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High-Level Agri-Park Master Business Plan: Lejweleputswa District Municipality

Revision 0 28 April 2016

Prepared by: CSIR Enterprise Creation for Development Address: PO Box 395, Pretoria, 0001


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Confidential between DRDLR and CSIR

EXECUTIVE SUMMARY This document outlines a high-level business case for the Lejweleputswa District Municipality (LDM) Agri-Park (AP) and is based on a feasibility study conducted by CSIR Enterprise Creation for Development (ECD) on behalf of the Department of Rural Development and Land Reform (DRDLR). The LDM is one of four districts within the Free State Province, and has five local municipalities, namely Masilonyana, Matjhabeng, Nala, Tokologo and Tswelopele. A DRDLR initiated AP will typically comprise of the following three basic units:

A central Agri-Hub (AH)

Farmer Production Support Unit(s) (FPSU)

A Rural-urban Market Centre (RUMC) The Lejweleputswa AP, more specifically, will comprise of an AH situated in Wesselsbron (Nala Municipality) and three FPSUs. One FPSU will primarily support broiler farmers and will be situated in Odendaalsrus (Matjhabeng Municipality). The other two, both intended to support beef cattle farmers will be situated in Ventersburg (Matjhabeng Municipality) and Dealsville (Tokologo Municipality). A RUMC will not be established as part of this AP. The LDM AP is diagrammatically presented below.

The LDM AP will initially focus on three prioritised value chains, namely poultry, grain (maize, wheat and sunflower) and beef cattle. At a later stage, the pig and wool sheep value chains could be considered for inclusion. It is envisaged that the central AH will comprise of the following business opportunities: poultry abattoir, broiler hatchery; and livestock feedmill. One of the factors considered in locating the FPSUs is the environment


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and food safety as they both deal with livestock. The poultry FPSU had to be situated where there are broiler farming developments, including possible new projects by DRDLR. The cattle FPSUs are meant to reach cattle farmers who are almost evenly distributed throughout the LDM. The services offered by the AH will include technical and business management training to build capacity for businesses to operate optimally. Technical services will also include maintenance service to the processing facilities, poultry farms, and cattle FPSUs infrastructure (cattle farmers will have to maintain their own facilities) Prior to the development of this business case, a high-level feasibility study was conducted. The results from the market, technical and financial assessment indicated that the Lejweleputswa AP could be viable based on the following assumptions:

The AP consists of an AH and three FPSUs

The AH will house, integrate, and synchronise the business operations of three processing businesses which will operate autonomously

The AP can secure 10% of revenue from these businesses as its revenue

The production volumes are phased in at 50% of total production capacity for the first three years, 80% for year four to six and 100% from year seven onwards

Grant funding of R118 188 978 million is secured prior to AP establishment A total investment of R1118 188 978 grant funding will be needed over a two year period as follows: R108 819 459 (establishment costs) for year zero and R9 369 519 in year one of operation. If the required grant funding could be secured, the business will have a positive cash flow from the start. Therefore it is critical that the involved stakeholders make a long term commitment to fund the establishment and operations of the business. The results from preliminary financial modelling show that if a discount rate of 7% is used:

The net present value (NPV) is R19 814 261

The internal rate of return (IRR) is 9.24%

The payback period is 11.14 years

Because the NPV is positive and the IRR is greater than the discount rate, the business could be financially feasible

It is important to note that this business case was developed based on a high-level feasibility analysis and is not meant to be used for the implementation of the Lejweleputswa AP. As a reminder, ECD proposed that the work to develop an AP be structured according to the following phases:

Phase 1: Feasibility study

Phase 2: Development of the business case

Phase 3: Detailed business planning

Phase 4: Agri-park establishment

Phase 5: Operation and aftercare Phases 1 and 2 have now been completed, and work on Phase 3 (Detailed business planning) would need to be undertaken prior to establishment. The activities that will be undertaken during Phase 3 will include the incorporation of the detailed business opportunity assessments, detailed site or property development assessments, and


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detailed unpacking of the ownership and institutional arrangements for the district municipality.


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TABLE OF CONTENTS

EXECUTIVE SUMMARY ..................................................................................................... 2

GLOSSARY OF TERMS ..................................................................................................... 7

LIST OF TABLES ................................................................................................................ 8

LIST OF FIGURES ............................................................................................................ 10

1 INTRODUCTION ....................................................................................................... 11

1.1 Intent/Rationale............................................................................................. 12

1.2 Opportunity/Business description ................................................................. 13

1.3 Feasibility results .......................................................................................... 13

2 BUSINESS AND SERVICES .................................................................................... 15

2.1 Policy and strategy alignment ....................................................................... 15

2.2 Provincial and local economic context .......................................................... 15

2.3 Location / Site ............................................................................................... 17

2.4 Business concept .......................................................................................... 17

2.5 Institutional arrangements ............................................................................ 18

2.6 Services ........................................................................................................ 19

3 MARKET RESEARCH, ANALYSIS AND PLAN ...................................................... 20

3.1 Customers .................................................................................................... 20

3.2 Market demand and sales forecast ............................................................... 20

3.3 Market prices ................................................................................................ 21

3.4 Competition and competitive edge................................................................ 21

3.5 Marketing and distribution ............................................................................. 22

4 MANUFACTURING AND OPERATIONS PLAN ...................................................... 22

4.1 Service inputs ............................................................................................... 22

4.2 Facility .......................................................................................................... 23

4.3 Equipment .................................................................................................... 25

4.4 Regulatory and legal issues .......................................................................... 26

4.5 Systems, processes and procedures ............................................................ 26

4.6 Supply chain management ........................................................................... 28

5 HUMAN RESOURCES AND GOVERNANCE .......................................................... 29

5.1 Key management personnel ......................................................................... 29

5.2 Industry role players ..................................................................................... 29

5.3 Human resource requirements ..................................................................... 30

5.4 Governance .................................................................................................. 30

6 RISK MANAGEMENT ............................................................................................... 32

7 FINANCIAL PLAN AND ECONOMICS OF THE BUSINESS ................................... 33

7.1 Costs ............................................................................................................ 33


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7.2 Predicted financial statements ...................................................................... 36

7.3 Financial analysis ......................................................................................... 39

7.4 Economic benefits of the business ............................................................... 39

APPENDIX A - MARKET ANALYSIS ............................................................................. 40

A.1. INTRODUCTION .......................................................................................... 41

A.2. HIGH-LEVEL OPPORTUNITIES .................................................................. 41

A.3. MARKET ANALYSIS .................................................................................... 43

A.4. SELECTED OPPORTUNITIES..................................................................... 61

APPENDIX B - TECHNICAL ANALYSIS ........................................................................ 67

B.1. INTRODUCTION .......................................................................................... 68

B.2. OPPORTUNITIES AND SERVICES ............................................................. 68

B.3. AGRI-PARK CONCEPT ............................................................................... 86

B.4. LOCATION ................................................................................................... 89

B.5. EQUIPMENT ................................................................................................ 89

B.6. SPACE REQUIREMENTS ............................................................................ 90

B.7. SUPPLY CHAIN LOGISTICS ....................................................................... 94

B.8. REGULATORY COMPLIANCE .................................................................... 94

B.9. ORGANISATIONAL DESIGN ....................................................................... 97

B.10. RISK MANAGEMENT ................................................................................. 100

APPENDIX C - FINANCIAL ANALYSIS ....................................................................... 102

C.1. INTRODUCTION ........................................................................................ 103

C.2. COSTS ....................................................................................................... 103

C.3. SALES ........................................................................................................ 106

C.4. PREDICTED TEN YEAR FINANCIAL STATEMENTS ............................... 107

C.5. FINANCIAL ANALYSIS .............................................................................. 111

C.6. ECONOMIC BENEFITS OF THE PROPOSED AGRI-PARK ..................... 112

APPENDIX D - FINANCIAL ASSUMPTIONS ............................................................... 114

APPENDIX E - REFERENCES ..................................................................................... 126


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GLOSSARY OF TERMS

AH - Agri-hub

AP - Agri-park

APAP - Agricultural Policy Action Plan

ARC - Agricultural Research Council

CSIR - Council for Scientific and Industrial Research

DAFF - Department of Agriculture, Forestry and Fisheries

DAMC District Agriculture Management Committee

DBSA - Development Bank of Southern Africa

DRDLR - Department of Rural Development and Land Reform

ECD - Enterprise Creation for Development

FPSU - Farmer Production Support Unit

FSA - Vrystaat Landbou (Free State Agriculture)

FSDARD - Free State Department of Agriculture and Rural Development

FSGDS - Free State Growth and Development Strategy

FSSDF - Free State Spatial Development Framework

GDP - Gross domestic product

GGP - Gross geographic product

(MTSF) Medium term Strategic Framework

GrainSA - Grain South Africa

IDC - Industrial Development Cooperation

IDP - Integrated Development Plan

IGDP - Integrated Growth and Development Plan

IPAP - Industrial Policy Action Plan

IRR - Internal Rate of Return

LDM - Lejweleputswa District Municipality

LED - Local Economic Development

LRAD - Land Redistribution for Agricultural Development

NAPOTT - National Agri-parks Operating Task Team

NDP - National Development Plan

NGP - New Growth Path

NPV - Net Present Value

OHS Occupational health and safety

PDI - Previously disadvantaged individual

PLAS - Proactive Land Acquisition Strategy

(DCGTA) Department of Cooperative Governance and Traditional Affairs

RADP - Recapitalisation and Development Programme

REID - Rural Enterprise and Industrial Development

RID - Rural Infrastructure and Development

RUMC - Rural-Urban Market Centre


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LIST OF TABLES Table 1: Sales projections for the AP businesses .............................................................. 20

Table 2: Projected AP revenue .......................................................................................... 21 Table 3: Market prices for the AP products ........................................................................ 21 Table 4: Parent cattle stock ............................................................................................... 22 Table 5: Transport equipment ............................................................................................ 22 Table 6: Production space ................................................................................................. 25

Table 7: AH space administration requirements ................................................................ 25 Table 8: Utilities cost .......................................................................................................... 25 Table 9: AP equipment ...................................................................................................... 26 Table 10: Opportunity throughput ...................................................................................... 27 Table 11: Quality management systems ............................................................................ 28

Table 12: List of industry role players ................................................................................ 29

Table 13: AP human resources requirements .................................................................... 30

Table 14: AP risks .............................................................................................................. 32 Table 16: Projected income statement............................................................................... 36 Table 17: Projected balance sheet .................................................................................... 37 Table 18: Projected cash flow statement ........................................................................... 38

Table 19: Estimated jobs from business ............................................................................ 39 Table 20: Typical intermediate and final products .............................................................. 42

Table 21: Estimated SA beef, mutton and pork consumption (2015) ................................. 48 Table 22: Poultry abattoirs in LDM ..................................................................................... 50 Table 23: Total cattle head count, slaughtering, production and consumption .................. 52

Table 24: Beef export by province in percentage (%) ........................................................ 55 Table 25: Red meat abattoirs in LDM ................................................................................ 56

Table 26: Estimation of grain demand for the feed-mill ...................................................... 59 Table 27: Parent herd size and composition ...................................................................... 61

Table 28: Poultry role players ............................................................................................ 63 Table 29: Poultry risks ....................................................................................................... 63 Table 30: Livestock feed role players ................................................................................ 64 Table 31: Livestock feed risks ............................................................................................ 65

Table 32: Beef cattle trading role players ........................................................................... 66 Table 33: Beef cattle trading risks ...................................................................................... 66 Table 34: Utilities ............................................................................................................... 71 Table 35: Abattoir building cost .......................................................................................... 71 Table 36: Abattoir processing plant equipment .................................................................. 72

Table 37: Abattoir auxiliary equipment ............................................................................... 72 Table 38: Broiler farms utility cost ...................................................................................... 74 Table 39: Broiler house equipment .................................................................................... 75 Table 40: Hatchery building cost ........................................................................................ 76 Table 41: Hatchery equipment ........................................................................................... 76

