an ever-growing body of research and published work.
These stringent quality requirements present complications and non-tariff barriers to entry for farmers and agribusinesses in fresh produce both for local and export markets.
These hindrances have been described as emerging barriers to agricultural and food trade.
The afore-mentioned developments exert additional demands on producers and processors of fresh produce to meet high and uniform quality standards and frequent delivery requirements. Sourcing of perishable produce to secure all-year round supply, under private label, can be guaranteed through partnerships and long-term contracts between primary producers (farmers) and processors.
Joint ventures in the agrifood chains are seen as an innovative response to emerging developments in the industry. These trends are brought about by the ever-evolving consumer demands and the concomitant quality requirements as identified through supply-chain analyses to understand market structure and performance.
According to scholars in the field, such as Michael Porter, supply chains are understood as transformation processes from inputs through primary production, processing and marketing to the final consumer.
These transformation processes involve three dimensions: (1) organisational systems for the coordination amongst agents; (2) knowledge systems for combining information, skills and technologies; and (3) economic mechanisms for product and technology selection and for providing market access.
Thus, supply chain performance can be assessed with efficiency parameters, searching for specialisation according to comparative advantage and towards integration for reducing transaction costs.
However, trust is an indispensable ingredient for joint ventures and other forms of partnership to succeed. Accordingly, trust is an integral part of maintaining any successful business relationship, especially within agriculture and trust is required for any transaction to take place. Trust is the cohesion in agricultural transactions, which creates the value of relationships between transacting parties.
South Africa has been involved in the land reform process since the inception of democracy in the early 1990s and vast tracts of land have exchanged hands from previous white owners to black beneficiaries. The Achilles’ tendon of the land reform programme and other interventions aimed at integrating emerging and smallholder farmers into lucrative value chains has been limited access to markets.
The limited access to markets is not simply a function of the absence of markets but rather the inability of these emerging and smallholder farmers to meet the demands of formal markets. These demands revolve around the ability to reliably supply the required (agreed upon) quality and quantity products.
Teaming up with already established agribusinesses provides an entry point for most land reform farmers to forma, and often lucrative, markets because established agribusinesses have already established a good rapport with the market. In most cases, established agribusinesses are a market in themselves for raw agricultural produce.
Furthermore, properly structured joint ventures between renowned agribusinesses and emerging farmers is mutually beneficial. In the main, agribusinesses are interested in securing throughput but do not have sufficient land of their own on which to engage in primary agriculture. Land reform beneficiaries and other smallholder farmers, even on communal land, provide the required land while exonerating the large agribusinesses from the burden of owing, tilling and capitalising the land.
Public-private partnerships in the ilk of joint ventures should be encouraged in order to take South African agriculture forward in a more inclusive manner. However, a caveat here is that the partnerships should be structured on an equal footing without rendering one of the partners as sacrificial lambs.
In order to guard against exploitation of one group by the other and circumvent the economic problem of moral hazard, a neutral arbiter is required. The arbiter should not necessarily be a court of law due to the cumbersome nature of litigation and the fact that the justice system may be over-burdened.
An agricultural arbiter is likeness of an ombudsman is proposed in this article to deal with disputes in agricultural joint ventures to ensure equity and equal yoking. There are already some attempts to entrench such arbitration and one can cite Vumelana Advisory Fund.
Dr Thulasizwe Mkhabela is an agricultural economist and is currently the Group Executive: Impact & Partnerships at the Agricultural Research Council; [email protected]
BUSINESS REPORT