By Mariette Kotzé
Big and small producers are feeling the economic pressure and are uncertain about what the future holds. Over the past twelve to 18 months, the agricultural sector and fruit industry in particular pome and stone fruit growers have had to face several challenges which had a direct impact on farm-level profitability. Within Hortgro we have a saying “the product pays!” The pome and stone fruit industries are price takers and therefore not in a position to pass any additional expenses incurred throughout the supply chain on to other supply chain actors or even the consumer. Any increase or additional costs is recovered from the margin of the growers’ vis a vis the product. The pome fruit industry is competing in a globally competitive environment and the current global economic outlook puts pressure on all economic activities. Hence, all industries aim to improve competitiveness and innovation sustainably. The industry is also replete with challenges, that impact profitability, some of which are widely shared but not unchangeable over time.
These challenges impacting farm profitability and the ability of the industry to remain competitive and sustainable relate to, amongst others:
- Increased demand for shipping directly impacts the availability of ships and costs―this together with local port inefficiencies and lack of infrastructure, machinery and equipment created a perfect storm.
- Increased shipping rates―demand-driven, but also due to an increase in energy costs (fuel).
- Increased fertilizer and agro-chemicals prices and availability. Most raw materials are being imported and are affected by the conflict situation in Russia and Ukraine, increased shipping rates due to higher demand and energy costs, as well as the availability of ships that were re-directed due to stronger demand in other shipping routes and the inefficiencies experienced in SA ports.
- Electricity costs and availability―requiring producers and packhouses/processors to make capital investments to offset load-shedding and business disruptions (such as generators and/or solar or other green/sustainable technologies) to continue with normal business processes. This adds to the total cost of electricity.
- Interest rate hikes impact cash flows and capital expansion projects and squeezing on producer profit margins.
- Wages―as much as the industry is centred around fruit, the industry is also highly dependent on manual labour for most of the pre-harvest and post-harvest actions. Increased fuel prices automatically result in pressure on food prices. Food inflation together with increased living expenses and interest rate hikes drives the labour sector to motivate above inflationary increases. Labour costs alone account for roughly 30% of the total production cost.
- Export markets remain under pressure with high inflation being recorded in SA’s major export markets that impact the demand for fresh produce and purchasing power of consumers and the ability to pay more for fresh fruit. Consumption increased at the beginning of the pandemic, but as the pandemic persisted, consumption returned to pre-pandemic levels. Even falling beyond these initial levels in some export markets. Due to high inflation, consumers are more discerning which translates to lower sales. The volatility of export markets, for instance, exports to Russia, make for a very difficult marketing environment.
These are just a few of the key challenges. So how do these challenges impact farm-level profitability? The key assumptions used to calculate the profitability at the farm level are:
- Total production costs per hectare (excluding packing and marketing fees) = R232,000 for apples; and R206,000/ha for pears. This includes interest repayments on an overdraft, provision for depreciation and orchard replacement and a 7% Return on Investment (ROI).
- Packing costs (including marketing fees) = R70/equivalent carton (12.5 Kg).
- The long-term yield projection on average over all cultivars and areas is 65 tons/ha for apples and 50 tons/ha for pears.
- The average pack-out assumptions (based on long-term pack-out information) for apples are – Export % = 46%; Local =25% and Juice = 29% (Orchard run = 71%).
- The average pack-out assumptions (based on long-term pack-out information) for pears are – Export % = 49%; Local % = 16%; Juice/processed = 36%.
- The weighted average price per carton for the 2021 financial year was used which is approximately R100/12.5 kg Equivalent for both apples and pears.
Considering the above it is evident that profitability is very sensitive to slight movement in costs, yield, pack-out and price. These remain the key drivers of farm gate profitability. In terms of costs (expenses), there is very little that producers can do to minimize costs per carton and per hectare. These costs can only be optimized through economies of scale by ensuring efficiencies in terms of yield and pack-out, and through input-output improvement which directly impacts price. So, what can growers do?
Back to basics! You cannot measure what you do not know. Make sure that you know what your production, packing, cooling, and marketing costs are per hectare and per unit (carton) produced. Liaise with your marketing agency to ensure optimization of fruit on the tree and fruit in the bin. That does not necessarily mean harvest as much as possible and delivering it to the packhouse. No! It means, do you know where your fruit is going (target market), and do you understand marketing windows – RA or CA based on the quality of fruit? What are the market trends in terms of prices and income? Make sure you are aware of costs to produce, market and remain profitable.