Table 42: Hatching-egg farms utility cost ........................................................................... 77 Table 43: Hatching-egg chicken house equipment ............................................................ 78

Table 44: Feed-mill utility cost ........................................................................................... 79 Table 45: Feed-mill building cost estimates ....................................................................... 80 Table 46: Feed-mill equipment .......................................................................................... 80 Table 47: Calf crop estimation ........................................................................................... 82 Table 48: Cattle breeding ................................................................................................... 82 Table 49: Parent herd size, composition and costs ........................................................... 82


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Table 50: Total distance for transporting cattle .................................................................. 84

Table 51: Transportation for the AH and FPSU based businesses .................................... 85 Table 52: List of AP vehicles .............................................................................................. 85

Table 53: AP plant and equipment cost ............................................................................. 89 Table 54: AP space requirement ....................................................................................... 90 Table 55: AH space requirements ..................................................................................... 90 Table 56: FPSUs total area ................................................................................................ 93 Table 57: General legislation ............................................................................................. 94

Table 58: Food safety legislation ....................................................................................... 95 Table 59: AP human resources requirements .................................................................... 98 Table 60: Agri-Park risks .................................................................................................. 101 Table 61: Investment costs .............................................................................................. 104 Table 62: Sales forecast for AP ....................................................................................... 107

Table 63: Projected income statement............................................................................. 108 Table 64: Projected balance sheet .................................................................................. 109

Table 65: Projected cash flow statement ......................................................................... 110 Table 66: Sensitivity – Revenue collected ....................................................................... 112 Table 67: Sensitivity analysis – labour costs .................................................................... 112 Table 68: Jobs created at opportunity level ..................................................................... 113


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LIST OF FIGURES Figure 1: Lejweleputswa AP business concept .................................................................. 18

Figure 2: AP structure ........................................................................................................ 19 Figure 3: Agri-park process flow ........................................................................................ 24 Figure 4: Governance ........................................................................................................ 30 Figure 5: Total fixed costs split .......................................................................................... 34 Figure 6: Indirect costs....................................................................................................... 35

Figure 7: Poultry meat contribution by province – 2015 ..................................................... 45 Figure 8: South African poultry meat import / export trends ............................................... 47 Figure 9: Major South African producers ........................................................................... 50 Figure 10: SA cattle slaughtering per province .................................................................. 53 Figure 11: SA beef industry import and export ................................................................... 55

Figure 12: South African yellow maize import trend ........................................................... 57

Figure 13: Trends of yellow maize processed for livestock feed ........................................ 58

Figure 14: Poultry supply chain .......................................................................................... 62 Figure 15 : Livestock feed supply chain ............................................................................. 64 Figure 16: Beef cattle trading supply chain ........................................................................ 65 Figure 17: Poultry meat production process ...................................................................... 70

Figure 18: Chicken abattoir floor diagram .......................................................................... 71 Figure 19: Broiler production process ................................................................................ 73

Figure 20: Broiler house floor plan ..................................................................................... 74 Figure 21: Day-old chick production process ..................................................................... 75 Figure 22: Hatchery floor diagram ..................................................................................... 76

Figure 23: Hatching egg production process ..................................................................... 77 Figure 24: Hatching-egg chicken house floor plan ............................................................. 78

Figure 25: Feed processing ............................................................................................... 79 Figure 26: Feed-mill floor diagram ..................................................................................... 80

Figure 27: Process flow for the breeding and sales program ............................................. 83 Figure 28: Transport routes to AP sites ............................................................................. 84 Figure 29: AP concept ....................................................................................................... 87 Figure 30: AH administration building ................................................................................ 91

Figure 31: AH site map ...................................................................................................... 92 Figure 32: FPSU 1 – Poultry .............................................................................................. 93 Figure 33: FPSU 2 and 3 – Cattle ...................................................................................... 94 Figure 34: AP structure ...................................................................................................... 97 Figure 35: Agri-Park Organogram .................................................................................... 100

Figure 36: Total fixed costs breakdown ........................................................................... 105 Figure 37: Indirect costs breakdown ................................................................................ 106


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1 INTRODUCTION The Economic and Information and Communication Technology Infrastructure Chief Directorate of the Department of Rural Development and Land Reform (DRDLR) was tasked with the establishment of Agri-Parks in each of South Africa’s 44 district municipalities. The CSIR’s Enterprise Creation for Development (ECD) unit was thus commissioned to develop a master AP business plan for the Lejweleputswa District Municipality (LDM). The municipality is one of the four district municipalities in the Free State Province (FS) and situated in the north-western part of the province. LDM comprises of five local municipalities, namely Tswelopele, Masilonyana, Matjhabeng, Tokologo and Nala. The ultimate goal of the establishment of an AP in the South African context is to support and develop the emerging black farmers to be competitive and able to supply the market sustainably, with quality products. The concept of its development involves the use of farmer incubation, collective farming, agri-cluster and eco-village development, as well as the coordination of agricultural activities in identified geographic areas. This also includes the traditional model of an agricultural business park or hub, where multiple tenants and owners operate under a common management structure, and where a range of productive agri-horticultural enterprises may exist. The AP will comprise of three basic units:

Farmer production support units (FPSUs) – a rural smallholder farmer outreach and capacity building unit that links farmers with markets. Its functions include primary produce collection; as well as provision of storage capacity; processing capabilities for the local market; and extension services (including mechanisation).

An agri-hub (AH) – a production; equipment hire; processing; packaging; logistics; innovation; and training unit.

A rural urban market centre (RUMC) – possibly one per province – for:

Linking rural, urban, and international markets through contracts.

Acting as a holding-facility, releasing produce to urban markets, based on seasonal trends.

Providing market intelligence and information feedback to the agri-hub and FPSU, using the latest Information and communication technologies.

The RUMC does not form part of Lejweleputswa AP as it is not district based. It is planned to be established next to large market centres and can be shared by a number of APs. ECD proposed that the entire AP programme be structured according to the following phases:

Phase 1: Feasibility study This phase involved engagement with various stakeholders, especially the DRDLR, to develop the business concept for the district municipality. It incorporated an industry and technical overview, as well as a situational analysis. It concludes by highlighting the various issues that need to be addressed in the district to ensure that the proposed AP has the greatest possible chance of success. Understanding the intent and gaining better insights into the local and regional context assisted in identifying at least three preliminary opportunities that could lay the foundation for further development in the district municipality.


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Phase 2: Development of the business case This phase involved the development of the master AP business plan or high-level business case for the district municipality.

Phases 1 and 2 were completed and the next three phases are still to be carried out to complete the process.

Phase 3: Detailed business planning The activities that will be undertaken during this phase will include; the incorporation of the detailed business opportunity assessments, detailed site or property development assessments, and detailed unpacking of the ownership and institutional arrangements for the district municipality.

Phase 4: AP establishment Once a bankable business plan has been drafted, funding from both public and private sector sources can be sought, and establishment of the proposed AP will commence.

Phase 5: Operation and aftercare After the AP has been established, technical assistance and support needs to be provided to the newly established entity to ensure that it remains focused on both the social and developmental objectives for which it has been established. This support and assistance will also ensure that operations remain compliant with the expectations of the primary investors, especially the South African government.

A structured approach was followed to develop the AP master business plan. The feasibility study was conducted and it entailed firstly conducting LDM situation analysis, primarily focusing on the socio-economic, primary agriculture and agro-processing situation. The outcome of the situation analysis was the identification of three key agricultural commodities. From these commodities, five business opportunities were identified for further assessment. A market assessment of each opportunity was then conducted to determine a potential market gap. A high level technical feasibility was also conducted on each of the opportunities in order to identify a market gap. High level financial calculations, focusing on key elements like revenue, cost of sales and major operational expenses (manpower and transport) were also conducted. The results of the feasibility study were then used as a basis for the concept design of the AP which included determining the opportunities that must be based at the AH; the services that the AH and FPSU must offer; and configuring both the physical and operational structures of the AH and FPSU. Finally a financial model was developed and analysed to determine if the AP could be financially viable as a business in the long-term. This document therefore presents the AP master business plan which is the outcome of the first two phases. 1.1 Intent/Rationale The eradication of rural poverty is one of the most critical challenges facing the country. Despite a great deal of work done by government and other sectors since 1994; rural poverty still persists today. The impact of poverty alleviation interventions has been


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considerably lower than expected. It seems that the range or quality of development and anti-poverty programmes cannot be attributed as the cause. The key issues inhibiting the eradication of poverty appear to be failure to coordinate developmental activities and providing an integrated package of services that match local priorities. The implementation of the AP seeks to overcome these challenges, and present a new model that brings together the relevant resources and stakeholders in an integrated and socially inclusive manner. The model therefore seeks to strengthen existing partnerships and create new ones within all three spheres of government; the private sector; and civil society. Partnerships with the Department of Agriculture, Forestry and Fisheries (DAFF) and the Department of Cooperative Governance and Traditional Affairs (DCGTA) will therefore also be critical. The AP should therefore also seek to:

Be based on economic advantage

Have all elements of the VC for dominant products

Ultimately lay the foundation for rural industrialisation. 1.2 Opportunity/Business description The primary goal of the Lejweleputswa AP will be capacity building of emerging famers in LDM so that they can become competitive and sustainably supply good quality products to the market. That will involve providing technical and business management skills; facilitation of access to finance by farmers; and mechanisation by renting facilities to primary farmer and agro-processors. The Lejweleputswa AP will be a privately owned business (that is a Proprietary Limited (Pty Ltd)) but with strong government support, particularly the DRDLR and DARD. The business is also expected to have strong linkages and partnerships with other government departments and agencies and established agribusinesses. These will include the DAFF and Land Bank. The main revenue source for AP will be a contribution of a maximum of 10% of revenue of each business that is supported and/or rent manufacturing facilities from the AP. It is also expected to generate revenue from providing transport services to the envisaged businesses. 1.3 Feasibility results This section presents a summary of the results of the high level feasibility study. Three opportunities namely a broiler abattoir; feed-mill for livestock feed and cattle breeding and market linkage initiative were identified as opportunities after a high-level market analysis was carried out (Refer to APPENDIX A - attached to this document):

Poultry abattoir – the prospects of a successful newly established (or existing one supported by the AP) abattoir processing 5 000 broiler per day (1 200 000 per annum) were high:


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Market trends, including current market size, historical and projected growth trends and possible market share are generally favourable to a new entrant who has access to properly structured support from an intervention like the AP

The current net import situation, assuming that regulations (tariffs) remain favourable, also show that there is a gap that well-supported and competitive broiler producers and meat processors need to fill

The competition that the abattoir is likely to face seems normal and healthy

The potential market gap (size) and the target market share (0.12% on the national, 2.4% of the FS and 6.4% of the LDM market sizes) were estimated.

Livestock feedmill - it was determined that the feedmill is a potential opportunity, but only on condition that it was supplying the AP businesses and had long-term supplier agreement with emerging grain farmers

The current market conditions, especially the shortage of yellow maize (main ingredient in broiler feed), is an entry barrier, particularly to broiler feed producers

As a result of the above situation, feed has also become too expensive for emerging broiler farmers. Therefore the “AP livestock feedmill”, which will possibly be owned by the abattoir owners, will address this challenge

Cattle breeding and market linkage initiative – the initiative is meant to be a long-term solution to the lack of capacity regarding the emerging farmers

Three primary farming business opportunities were identified in addition to the above three business opportunities. The poultry industry practice is to either integrate businesses vertically in the poultry value chain (from hatching-egg farms to abattoirs) or have contract suppliers along the value chain. In line with this practice, it was proposed that the following, who will be contract suppliers, be established:

Broiler farmers (first tier), supplying broilers to the abattoir

Hatchery (second tier), supplying day-old chicks to the broiler farmers

Hatching-egg farmers (third tier), supplying fertilised eggs to the hatchery It was not necessary to conduct individual market assessments for each of the abovementioned opportunities as they will be wholly dependent on the poultry abattoir for which market gap was identified. The results of the technical assessment indicated that it would be feasible to establish the production facility and operate each of the opportunities identified (Refer to APPENDIX B - attached to this document for more details). A summary of key results of the technical feasibility study is a follows:

The total costs estimate for the abattoir, broiler farms, hatchery, egg farm and feedmill is R32 961 452 for the processing plants

The opportunities are estimated to create approximately 240 jobs in total

It is estimated that a parent herd size of 5 936 cattle (5 708 cows and 228 bulls) at a cost of R45 890 411, will be required in order to achieve a 25 000 herd size in five years

Transport service which will cost R8 065 449 for a fleet of vehicles will be provided by the AP to all the businesses except the feedmill

The AP will also provide maintenance service for the buildings and processing plant to all the AP businesses except individual cattle farms.

Based on the above business opportunities it was estimated that a total of 20 116 m2 will be needed for the whole AP infrastructure (all buildings and production space).


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2 BUSINESS AND SERVICES The details covered from this section onwards are mainly about the AP, with little focus on the individual AP businesses. 2.1 Policy and strategy alignment Alignment of major economic initiatives to the relevant policies and strategies is very important. This enables maximisation of resource allocation and avoids unnecessary duplication of interventions. The following key policies and strategies at national, provincial and local levels were assessed in line with the establishment of the Lejweleputswa AP. The AP is aligned to the following key policies and strategies at national level:

National Development Plan (NDP) – Vision 2030

New Growth Path (NGP) - 2014-2019

Agricultural Policy Action Plan (APAP) - 2015-2019

Industrial Policy Action Plan (IPAP)

Medium term Strategic Framework (MTSF) - 2014-2015

Integrated Growth and Development Plan (IGDP) - 2011-2031 The AP initiative is also aligned to the following provincial and local strategies and policies:

The Free State Department of Rural Development and Land Reform (FS-DRDLR) Strategic Plan

The Free State Department of Agriculture and Rural Development (FS-DARD) Strategic Plan

Provincial Growth and Development Strategy (PGDS)

LDM Industrial Development Plan (IDP) , 2015

Local municipalities IDPs In terms of programmes and projects, the AP will link with the economic vision of the district as well as existing projects, including:

Free State poultry cluster by Rural Enterprise and Industrial Development (REID)

Lejweleputswa poultry hub – Virginia Broiler by REID

Poultry projects by the FS-DRDLR

Planned broiler production by Lejweleputswa DARD – broiler houses constructed

Game-farming, prickly pear project, aquaponics and hydroponics, pomegranates and/or olive projects planned by Tokologo Local Municipality

Grain and cattle projects funded by Recapitalisation and Development Programme (RADP) throughout the district

2.2 Provincial and local economic context 2.2.1 Provincial context

The FS, situated at the centre of the country, was by mid-2015 estimated to have a population of 2 817 900 which was 5.1% of national population. It is 335 352 square kilometres (km2) or 12.9 million hectares (ha) in size with almost 11.6 million ha in the


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province suitable for agricultural purposes and natural veld. It has consistently made the second lowest GDP contribution to the country’s economy, with the neighbouring Northern Cape Province being the lowest. Some of the key findings regarding the FS were as follows:

In line with the national trends the FS agriculture, fisheries and forestry (AFF) sector is the third lowest contributor to the provincial gross geographic product (GGP), at 4%

Despite the low contribution to the FS GGP, the provincial AFF is the third largest contributor to the South African AFF sector, only after the Western Cape and KwaZulu-Natal

The FS is a major producer of crops like sorghum, sunflower, maize and potatoes in the country and is seen as the “bread basket” of the nation

Due to mainly continuous technological improvement and improved farming, employment in the provincial AFF sector has been declining over years.

Based on the above the following conclusions were made regarding the provincial situation:

The decline of AFF sector could only be halted if there is strong cooperation among key stakeholders, particularly DRDLR; DARD; and experienced farmers and agri-businesses that are mentoring emerging famers.

If the provincial AFF continues to make such a significant contribution nationally, the AP would only have to formalise and coordinate the already well developed agricultural infrastructure and skills in the province, for the benefit of emerging farmers.

2.2.2 Local economic context

LDM is situated in the north-western part of the Free State province and comprises of five local municipalities, namely Masilonyana, Matjhabeng, Nala, Tokologo and Tswelopele. Its total population was estimated to be 627 626 in 2011, with Matjhabeng being the highest populated at 64.8% of the district population. Even though mining has been decreasing since the mid-nineties, the LDM economy is still heavily reliant on it. Some of the key socio-economic trends are as follows:

At 36.5%, the unemployment in LDM in 2011 was the highest in the province out of the five district municipalities

LDM has historically been the largest producer of maize in the whole Free State province, and most likely the largest maize producing region in the country

Compared to other districts, LDM has historically had more challenges in the AFF sector, particularly regarding emerging farmers.

LDM has approximately 5 micro, 18 small, and 6 medium sized enterprises owned by emerging famers, with the following capabilities:

They collectively own approximately 2 192 cattle and 2 712 sheep

There is capacity to produce a minimum of 772 000 broiler chickens per year

They have access to land and can produce either 33 032 tons of maize or 56 307 tons of sunflower.

The silos existing in LDM can absorb the projected maximum production of grain (maize and sunflower) by the emerging famers.

Dihoai Poultry, a wholly black-owned agro-processing business based outside Welkom, is currently operational and owns a feed-mill (10 000 ton capacity) and an abattoir (2 000 chicken per day)

The road infrastructure in LDM is reliable. The railway is still utilised for the transporting of grain to the silos, which are mostly situated along the railway lines


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The following conclusions were made regarding the LDM situation:

The socio economic situation in LDM, including the population decline and relatively low household income growth, implies that LDM is in dire need of economic initiatives such as AP

The fact that there seems to be an undersupply of cattle to abattoirs implies that emerging farmers might have difficulties to meet demand of another newly established abattoir

Dihoai Poultry has the potential to form the basis of the poultry (broilers) industry in LDM, supporting both grain and broiler producers

Only certain components of the cattle and grain value chains would need to be assessed for commercial viability

2.3 Location / Site The AH and FPSUs will be located in three different local municipalities, namely Nala, Matjhabeng and Tokologo 2.3.1 Agri-Hub

The AH will be located in Wesselsbron in Nala Local Municipality (NLM). 2.3.2 Farmer production support units

The exact locations of the FSPUs have not yet been determined, but it is proposed that the poultry FPSU be situated in Odendaalsrus in Matjhabeng Local Municipality (MLM) because that is where broiler and several poultry farming projects are concentrated. Cattle farmers are spread throughout the district and therefore the two cattle FPSUs are proposed to be located such that they can service the majority of farmers. It is therefore proposed that one cattle FPSU be situated at Dealsville in Tokologo Local Municipality (TLM) and the other in Ventersburg in MLM. 2.4 Business concept The Lejweleputswa AP concept design is as depicted in Figure 1.


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Figure 1: Lejweleputswa AP business concept

The businesses located at the AH are delicate and/or require relatively high maintenance, close monitoring and support in marketing in the case of the abattoir and cattle farming (other business will not need marketing strategies as they mainly supply the abattoir). They will therefore be able to easily access the necessary support as the personnel is situated at the AH. The fowls (broiler and breeder) are also sensitive and therefore need to be isolated from “noisy” operations, including the expected high traffic by the public in general at the AH. The breeder and broiler houses also do not need high maintenance as there are fewer moving parts compared to for instance the abattoir. The maintenance team from AH can therefore attend to their maintenance as and when is required. Except for the use of auction pens, maintenance of cattle farms will be the responsibility of farmers. Livestock is to be situated at the FPSU and not at the AH to comply with statutory and regulatory requirements, particularly food safety A significant number of grain farmers have agreements with established commercial famers and/or agribusinesses like Agri-SA. However, they will also be supported by the AP. 2.5 Institutional arrangements The AP will comprise of an AH as well as three FPSUs. The RUMCs will not be established in every district municipality (DM), but rather in large commercial centres linking a number of DMs. Therefore, no provision has been made for the establishment of a RUMC. Figure 2 illustrates the structure of the AP.

LEJWELEPUTSWA AGRI-PARK

Grain farmers

Lejweleputswa Agri-Hub (AH): Wesselsbron

Retail / Wholesale

Broiler hatchery

Poultry abattoir

Livestock feedmill

Services Transport

Maintenance

Training – technical and business management

FPSU 3: Odendaalsrus

Hatching-egg farm

Broiler farm

Retail / wholesale

Retail / wholesale

FPSU 1: Dealsville

FPSU 2: Ventersburg

Cattle farmers

Cattle farmers

Retail / wholesale


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Figure 2: AP structure

The AP will be registered as a private (Pty Ltd.) company. Initially, all the shares of the company will be held in a trust by one of the organisations that are part of the District Agri-Park Management Committee (DAMC). As the AP’s operations develop and grow, shares will be sold or transferred to private sector entities, community structures and emerging farmers up to the following maximums:

30% held by private sector entities (including commercial farmers and agro-processing companies)

70% held by emerging farmers, communal farmers and community structures. 2.6 Services The AP will provide a number of services, some at a fee to the businesses and others for no fee as it is assumed that cost for the service will be covered by the contribution that individual businesses are expected to make to the AP. The “free” services will be plant and equipment maintenance and facilitation of access to technical and business management training. The service for which businesses will have to pay a fee is transportation of mainly input material between the FPSU and AH; chicken to the market, and live cattle to auctions, feedlots and abattoirs.

Agri-Hub

Wesselsbron

FPSU 1

Odendaalsrus

FPSU 2

Dealsville

FPSU 3

Ventersburg


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3 MARKET RESEARCH, ANALYSIS AND PLAN Typically a business must develop a comprehensive marketing strategy shortly before or during the operations. It is at that stage that specifics regarding issues like customers, sales forecast and distribution channels are covered in detail. This section therefore discusses high level market issues and projections. 3.1 Customers The poultry abattoir customers are expected to be mainly wholesalers and retailers of different types and sizes including hospitality industry particularly guest houses and bread and breakfast (B&B) establishments in FS; mines; government institutions like prisons and hospitals. 3.2 Market demand and sales forecast Market assessment proved that there is a demand for chicken provided they develop a comprehensive marketing strategy. The upstream businesses that are dependent on it for success do not have to develop such strategy if they produce good quality products. It is therefore estimated that all the businesses except cattle farmers, will phase in their operating capacity starting at 50% in the first three years; and then increase to 80% capacity from the fourth to sixth year; and finally increase to maximum capacity from seventh year onwards. Sales projections for each product are as presented in Table 1.

Table 1: Sales projections for the AP businesses

Poultry abattoir – R 000

Broiler farm –

000

Broiler hatchery – 000

Egg farm –

000

Livestock Feedmill –

R 000

Cattle – R 000 Total – R

000 Weaners Cows / steers

Year 1 23 400 10 980 4 059 2 888 12 480 11 432 0 65 239

Year 2 23 400 17 568 6 336 3 960 19 968 11 432 0 82 664

Year 3 23 400 21 960 7 920 4 950 24 960 11 432 0 94 622

Year 4 37 440 17 568 6 494 4 620 19 968 22 864 0 108 954

Year 5 37 440 17 568 6 494 4 620 19 968 22 864 0 108 954

Year 6 37 440 17 568 6 494 4 620 19 968 0 38 400 124 490

Year 7 46 800 21 960 8 118 5 775 24 960 0 38 400 146 013

Year 8 46 800 21 960 8 118 5 775 24 960 0 38 400 146 013

Year 9 46 800 21 960 8 118 5 775 24 960 0 38 400 146 013

Year 10 46 800 21 960 8 118 5 775 24 960 0 38 400 146 013

The AP will have two income streams, namely: 10% of revenue of each of the AP businesses and the transport service it will provide to them, at a marginal cost. Different vehicles will be used for different goods and therefore different rates shall apply. The total revenue generated by the AP, including income from transport will be as presented in Table 2.


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Table 2: Projected AP revenue

Contribution (10%) by

AP businesses Income from

transport service Total AP revenue

Abattoir R 4 680 000 R 460 000 R 5 140 000

Broiler farm R 2 196 000 R 96 300 R 2 292 300

Hatchery R 811 800 R 96 300 R 908 100

Egg farm R 577 500 R 76 800 R 654 300

Feedmill R 2 496 000 - R 2 496 000

Weaners R 2 280 000 - R 2 280 000

Cows and steers R 3 840 000 R 144 096 R 3 984 096

Total R 16 881 300 R 873 496 R 17 754 796

3.3 Market prices The market prices for different products are as presented in Table 3.

Table 3: Market prices for the AP products

Poultry abattoir –

R/kg

Broiler farms – R/broiler

Broiler Hatchery – R/chick

Hatching-egg farms –

R/egg

Livestock feed-mill –

R/Ton

Cattle breeding –

R/male weaner

R/cow or steer

21.64 18.30 6.15 3.00 4 992 4 000 8 000

3.4 Competition and competitive edge Cattle farmers will not have any real competition provided they produce good quality cattle. Almost all abattoirs locally and nationally operate at maximum capacity and South Africa is still a net importer of beef. All the poultry abattoir suppliers, starting with the feedmill will almost be protected from external competition as they will be aiming to ultimately supply the AP abattoir. It is also expected that grain producers will be contract suppliers to the AP feed-mill. However, established agribusinesses, including silo owners will be competition when grain prices increase above what they would have agreed with the AP feedmill. It will therefore be important that the AP feedmill enter into supplier contract with grain farmers to ensure uninterrupted supply. The abattoir will face competition locally and nationally. Consumers are already familiar with well-branded products from established producers like Astral, Country Bird, and Rainbow. The Lejweleputswa AP abattoir will have to compete with these brands. It will also have to compete with similar equally smaller size abattoirs in LDM including Amalesco and Goudkwarts. Competition will also come from cheaper imports, particularly those from the United States of America (USA). Other competition will come from substitute products (animal protein) like fish, pork, and even beef.


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The competitive advantage of the Lejweleputswa AP abattoir is that it will have access to the necessary support, including:

Integration of business operations along the value chain which is very important in the poultry value chain

Technical and business management support, including marketing of their products

Access to the production facilities, something that most competitors do not have 3.5 Marketing and distribution The marketing and distribution of chicken will have to be based on a comprehensive marketing strategy that will be based on an intensive study of the market. It is however expected that chicken will be distributed to the potential customers that were mentioned in Section 3.1.

4 MANUFACTURING AND OPERATIONS PLAN This section is mainly about the daily operations of the AH and FPSU, with reference to the individual businesses mentioned only where relevant and meant to contextualise the issues being discussed. 4.1 Service inputs The services that will be provided from the AH will be as follows:

Cattle breeding and market linkage service, which will include provision of transport

Facilitation of technical and business management support services to primarily livestock and grain (maize and sunflower) farmers, as well as other farmers

Manufacturing plant and equipment hiring service. The inputs for the cattle breeding programme will be cattle as listed in Table 4.

Table 4: Parent cattle stock

Cows Bulls Total

Ratio 25 1 26

Quantity needed in Year 0 to reach 25 000 in 5th year

5 708 228 5 936

Cost per unit R 7 000 R 26 000 N/A

Total cost R 39 954 338 R 5 936 073 R 45 890 411

The inputs for the transport service will be as listed in Table 5.

Table 5: Transport equipment

Vehicle type Qty Unit cost Total Cost Cost (R/Km)

Ten (10) Ton truck 3 R 1 098 991 R 3 296 974 R 8.00

Three (3) Ton refrigerated truck 3 R 450 000 R 1 350 000 R 4.80

One (1) Ton Bakkie 5 R 235 000 R 1 175 000 R 3.20

Forklift 5 R 448 695 R 2 243 475 indirect cost)


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Total R 8 065 449

The AH will perform maintenance on all the facilities and it is estimated that the total cost will be R1 279 152 for the spares and consumables. This will be an overhead cost for the AH and therefore the businesses will not pay for the service as it will be covered by the contribution that each one makes to the AP. The training and development service will also be an overhead costs to the AH and will therefore be provided for free to the individual businesses 4.2 Facility This section covers the facilities for both the AH and FPSU 4.2.1 Process flow and facility layout

The AP process flow is depicted in Figure 3.


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Figure 3: Agri-park process flow

Livestock Feed-mill-AH

Primarily for supplying the “AP livestock” (cattle and poultry farms)

Hatching-egg farm-FPSU

Solely supplies AP but not necessarily owned by emerging farmers

Main ingredients (maize, soya, sunflower), others to be sourced elsewhere

Emerging grain farmer-FPSU

Emerging Broiler farmers-FPSU

Clustered / synchronised to ensure efficiency in the value chain

Poultry abattoir-AH

Capacity – 1.2 mil broilers per annum (expand to 2.5 mil broilers in future)

Increase collective herd size to ±25 000 of “pure breed” to sustain a feedlot

Emerging cattle farmers-FPSU

Meat processing

Possibly to process chicken and beef in one factory

Feedlot

Highly dependent on the success of the emerging cattle farmers

Beef abattoir

Majority of cattle sourced from the AP feedlot, the rest to sourced elsewhere

Wholesaler / retailers (AH & FPSU)

Meat (fresh and processed)

Livestock feed (bulk and small packages / bagged)

Fresh produce (vegetables)

Spent and unfertilised eggs (those that will not hatch) from hatching-eggs farm

Agricultural inputs (medication, seeds, fertilizers / compost etc.)

Agricultural implements

Hatchery-AH


Tannery

Majority of hides sourced from the AP abattoir, the rest to sourced elsewhere

Leather processing & goods


Greenhouse

Primarily for vegetable production

Compost

Cattle feed ingredient

Waste / By-products – AH

Key / legend:

To be implemented immediately when the AP is established

To be implemented at the AP in future (thy could also be existing businesses for now)


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4.2.2 Space occupied by facility

The total space required at the AH and FPSUs excluding walkways and gardens for the administration building, factory buildings, warehouse, wholesale/retail space and the auction plans will be 20 116 m2. Production facilities space requirement is as presented in Table 6.

Table 6: Production space

Opportunity Space (m2)

Poultry abattoir 300

Broiler farms 7 500

Hatchery 508

Hatching-egg farm 5 400

Feed-mill (excluding feed-mill admin space) 520

Cattle breeding and marketing 2 500

Total 16 728

The administration building at the AP will be as presented in Table 7.

Table 7: AH space administration requirements

Operations Space (m2)

AH administration 500

Abattoir administration 250

Hatchery administration 250

Feed-mill administration 80

Wholesale / retail 700

Workshop / warehouse 600

Total 2 380

Additional space of 1 008m2 will be required for the FPSU administration buildings. 4.2.3 Utilities

It is estimated that the annual consumption of utilities will be as shown in Table 8.

Table 8: Utilities cost

Utility Annual cost

Water R 12 000

Electricity R 60 000

Fuel R 72 000

Total R 144 000

4.3 Equipment The AP equipment will be as listed in Table 9.


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Table 9: AP equipment

Equipment Quantity Unit cost Total costs

AH office equipment 1 R 421 894 R 421 894

Truck (10 ton) 3 R 1 098 991 R 3 296 974

Truck (3 ton) - Refrigerated 3 R 450 000 R 1 350 000

Auction pens 2 R 165 000 R 330 000

Abattoir plant and equipment 1 R 4 267 701 R 4 267 701

Broiler houses 1 R13 406 531 R 13 406 531

Hatchery plant and equipment 1 R 5 409 830 R 5 409 830

Hatching-egg farm houses 1 R 6 082 833 R 6 082 833

Feed-mill 1 R 3 794 557 R 3 794 557

Bakkie (1 ton) 5 R 235 000 R 1 175 000

Forklift 5 R 448 695 R 2 243 475

Total R 41 778 795

4.4 Regulatory and legal issues The regulatory and legal issues that the AP will have to comply with include the following:

Meat Safety Act (Act No. 40 of 2000)

SANS 10049

Occupational Health and Safety Act (Act No. 85 of 1993)

Regulations Governing General Hygiene Requirements for Food Premises and the Transportation of Food (Regulation 723 of 2002)

Environmental regulations These regulations are explained in detail in APPENDIX B - included in this document. 4.5 Systems, processes and procedures As a legal entity, to achieve stability, consistency and continued success there should be financial discipline and good governance. Policies and procedures need to be developed to ensure compliance with legislation, good governance and effective operations. The lists of policies and procedures that need to be drafted and implemented have to cover the following areas:

Governance

Procurement

Financial management

Human resources management

General operations

Safety, health, environmental protection and quality.

4.5.1 Equipment and machines – current status

It is expected that the agri-park will link with existing interventions and programmes in the region, but will not make use of any existing equipment and machinery.


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4.5.2 Manuals and operating instructions

Equipment operating instructions and manuals is expected to form part of the purchase of such equipment. An amount of R200 000 has been budgeted for training including development of manuals and standard operating procedures. 4.5.3 Material handling systems

The AP will provide transport service to all the AP businesses including three 10 ton trucks, three 3 ton trucks, three 1 ton bakkie and five forklifts as detailed in Table 5. 4.5.4 Process yield and throughput

The information on the yield of each business is shown in Table 10

Table 10: Opportunity throughput

Opportunity Nominal capacity

Poultry abattoir 1 200 000

Broiler farms 1 200 000

Hatchery 1 320 000

Hatching-egg farm 1 650 000

Feed-mill (excluding feed-mill admin space) 5 000

Cattle breeding and marketing – weaners sales 5 916

Cattle breeding and marketing – cows and steers sales 4 800

4.5.5 Consumables

Cleaning materials for the facility are expected to amount to R7 000 per annum. This includes general cleaning of the facilities, but not specialised cleaning of opportunity-specific equipment. 4.5.6 Maintenance requirements

Maintenance for all equipment and facilities is expected to amount to approximately 5% of the total equipment cost, which is approximately R1 312 284 per annum. Maintenance staff will oversee any other maintenance that may be required and may outsource such maintenance to equipment manufacturers once the equipment is out of warranty. 4.5.7 Quality management

The AP will invest in specific quality certifications and approvals including the ones listed in Table 11.


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Table 11: Quality management systems

Management system

Purpose Regulation compliance

ISO 9001:2008

Management system designed to help organisations to meet the needs of customers and other stakeholders while meeting statutory and regulatory requirements related to products

Food Premises and the Transportation of Food (FPTT)

HACCP or ISO 22 000

Management system dealing with the analysis of potential food safety hazards in an operation.

Food Premises and the Transportation of Food (FPTT)

ISO 14001 An Environmental Management System (EMS) dealing with the environmental aspects of an organisation.

National Environmental Management Act

ISO 18001 A Health and safety Management System (OHS)

OHS Act

4.6 Supply chain management The AH will offer transport services to all the businesses, transporting inputs and finished products to and among the businesses in the value chain, as well as to external customers in the case of the poultry abattoir and cattle sales.


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5 HUMAN RESOURCES AND GOVERNANCE The AP is expected to create 22 jobs at the AH and FPSUs and a total of 240 jobs through the individual businesses, excluding cattle farmers. 5.1 Key management personnel The AP will be led by the General Manager who will have two senior managers, namely, the Technical / Operations Manager responsible for all the technical issues, including maintenance and technical support to the businesses; and the Shared Services Manager, primarily responsible for the human resources and finance functions of the AP. 5.2 Industry role players The industry role players are as listed in Table 12

Table 12: List of industry role players

Name Role

Agricultural Research Council (ARC) Support of smallholder farmers, with training and production inputs

Agri South Africa (AgriSA) Market intelligence

Agricultural Sector Education and Training Authority

Provision of guidance and support regarding education, training and development

DAFF Grant funding; technical support; and guidelines and support regarding business establishment

DAMC Represents the interest of the LDM emerging famers, including representing them at different forums at all three spheres of government and interactions with the private sectors if necessary

Department of Labour Rules and regulations regarding labour practices and activities

Department of Rural Development and Land Reform (DRDLR)

Funding and custodian of APs creation and development

Farmer cooperatives Market intelligence; and development and technical support and mentoring

Free State Department of Agriculture and Rural Development (FSDARD)

Non-financial support; and provision of some rules and regulations

Free State Department of Labour Rules and regulations regarding labour requirements

Grain SA Provision of commodity strategic support and services to SA grain producers, to support sustainability

National Emergent Red Meat Producers' Organisation

Livestock Credit Scheme, for the purchase of any type of livestock; animal feed; medication; farm machinery; and infrastructural improvements

Vrystaat Landbou / Free State Agriculture

Market intelligence; and development and technical support and mentoring


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5.3 Human resource requirements The human resource requirements, based on the operational activities of the AP, will be as detailed in Table 13.

Table 13: AP human resources requirements

Position Qty Annual

salary per person (R)

Total annual

salary (R)

General Manager 1 650 000 650 000

Personal Assistant / AP Secretary 1 240 000 240 000

Shared Services Manager (HR, finance and marketing) 1 500 000 500 000

Technical / Operations Manager 1 500 000 500 000

HR Coordinator 1 380 000 380 000

Management Accountant 1 380 000 380 000

Agricultural technician / advisor 4 380 000 1 520 000

Maintenance technician 1 300 000 300 000

Artisans 3 240 000 720 000

Drivers 5 92 000 460 000

General workers 3 48 000 144 000

Total 22 - 5 794 000

The total costs for year one of the AP is estimated at R5.8 million 5.4 Governance Figure 4 shows the governance structure of the AP.

Figure 4: Governance

Shareholders: 30% commercial

70% emerging

Board of directors

Agri-Park (Pty) Ltd.

DAMC (advisory capacity): DRDLR

Individual farmers


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DAMC could advise the board of directors of the company on technical, financial and market related issues. DAMC will comprise of representatives from the following institutions: DRDLR, individual famers and emerging famers cooperatives. The roles and contributions of these members and key organisations will be required for the success and sustainability of the AP. The selection and appointment of directors for the company board will be done in collaboration between the shareholders and DAMC. The board should be representative of the agricultural or agro-processing industry, as well as of the broader South African population. Board members should be appointed to ensure that at least the following skills are available:

Financial

Business

Technical (agriculture and agro-processing).

The general manager of the AH will be responsible for the day-to-day management of the AP, and he/she will report to the board of directors. All staff members of the AH and FPSUs will report to the general manager of the AH.


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6 RISK MANAGEMENT Risks that could affect the establishment and/or operations of the AP were identified. To prevent or counter the effects of all possible risks, the AP will develop and implement a comprehensive risk management and mitigation plan, which will entail the following:

Conducting a detailed assessment of the identified risks

Rating the risks in terms of likelihood and impact

Ensuring that preventative measures (including policies and standard operating procedures) are in place

Developing plans for risk monitoring and control

Documenting and communicating the plan.

Some of the potential risks to the AP are as listed in Table 14.

Table 14: AP risks

Potential risk Risk rating Mitigation

1. Low occupation rate High Affordable rental fees

2. Food poisoning and contamination

High Implement quality standards (like HACCP or ISO 22 000)

3. Inferior equipment High Reputable suppliers to be used

4. Labour unrest Medium Comply with all applicable labour legislation

5. Crime and robbery Medium Employ security personnel to safeguard the premises

6. Lack of buy-in from key stakeholders

Medium Adequate stakeholder engagement prior to the establishment of AP

7. Unaffordable rent or fees (for tenants)

High AP to link opportunities with the market to maximise opportunity profits


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7 FINANCIAL PLAN AND ECONOMICS OF THE BUSINESS The summary of financial results found in this section is based on a financial analysis contained in APPENDIX C - attached to this document and is based on financial modelling with Comfar software developed by UNIDO. The detailed assumptions and input data used in the financial modelling can be found in APPENDIX D - attached to this document. The key assumptions that underpin the model are as follows:

The financial model is based on 100% grant funding – therefore a discount rate of 7% is used.

The AH and Farmer Production Support Units FPSUs will be located on state-owned land.

Supplier accounts are payable in 30 days, and customer payments will only be received after 60 days.

The AP will rent out space and machinery to the following enterprises as a revenue stream:

Poultry abattoir

Broiler farm

Broiler hatchery

Hatching-egg farm

Livestock feed-mill

Cattle breeding and sales service.

The potential revenues of the respective enterprises were estimated based on the production of the following products quantities (determined based on a high-level market analysis):

Slaughtered chickens – 1 200 000 units

Broiler chickens – 1 200 000 units

Day-old chicks – 1 320 000 units

Fertilised eggs – 1 650 000 units

Livestock feed – 5 000 tons

Cattle – 4 800 heads.

The AP will receive 10% of the revenue generated by the respective businesses, as rent for the equipment and space, as well as other services rendered by the AP through the AH or FPSUs.

A zero dividends policy is assumed on all financial statements, meaning that all revenue earned will be retained in the AP business.

Grant funding will be invested in the AP to cover all setup or establishment costs, as well as working capital for the first year of operation. It also needs to be emphasised that the amounts used are preliminary estimates based on high level analysis with accuracy estimated at ±20%. 7.1 Costs For any operation there are three types of cost that need to be taken into account, namely investment costs, direct operation costs and indirect operation costs. Investment costs are usually once-off costs incurred during the production facility setup or establishment phase


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for capital expenditure, pre-production expenses and working capital. Both direct and indirect operation costs are incurred only once production starts. 7.1.1 Investment costs

Investment costs are incurred during the set-up or establishment of the AH and FPSUs for items such as capital expenditure; pre-production expenses; and working capital. The total of investment for the establishment of the LDM AP is estimated at R118.2 million and is detailed in Table 15

Table 15: Investment costs

Type of investment Investment costs (R)

Civil works, structures and buildings R 29 901 005

Plant machinery and equipment R 10 284 733

Auxiliary and service plant equipment R 3 657 500

Incorporated fixed assets R 8 497 342

Pre-production expenditure R 46 586 201

Contingencies R 9 892 678

Working capital (Year 1) R 9 369 519

Total investment costs R118 188 978

The breakdown of the fixed investment costs is shown in Figure 5.

Figure 5: Total fixed costs split

Pre-production expenditure, which covers all the expenditure required to get the business operational by its first year, is the main cost item at 40%. An example is the cattle that need to be purchased before the first year which accounts for a significant amount of R45 953 361. 7.1.2 Direct and indirect operation costs

The total indirect costs for the first year of production is estimated at R12 279 256. These costs will escalate annually by 7%.

25%

9%

3%

7% 40%

8% 8%

Civil works, structures andbuildings

Plant machinery andequipment

Auxiliary and service plantequipment

Incorporated fixed assets(project overheads)

Pre-production expenditure

Contingencies

Working capital


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The contribution by the respective cost items is depicted in Figure 6.

Figure 6: Indirect costs

The largest component of the indirect costs is labour at 51%, followed by depreciation and raw materials respectively at 23% and 14%.

14%

1%

0%

51%

0%

0%

10%

23%

1%

Raw materials

Utilities

Repair and maintenance

Labour

Labour overhead costs

Factory overhead costs

Administrative overheadcosts

Depreciation


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7.2 Predicted financial statements

Based on the cost and sales assumptions the projected 10 year income statements, balance sheet and cash flow forecasts were prepared, as shown in prepared, as shown in Table 16,

Table 17 and Table 18 respectively. Table 16 shows the ten year projected income statement of the AP.

Table 16: Projected income statement

Description Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Yea 8 Year 9 Year 10

Sales revenue 11 507 564 12 313 093 13 175 010 17 622 069 83 958 497 22 555 275 28 601 506 30 603 612 32 745 864 35 038 075

Less variable costs 1 789 781 1 915 066 2 049 120 3 508 096 3 753 663 4 016 419 5 371 957 5 747 994 6 150 354 6 580 879

Material 1 789 781 1 915 066 2 049 120 3 508 096 3 753 663 4 016 419 5 371 957 5 747 994 6 150 354 6 580 879

Less fixed costs 11 189 475 12 340 633 12 987 807 13 709 131 14 455 901 16 023 228 16 911 592 17 826 417 18 792 258 19 880 542

Material 409 874 575 770 616 074 659 199 705 343 754 717 807 548 864 076 924 561 989 280

Personnel 6 633 551 7 211 485 7 716 289 8 256 429 8 834 379 9 452 786 10 114 481 10 822 495 11 580 069 12 390 674

Marketing 41 216 44 102 47 189 50 492 54 026 57 808 61 855 66 185 70 817 75 775

Depreciation 3 022 671 3 022 671 3 017 588 3 040 997 3 040 997 3 809 281 3 842 669 3 842 669 3 829 648 3 870 549

Other fixed costs 1 082 163 1 486 605 1 590 667 1 702 014 1 821 155 1 948 636 2 085 040 2 230 993 2 387 162 2 554 264

GROSS PROFIT (1 471 692) (1 942 605) (1 861 918) 404 841 65 748 933 2 515 627 6 317 957 7 029 201 7 803 253 8 576 655

TAXABLE PROFIT (1 471 692) (1 942 605) (1 861 918) 404 841 65 748 933 2 515 627 6 317 957 7 029 201 7 803 253 8 576 655

NET PROFIT (1 471 692) (1 942 605) (1 861 918) 404 841 65 748 933 2 515 627 6 317 957 7 029 201 7 803 253 8 576 655

in % of sales revenue (13) (16) (14) 2 78 11 22 23 24 24

The projected income statement shows that the AP will be making a loss for the first three years, when enterprises are still building capacity, and operating at 50% of the maximum factory throughput. Although the AP does not necessarily yield large profits, the profit margins are healthy for a business with developmental objectives like the AP.


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Table 17 shows the ten year projected balance sheet of the AP.

Table 17: Projected balance sheet

The net worth of the equity increased from R118 million year 0 (set-up year) to R266 million in year 10. This indicates that the proposed AP has potential to grow the value of investment made into it. Table 18 shows the projected cash flow statement of the AP.

Description Set-up Year Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10

TOTAL ASSETS 118 188 978 118 216 651 118 220 181 118 222 366 119 560 686 188 398 915 190 107 856 197 937 304 206 580 799 216 111 355 226 536 224

Total current assets 0 2 184 313 3 915 967 5 410 733 9 790 050 70 780 353 77 858 590 89 530 707 102 016 870 114 842 048 129 137 466

Inventory on materials & supplies - 5 410 5 789 6 194 10 282 11 002 11 772 15 581 16 671 17 838 19 087

Work in progress - 23 837 27 115 29 013 34 699 37 127 39 726 45 492 48 676 52 083 55 729

Finished product - 27 543 31 080 33 256 39 238 41 985 44 924 51 053 54 627 58 450 62 542

Accounts receivable - 27 657 31 203 33 387 39 378 42 135 45 084 51 225 54 810 58 647 62 752

Cash-in-hand - 22 132 25 291 27 062 28 956 30 983 33 152 35 472 37 955 40 612 43 455

Cash surplus, finance available 0 2 077 733 3 795 488 5 281 821 9 637 497 70 617 121 77 683 932 89 331 885 101 804 131 114 614 417 128 893 900

Total fixed assets, net of depreciation 118 188 978 115 166 307 112 143 636 109 482 558 106 441 561 115 621 807 112 249 266 108 406 597 104 563 929 101 269 307 97 398 758

Fixed investments - 68 341 743 68 341 743 68 341 743 68 698 253 68 698 253 80 919 496 81 356 237 81 356 237 81 356 237 81 891 262

Construction in progress 68 341 743 - - 356 510 - 12 221 243 436 740 - - 535 026 -

Total pre-production expenditures 49 847 235 49 847 235 49 847 235 49 847 235 49 847 235 49 847 235 49 847 235 49 847 235 49 847 235 49 847 235 49 847 235

Less accumulated depreciation - 3 022 671 6 045 342 9 062 930 12 103 927 15 144 924 18 954 205 22 796 874 26 639 543 30 469 191 34 339 740

Accumulated losses brought forward - - 866 031 2 160 578 3 329 074 1 996 755 - - - - -

Loss in current year - 866 031 1 294 547 1 168 496 - - - - - - -

TOTAL LIABILITIES 118 188 978 118 216 651 118 220 181 118 222 366 119 560 686 188 398 915 190 107 856 197 937 304 206 580 799 216 111 355 226 536 224

Total current liabilities - 27 672 31 203 33 387 39 389 42 135 45 084 51 233 54 810 58 647 62 752

Accounts payable - 27 672 31 203 33 387 39 389 42 135 45 084 51 233 54 810 58 647 62 752

Total equity capital 118 188 978 118 188 978 118 188 978 118 188 978 118 188 978 118 188 978 118 188 978 118 188 978 118 188 978 118 188 978 118 188 978

Reserves - - - - - - 68 171 046 71 873 793 79 697 093 88 337 010 97 863 729

Retained profit - - - - 1 332 319 70 167 802 3 702 747 7 823 299 8 639 917 9 526 719 10 420 764

Net worth 118 188 978 117 322 948 116 028 400 114 859 904 116 192 223 186 360 025 190 062 772 197 886 071 206 525 988 216 052 708 226 473 471


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Table 18: Projected cash flow statement

The projected cash flow indicates that the proposed AP would have sufficient funds to pay for its current liabilities. If the required funding could be secured at least one year prior to establishment, the business will have a positive cash flow from the beginning. Therefore it is critical that the involved stakeholders make a long term commitment to fund the establishment and operations of the business. .

Description Set-up Year Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 Y9 Y10

TOTAL CASH INFLOW 118 188 978 12 140 897 12 964 682 13 870 616 18 555 548 88 380 111 23 745 344 30 112 997 32 217 905 34 473 168 36 886 289

Inflow funds 118 188 978 27 672 3 531 2 184 6 002 2 746 2 949 6 149 3 577 3 837 4 105

Total equity capital 118 188 978 - - - - - - - - - -

Total short-term finance - 27 672 3 531 2 184 6 002 2 746 2 949 6 149 3 577 3 837 4 105

Inflow operation - 12 113 225 12 961 151 13 868 432 18 549 546 88 377 365 23 742 394 30 106 849 32 214 328 34 469 331 36 882 184

Sales revenue - 12 113 225 12 961 151 13 868 432 18 549 546 88 377 365 23 742 394 30 106 849 32 214 328 34 469 331 36 882 184

TOTAL CASH OUTFLOW 118 188 978 10 063 165 11 246 927 12 384 283 14 199 871 27 400 488 16 678 533 18 465 044 19 745 660 21 662 882 22 606 806

Increase in fixed assets 118 188 978 - - 356 510 - 12 221 243 436 740 - - 535 026 -

Fixed investments 68 341 743 - - 356 510 - 12 221 243 436 740 - - 535 026 -

Pre-production expenditures 49 847 235 - - - - - - - - - -

Increase in current assets - 106 580 13 899 8 434 23 641 10 679 11 426 24 164 13 918 14 892 15 934

Operating costs - 9 915 369 11 188 926 11 972 151 14 125 738 15 114 540 16 172 558 18 379 026 19 665 558 21 042 147 22 515 097

Marketing costs - 41 216 44 102 47 189 50 492 54 026 57 808 61 855 66 185 70 817 75 775

SURPLUS (DEFICIT) - 2 077 733 1 717 755 1 486 333 4 355 676 60 979 624 7 066 811 11 647 953 12 472 246 12 810 286 14 279 484

CUMULATIVE CASH BALANCE - 2 077 733 3 795 488 5 281 821 9 637 497 70 617 121 77 683 932 89 331 885 101 804 131 114 614 417 128 893 900


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7.3 Financial analysis 7.3.1 Financial ratios

If a discount rate of 7% is used:

The net present value (NPV) is R16 320 078

The internal rate of return (IRR) is 8.8%,

The payback period is 11.67 years

Because the NPV is positive and the IRR is greater than the discount rate, the business could be financially feasible.

7.4 Economic benefits of the business The establishment of the APs by the government aims primarily to transform rural economies through agriculture and serve as a catalyst around which rural industrialisation takes place. Job creation remains high on the government agenda. It is therefore important to analyse the potential of this programme to create jobs and livelihoods in district municipality. 7.4.1 Jobs

Based on the number of people needed to manage and operate the AP, 22 direct jobs will be created. The job opportunities would include the following:

Qualified staff: 19

Low skill jobs: 3. Also, the following jobs will be created from businesses which will utilise the services of the AP.

Table 19: Estimated jobs from business

Business Jobs

Poultry abattoir 35

Broiler farms 150

Hatchery 20

Egg farm 35

Feedmill 15

Cattle farms 100

Wholesaler / Retailers 10

TOTAL 365

These jobs could be filled from the LDM population.


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APPENDIX A - MARKET ANALYSIS


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A.1. INTRODUCTION A situational analysis was conducted in the Lejweleputswa District Municipality (LDM), in support of the preparation of a business case for an agri-park (AP) in the district. The commodities that were selected for the purpose of assessing the viability of value addition are grain (maize, wheat and sunflower), cattle (beef) and poultry (broilers). These commodities were selected through a process involving a high-level analysis of prioritised commodities in the district, using the “value chain typology checklist” tool. The results thereof were discussed with stakeholders in a workshop. From the assessment of the value chains of the different commodities, potential opportunities were identified for the envisaged AP. The selection process for opportunities from the value chains, which would undergo market analysis, considered the following:

The strategic objective of the AP program to promote the skills of, and support small-holder farmers through the provision of capacity building, mentorship, farm infrastructure, extension services, production inputs and mechanisation inputs.

The guiding principles for the establishment of the AP, namely to maximise access to markets for all farmers, with a bias to emerging farmers and rural communities; and maximise the use of existing agro-processing, bulk and logistics infrastructure, including availability of water, energy and roads.

The desired outcome of developing a ‘new’ class or pool of skilled black farmers that have the necessary technical expertise and ability to supply the market sustainably and at the desired quality.

The opportunities were identified in the form of primary produce and final or intermediate products. As part of the process to identify opportunities, a high level understanding of the market situation of the specific products was considered. This market analysis does not constitute a comprehensive market feasibility study and only involves factors that assisted in qualifying and validating the identified product opportunities from a market point of view. The key factors considered included the following:

Market size

Market trends

Trade balance

Competition. The concept design of the AP is guided by the services that will be provided to potential tenants or external customers. These services were mainly determined based on the outcomes of the market analysis. Beneficiaries of this initiative also identified some services and where markets could not be quantified, reasonable inputs were considered.

A.2. HIGH-LEVEL OPPORTUNITIES The typical final or intermediate products and services from the selected value chains are listed in Table 20. All these products or services come after the primary farming activities in the value chains.


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Table 20: Typical intermediate and final products

Grain Beef Cattle Poultry (broilers)

Inputs Grain storage (silos) – grain is sourced from primary producers (farmers), and then stored in bulk before it is sold for processing

Livestock finishing (feedlots) – cattle are sourced from farmers and then finished or fattened before they are sold for processing

Broiler growing – chicks are sourced from hatcheries and then grown (and finished if necessary) into broilers, before selling for processing

Primary processing

Dry milling for human consumption – maize meal; rice and samp; and wheat flour and bran

Dry milling (feed-mill) – grain or stubble for livestock feed; and stubble for secondary or further processing into other products

Wet milling – extracting oil, protein and starch; and milling of the whole green plant into livestock feed (silage)

Abattoir – slaughtering cattle to produce “large” cuts of meat and offal ready for consumption or further processing into various products; and hides for further processing

Butchery – processing of mostly high quality (top grade) large meat cuts into smaller cuts; or into semi-processed products like sausages and mince

Tannery – processing of hides into leather

Abattoir – slaughtering of broilers to produce fresh whole chickens and pieces (bone-in or deboned); individually quick frozen pieces; feet and offal ready for consumption; deboned pieces for further processing into other products; and feathers for further processing into feather meal, plastic, paper, pillow stuffing and diapers

Secondary processing

Edibles processing – starch and protein extracts into gravies or sauces and protein or fat substitutes; oil into cooking oil and margarine; and stubble and hexane into livestock feed

Non-edibles processing – starch and protein extracts into cosmetics, adhesives, paper, textiles and plastics; stubble into furniture material (cover); and oil into biofuel

Processing of meat (mostly lower quality or grade) into products like polonies and canned beef

Processing of leather into clothing; and automotive and furniture covers

Processing of deboned chicken into products like polonies and sausages

Services Trading of grain from primary producers

Wholesale of some of the products

Cattle sales (auctions or directly selling to feedlots or abattoirs) or buying weaners for primary farming purposes

Wholesale of some of the products

Wholesale of some of the finished or intermediate products


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The primary objective for the establishment of the AP is to promote and develop emerging farmers into established commercial farmers who supply their produce for mainly agro-processing. Secondarily, the objective is to ensure that these farmers benefit as co-owners or investors of the AP, and play an important role as the main suppliers of primary produce. Therefore, the key considerations in selecting preliminary business opportunities from the list in Table 20 were as follows:

Emerging farmers must be able to sustainably supply the produce (commodity) required by the primary agro-processing business, with little or no additional supply of produce from established farmers.

Similarly, the secondary or further processors (like producers of polonies) must be able to sustainably source their major ingredients from primary processors (for example abattoirs).

The preliminary assessment during the situational analysis should have indicated a potential market gap for a new agro-processing enterprise. Otherwise, the primary producers must supply their produce to existing agro-processors.

Products that require sophisticated processing technology, in-depth research and development or market testing before full commercialisation were excluded.

The preliminary market assessment showed a potential gap in the beef value chain. There is currently an insufficient supply of cattle from emerging farmers to sustain an agro-processing business over the medium to long term. It therefore became important to consider a cattle breeding programme, to increase cattle herd as a first step. Further processing of beef was therefore not investigated at this stage, as it has to be proven first that primary processing can be sustained. A potential market gap for chicken was identified, but considering the planned interventions by the LDM Department of Agriculture and Rural Development and the Free State DRDLR to capacitate the farmers, only chicken primary agro-processing was considered. There was no potential market gap for grain processing, but grain producers also do not have the capacity to sustainably supply a commercial agro-processing entity. As a result only a feed-mill for supplying the broiler and cattle farmers was considered Therefore, only the following potential agro-processing business opportunities in LDM were selected for market analysis:

Poultry (broiler) abattoir

Beef abattoir

Feed-mill for livestock feed

Bovine (cattle) tannery

Cattle breeding and market linkages.

A.3. MARKET ANALYSIS A high level market analysis was conducted for each of the five opportunities, namely poultry meat production; beef production; livestock feed production (mainly poultry and cattle); a tannery; and a cattle trading service (linking farmers to auctions, abattoirs and feedlots).


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A.3.1. Poultry (broiler) abattoir Broiler meat (chicken) comprises the largest proportion of all poultry meat produced in South Africa. The amount produced in the formal market is approximately 93.6%. The rest is from mature chicken slaughter, small scale and backyard broiler producers, and only a small portion is from other poultry like geese and turkey (DAFF, 2014). Therefore, in this document poultry meat mostly refers to broiler meat. Additional capacity can be created in LDM, through either establishing a new abattoir or increasing the capacity of an existing one. The aim of this will be to support emerging broiler producers, and as a result also support emerging grain producers. A.3.1.1. Industry overview

According to the Government Communications and Information System (2015), the South African poultry industry is the largest component of the agricultural sector measured by turnover, having contributed 16% of the total agriculture value in 2013, with its total revenue having grown from R29.8 billion in 2012 to R30.6 billion in 2013. The industry has challenges, the largest being an increase in feed costs in recent years, which led to decrease in the net profits of enterprises. According to Bolton (2015), even though the industry had recorded a revenue increase in 2013, there was a net loss of R24.7 million in the same year, down from net profit of R56.6 million in 2012. The year-on-year (December 2015) cost increases in the two main feed ingredients, namely yellow maize and sunflower were 57.7% and 18.9% respectively, and the total feed cost for the full development of a broiler increased by 21.06%. There is the likelihood of still higher feed prices, following the severe drought in parts of South Africa (DAFF, 2016). The high costs of important inputs (like feed) may have a detrimental effect on the envisaged abattoir, which would most likely be a small enterprise with disadvantages like the lack of economies of scale. It is therefore critical that the value chain, particularly among emerging farmers, be well-integrated so that costs can be minimised as far as possible. According to the South African Poultry Association (SAPA, 2012), the Developing Poultry Farmers Organisation (DPFO), a division of SAPA, was formed in 2003 with the aim of catering for the specific needs of emerging farmers. SAPA admits that there was no visible achievement until a DPFO Coordinator was appointed in 2010, but there has been a slight improvement since then. However, more interventions are required, as emerging farmers still contributed less than 2% of the total formal broiler production in 2012. The industry remains an important contributor to employment, with an estimated total of 48 084 people from hatcheries to distribution in 2013 (DAFF, 2014) A.3.1.2. Market trends

Poultry is the meat type with the highest production volumes globally, and it was projected that production would grow from 95.7 million ton in 2011 to 124.6 million ton by 2017 (PR Newswire, 2014). According to the United States Department of Agriculture (2016) the United States of America (USA), one of the world’s largest meat producers, had a higher


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poultry meat production for the first quarter of the 2016 calendar year than was expected. Beef and pork production was lower than expected, further indicating a growth in poultry meat consumption. It is expected that developing countries such as China and Brazil will take the lead in production growth. This is due to factors such as their relatively lower production costs. In line with international trends, poultry meat in South Africa constituted the highest volume of all meat types (animal protein source) produced in 2014 (DAFF, 2016). An estimated 960.4 million broilers (equivalent of 1 728 720 ton) were slaughtered in 2014. The mid-year 2015 South African population estimate was 54 956 900 people nationally (StatsSA, 2015). Therefore the per capita production equated to about 31.5 kg per capita. The consumption per capita of 38.1 kg (DAFF, 2016) implies that there was a shortfall of about 6.6 kg per capita in 2014, translating to a total 365 138 ton of broiler meat, which is mainly covered by the net imports. It indicates a market gap that could be explored by new entrants if they are able to compete with imports. Figure 7 depicts the broiler meat production contribution per province.

Figure 7: Poultry meat contribution by province – 2015

Adapted from: (DAFF, 2016)

The largest broiler producing provinces, each averaging approximately 19.4% of the national production in 2015, are the North West, the Western Cape, Mpumalanga and KwaZulu-Natal. These provinces produced a combined 77.7% of the national production in 2014. The Free State is among the bottom three producers with a contribution of 5.1%. In line with provincial trends, LDM is also a relatively small producer of poultry meat. Its poultry meat production and market share estimation can be summarised as follows:

LDM’s poultry abattoirs currently have the capacity to slaughter 2 904 000 broilers per annum, calculated based on the following:

There are nine operational poultry abattoirs (determined during the situational analysis) with a combined production capacity of 14 100 broilers per day

It is assumed that there are 240 working days per annum.

LDM is estimated to currently have market share of 5.9% of the Free State’s production, calculated based on the following:

North West 23.5%

Western Cape 22.3%

Mpumalanga 18.0%

Kwa-Zulu Natal 13.9%

Gauteng 7.4%

Eastern Cape 5.9%

Free State 5.1%

Limpopo 3.8%

Northern Cape 0.1%


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The provincial production is approximately 48 980 400 broilers (960 400 000 national production for 2014 x 5.1% as shown in Figure 7)

Total LDM broiler production of 2 904 000 as determined above

Similarly, LDM is estimated to currently have 0.3% share of the total South African broiler production.

Based on an average carcass weight per broiler of approximately 1.8 kg (1.5 kg for a dressed carcass plus 0.3 kg for the giblets, head and neck), LDM produced only 6 091 200 kg broiler meat (1.8 kg per carcass x 2 904 000 carcasses). Therefore, based on the 2011 LDM population of 627 626 (LDM, 2015), broiler production was just 8.4 kg per capita (2 904 000 ÷ 627 626). This is less that the national consumption of 38.1 kg per capita by about 29.7 kg per capita. These market trends can be summarised as follows:

The current situation of the eight abattoirs in LDM implies that:

On average each abattoir has approximately 0.039% market share of the national market size and 0.74% of the provincial market size. It is small market share, particularly considering supply shortage locally

The largest abattoir in LDM, namely Amalesco Family Chickens, with a capacity of 10 000 broilers per day, has a national market share of approximately 0.3% and a provincial market share of 4.9%.

With the local production of less than a quarter of the average per capita demand, LDM has to source additional broiler meat from outside the district.

These trends support a case for establishing a new poultry abattoir or supporting existing ones in the district. However, in the case of strengthening existing abattoirs, evidence will have to be provided that they are sourcing broilers from the intended primary beneficiaries (emerging broiler producers from LDM), before receiving support from the AP. The AP will therefore have to ensure that emerging broilers producer are capacitated (for example with infrastructure and business management skills), and abattoirs should also be supported and developed so that they can become competitive, both locally and nationally. The 29.7 kg per capita shortfall in LDM, which translates to 18 640 492 kg of poultry meat, is currently supplied by sources outside LDM, including imports. The largest abattoir currently in LDM has the capacity to process 10 000 broilers per day, and using this as a guide, the new abattoir should be aiming to have half of this capacity, that is 5 000 broilers per day. Using different potential markets and their respective sizes, it would mean that the new abattoir will target a market share of:

6.4% (5 000 x 240 ÷ 18 640 492) of the LDM market size

2.4% (5 000 x 240 ÷ 48 980 400) of the Free State market size

0.12% (5 000 x 240 ÷ 960 400 000) of the national market size

0.32% of (5 000 x 240 ÷ 370 000 000) of the imports market size (refer section A.3.1.2 – annual average of net imports from 2011 to 2013)

0.51% (5 000 x 240 ÷ 237 000 000) of the market supplied by “other” small producers (refer section A.3.1.4)

The target market share of 5 000 boilers per day (a market share between 0.12% and 0.58% of the national market) is relatively low, particularly for a commodity that has growing demand like poultry meat. It should therefore be achievable. Even the 6.4% of the


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LDM and 2.4% of the Free State market sizes are still very low, considering that the current LDM producers cannot meet the local demand by far. In addition, the 370 000 ton average annual imports constitutes a significant 21.4% (370 000 ÷ 1 728 270) of the national production. A.3.1.3. Trade balance

South Africa has for many years been consuming more poultry meat than what it produces. Consumption has been exceeding production by an average of 19% from 2004 to 2013 (DAFF, 2014). This gap between consumption and production has been widening, and may continue to do so for years to come. The United States Department of Agriculture (2015) estimated that South Africa produced and consumed poultry meat of 595 000 ton and 710 000 ton, respectively, in 1995. It projected production to be approximately 1 745 000 ton and consumption to be 2 230 000 ton by 2025 (consumption will then exceed production by 27.8%). Figure 8 shows South Africa’s poultry import and export trends from 2004 to 2013.

Figure 8: South African poultry meat import / export trends

Adapted from: (DAFF, 2014) South Africa is a net importer of poultry meat, and imports are continuing to grow. The annual average of net imports from 2011 to 2013 was 370 000 ton, which is more than four times the total production of Free State, and more than 30 times that of the maximum total capacity of LDM poultry abattoirs. The imports / exports gap continues to widen. Despite some exports in recent years, the quantities have almost stagnated since the sharp increase of exports from 3 000 ton in 2008 to 19 000 ton in 2009. These trends have both positive and negative implications on the local poultry meat market, particularly the envisaged start-up abattoir. The implications are as follows:

On the positive side, the significant imports that on average constitute 17.5% of local poultry meat consumption (DAFF, 2016) show that there is a supply shortage by local producers and therefore a gap that a capable new entrant can exploit.

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Exports 4 2 2 2 3 19 17 10 7 15

Imports 182 241 294 276 220 231 265 349 403 391

0

50

100

150

200

250

300

350

400

450

'00

0 t

on


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On the downside, the fact that the seemingly cheaper imports have always followed the South African consumption trends (for example increasing whenever the local consumption increased) could mean that:

The reason they have not yet flooded local market is because of the protection that South African government offers to local producers through tariffs (refer section A.3.1.4)

If it becomes difficult to impose such protective measures (as with the recent American chicken imports), imports could easily increase, making it almost impossible for new entrants to operate profitably.

In conclusion, poultry meat imports are a real threat to the local industry. High productivity and competitiveness by local producers seem to be the best way to counter such a threat. It is expected that the AP would play an important role in ensuring that. A.3.1.4. Competition

The competition for the envisaged poultry abattoir in LDM could be grouped into three categories, namely substitute products (other meat types), imported poultry meat and existing South African poultry meat producers. Poultry meat consumption grew significantly from 2000 to 2014, followed by pork, while the consumption of beef and mutton or lamb stagnated and even declined marginally during the same period. According to the USDA (2015) the following trends can be noted:

Poultry meat consumption grew from 21.5 kg per capita per annum in 2000 to 38.5 kg in 2014, with an average annual consumption of 32.7 kg per capita

Beef consumption declined marginally from 16.5 kg per capita in 2000 to 15.5 kg in 2014 and the average annual consumption was 15.9 kg per capita

Mutton also declined marginally from 3.8 kg per capita in 2000 to 3.5 kg per capita, with an average annual consumption of 3.5 kg per capita

Pork consumption grew from 3.0 kg per capita in 2000 to 4.5 kg per capita in 2014, with an average of annual consumption of 3.9 kg per capita.

Assuming that the national poultry meat consumption for 2015 was still 38.1 kg per capita and based on the 54 596 900 mid-year South African population estimation for 2015 (StatsSA, 2015), and the total consumptions in 2015 (DAFF, 2016), the total annual consumption per capita of each meat type is estimated to have been as shown in Table 21.

Table 21: Estimated SA beef, mutton and pork consumption (2015)

Meat type Total consumption,

ton – A Total RSA population –

B Consumption (kg) per

capita – (C = A ÷ B)

Beef 1 004 460 54 596 900 18.4

Mutton / lamb 191 000 54 596 900 3.5

Pork 256 860 54 596 900 4.7

Total Consumption per capita 26.6

The importance of poultry meat as a growing source of animal protein is emphasised by the substitute products’ consumption that is declining. Poultry’s annual consumption per capita exceeded that of other meat types (beef, mutton and pork combined) by 11.5 kg and constituted approximately 58.9% of the total meat consumed in the country in 2015. This presents an opportunity for additional poultry meat production in LDM.


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There have been a number of regulatory changes, particularly with regard to import tariffs, and this greatly influenced the quantity of imports and the roles played by key global suppliers. According to the USDA (2015), the poultry import trends to South Africa over the years have been as follows:

The USA was the largest exporter, supplying approximately 25 000 ton (almost 50% of the total imports) until the anti-dumping duties were imposed in 2000, resulting in their imports dropping to almost zero.

Brazil took over as the largest exporter from 2001 until 2013, supplying over 50% of imports.

Brazil is slowly being displaced as the largest supplier of imports, after South Africa scrapped all tariffs on the European Union (EU) imports in 2010, resulting in:

The EU supplying the highest amount ever of approximately 137 000 ton in 2014 (their imports were almost zero until 2010)

Brazil’s imports dropped to 165 000 ton in 2014, the lowest ever since 2010.

Anti-dumping tariffs on the USA imports have been scrapped with effect from March 2016. It was projected by Gatestreet (2015) that 65 000 ton of poultry meat from the USA has already been supplied to South Africa in March 2016.

There has been a level of protection for local producers against imports over years, but this is changing going forward. The scrapping of EU and USA tariffs poses a significant threat, particularly to emerging and small producers with limited capacities. There is already evidence of the implications of this threat and Gatestreet (2015) estimates that approximately 110 emerging broiler producers nationally stopped farming during 2014, mainly due to cheaper imports. The weak local currency, which has been at its lowest recently, has made imports relatively expensive, providing some protection to local producers. According to ABSA (2016) the South African Rand traded at R15.756 to the United States Dollar (USD) at close of business on 17 March 2016. The currency protection also applies to established businesses like Rainbow and Astral, who also have economies of scale among other competitive advantages. Such producers therefore use a combination of favourable exchange rates and economies of scale to counter the impact of cheaper imports. However, emerging poultry farmers and agro-processors might not be so protected from import impacts, which could result in low profit margins. The imports situation does create entry barriers and though unfavourable, it should not make it impossible for new entrants to operate, particularly with the support of an initiative like the AP. Figure 9 provides a summary of South African poultry production per producer.


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Figure 9: Major South African producers


The country’s poultry meat production is dominated by Rainbow and Astral, together supplying 46% of the total production in 2013. Other medium sized producers supplied 29%, with the remaining 25% supplied by smallholder farmers. Based on the 947 million broilers slaughtered in 2013, “Other” producers therefore produced approximately 237 million broilers. The envisaged abattoir would be targeting a market share of 0.12% of national market size. The LDM abattoirs, which will be direct competition for the envisaged new abattoir and which are all in the “Others” segment, are presented in Table 22 (the Holfontein and Grootvlei abattoirs that have a combined capacity of 60 broilers per day were excluded from the list due to their very low capacity).

Table 22: Poultry abattoirs in LDM

Municipality Town Business Name Capacity (chickens)

Nala Bothaville Van Rensburg 300

Wesselsbron Ekwalita 200

Wesselsbron Goudkwarts 800

Odendaalsrus JZ Poultry 200

Matjhabeng Welkom Amalesco Family Chickens 10 000

Hennenman Barries 200

Hennenman Funky Chicks 200

Welkom Dihoai Poultry 2 000

Tswelopele Theunissen Kiep Kiep 200

Total Capacity 14 100 (Mphuthi, 2016)

Even though there seems to be a market gap that can be filled by a new abattoir, the competition situation with regard to imports and local (national and LDM) producers would make it difficult for new entrants with limited capacity (technical skills, business management skills and access to capital) to penetrate the market. However, with the support of the AP it is expected that this challenge could be overcome. Competition with regard to other meat types is favourable to a new abattoir

Rainbow 24%

Astral 22%

Country Bird 7%

Tydstroom 6%

Daybreak 5%

Rocklands 5%

Fouries 6%

Others 25%


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A.3.1.5. Conclusion

The prospects of a successful newly established (or existing one supported by the AP) abattoir seem high for the following reasons:

Market trends, including current market size, historical and projected growth trends and possible market share are generally favourable to a new entrant who has access to properly structured support from an intervention like the AP

The current net import situation, assuming that regulations (tariffs) remain favourable, also show that there is a gap that well-supported and competitive broiler producers and meat processors need to fill

The competition that the envisaged abattoir is likely to face seems normal and healthy

An additional 5 000 broilers per day capacity is reasonable based on the potential target markets and their respective sizes.

The poultry abattoir business opportunity should therefore be explored further. In case of implementation, full support should also be extended to the broiler producers, and where possible to their emerging input suppliers, particularly grain-based feed suppliers. A.3.2. Cattle (beef) abattoir Beef is the second most consumed meat type after poultry, constituting about 69.2% of the total red meat and about 28.4% of the total meat consumed in South Africa. Additional capacity could be created in the LDM, either by establishing a new abattoir or increasing the capacity of an existing one. The aim of this increased capacity is to support emerging beef cattle producers, which would in turn support emerging grain producers. A.3.2.1. Industry overview

According to Beef2live (2016) the USA is the world’s leading producer of beef, producing 18.53% of the total global production in 2015, followed by Brazil at 16.13% and the EU at 12.9%. The South African beef industry is a mature one, contributing 1.5% to global production in 2015. Two major groups of beef cattle farmers co-exist in South Africa (DAFF, 2014). The first group comprises established commercial farmers whose production is generally based on cross-breeding. The second group consists of emerging black farmers who own or lease land and generally produce indigenous cross-bred animals. The production of weaners that are supplied to feedlots for finishing before slaughtering is the most common form of commercial cattle farming in South Africa. As such, feedlots that supply all their cattle to abattoirs for slaughtering account for approximately 75% of all beef produced in the country (DAFF, 2016). According to the National Agricultural Marketing Council (2001), the deregulation of the red meat industry in 1993 led to an increase in the number of abattoirs as the demand for red meat grew. The gap between meat consumption and local production has continued to widen over years, partly due to growth in the black middle-class (Labuschagne A., 2010).


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South Africa currently has approximately 500 red meat abattoirs, slaughtering 2.3 million cattle per annum. Abattoirs are regulated by classification as follows (BC, 2016):

Class A – abattoirs are allowed to slaughter, cut and wrap if necessary

Class B – abattoirs are allowed to slaughter only. In addition to regulations based classification, according to DAFF (2007), red meat abattoirs are also categorised according to their throughput, as follows:

Rural abattoirs have throughput that may not exceed two units per day

Low throughput abattoirs that process up to 20 units per day

High throughput abattoirs, generally processing hundreds of units per day. Approximately 40% of slaughtering is conducted by high throughput abattoirs, which are mostly Class A (DAFF, 2014). A.3.2.2. Market trends

According to Beef2live (2016), the world beef production was estimated at 58 485 000 ton in 2013, with the USA, Brazil and the EU contributing a total of almost 50%. The largest importer of beef at the time was the USA, followed by Russia and Japan. Table 23 depicts the beef South African production trends from standing live cattle, to slaughtering and the production of beef, and consumption thereof, for 2013/14 and 2014/15.

Table 23: Total cattle head count, slaughtering, production and consumption

Year Cattle herd

count Slaughtering (cattle head)

Production (kg)

Consumption (kg)

Variance between production and

consumption (kg)

2013/14 13 915 000 2 648 405 755 543 492 980 720 000 -225 176 508

2014/15 13 694 000 2 823 550 805 509 288 1 004 460 000 -198 950 712

Average 13 804 500 2 735 978 780 526 390 992 590 000 -212 063 610 (DAFF, 2016)

These trends do not include rural abattoirs and slaughtering for non-commercial purposes (such as social functions and individual households). This could explain the variance between consumption and production that far exceeds the net imports, which according to DAFF (2016) were 23 010 tons and 32 648 tons for 2013/14 and 2014/15 respectively. However, South African beef producers do not meet the local beef demand. Furthermore, the demand for beef is projected to increase by almost 28% over the next decade, resulting in almost 200 000 tons of additional beef consumption by 2024 (BFAP, 2015). Some abattoirs confirmed during the situational analysis that the availability of good quality cattle is one of the challenges that they face. Therefore, depending on other market issues like the availability of cattle and the beef trade balance, this situation gives an opportunity for a new entrant (beef producer) in the industry. Figure 10 depicts the beef production contribution per province.


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Figure 10: SA cattle slaughtering per province

(DAFF, 2014)

The Free State is the second largest beef producer in the country after Mpumalanga, contributing 20% of SA’s beef production in 2013. The annual beef production in the province in 2015 was estimated to be 57.1 kg per capita, based on the following assumptions and estimates:

The Free State 2015 mid-year population estimate of 2 817 900 (StatsSA, 2015).

Beef production of 160 942 350 kg per annum, based on:

20% contribution of the national beef (Figure 10)

2 823 550 cattle slaughtered nationally in 2015 (Table 23)

285 kg average animal total mass (265 kg carcass plus 20 kg edible offal) of slaughtered cattle

National trends of cattle slaughtered versus beef production from 2010 to 2013 (DAFF, 2014).

The Free State production per capita exceeds even the national average consumption of 18.4 kg per capita, which indicates that the province is self-sufficient regarding beef supply as their production exceeds consumption. Such a situation could pose a serious challenge to a newly established abattoir. The enterprise will not only have to be managing its internal operations (which is challenging enough for a start-up), but will also have to establish markets outside the province, as there is already an oversupply of beef locally. The annual beef production in the district was estimated to be 175.2 kg per capita in 2015, based on the following assumptions and estimates:

LDM’s population of 627 626 (LDM, 2015)

Beef production of 109 987 200 kg per annum, based on the following:

Nine beef abattoirs in LDM (Table 25) with 1 608 cattle per day total capacity

It is assumed that there are 240 working days per annum

285 kg carcass weight

Western Cape 6% Northern Cape

8%

Free State 20%

Eastern Cape 6%

KwaZulu-Natal 11%

Mpumalanga 22%

Limpopo 5%

Gauteng 14%

North West 8%


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The district production of beef per capita exceeds the national average consumption by 156.8 kg, which is very high. LDM is the highest beef producing district in the Free State, producing 68.3% of the total production in the province. The district is probably the highest producing region nationally as well, producing approximately 13.1% (102 268 800 ÷ 780 526 390) of the total production in the country. It is estimated that emerging farmers in LDM would only be able to produce approximately 112.5 ton of beef per annum, based on the following:

They currently own minimum 2 192 beef cattle (Makena, 2016)

Based on the national trends for cattle slaughtering (DAFF, 2014):

The average number of cattle slaughtered per annum is approximately 18% of the live, standing cattle at any time

A beef carcass weighs 285 kg on average. An abattoir focusing on only emerging farmers will slaughter a maximum of two cattle per day (112 500 kg ÷ 240 days ÷ 285 kg). It would be categorised as rural abattoir and not a commercial one that will contribute to real economic growth and job creation locally as expected. An appropriate commercial abattoir would have been one processing at least 20 cattle per day, producing 1 368 ton of beef (240 working days x 20 units/day x 285 kg) A.3.2.3. Trade balance

According to DAFF (2016) SA beef imports decreased by 65.6% from 4 255 ton in 2014 to 1 465 ton in 2015. The five-year annual average from 2010 to 2015 was 5 440 ton. The major trends regarding beef imports are:

The major beef exporter to South Africa is Australia, contributing on average 60% of South African beef imports (DAFF, 2014)

There is a 40% beef import tariff charge for what DAFF calls most favoured nations, which include countries like Australia, Argentina, New Zealand and Brazil.

SADC regions enjoy a zero percent (0%) tariff on beef, to encourage close border trading as part of stimulating economic development in the region.

Botswana is the major SADC beef exporter to SA, with an 11% (DAFF, 2014) contribution to South African imports in 2013.

South Africa was one of the world’s top 15 beef exporters in 2015, exporting 60 000 tons of beef, which was a 36.4% increase from the 44 000 tons in 2014. India was at the top, exporting 2 million ton, followed by Australia (1.8 million ton), Brazil (1.6 million ton) and the USA (1 million ton) (Beef2live, 2016). Figure 11 shows South Africa’s beef import and export trends from 2004 to 2013.


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Figure 11: SA beef industry import and export


South Africa is a net importer of beef. Although the net imports have gradually reduced since 2004, South Africa still consumes more beef than what is produced locally. It was only in 2013 that the country exported more beef than it imported. DAFF (2014) speculates that the unbanning of South African bovine animals and their products might be the cause for the increase in exports. It is also possible that the depreciation of the local currency in the past few years could have led to local producers exporting more beef than before. The ABSA Agri-trends (2016) has indicated possible beef trade between South Africa and some Asian nations, with South Africa exporting close to R10 billion worth of beef products annually. Such a deal would increase local beef production, which could also mean a good opportunity for an envisaged beef abattoir in LDM. Table 24 shows the contribution by province to the South African beef export market.

Table 24: Beef export by province in percentage (%)

Province 2006 2007 2008 2009 2010 2011 2012 2013

Western cape 19.6 12.2 21.3 22.1 12.2 15.0 13.4 17.9

Eastern Cape - 0.1 - - - 0.1 - 1.3

Northern Cape 3.4 8.0 2.3 17.7 3.4 3.4 1.6 0.3

Free State 0.1 - - - 0.2 - 0.1 0.3

KwaZulu-Natal 8.0 10.0 2.3 2.0 8.9 13.1 5.9 4.4

North West - - - 4.4 5.4 3.4 4.2 0.1

Gauteng 66.5 67.1 61.8 40.5 40.2 24.2 39.0 49.0

Mpumalanga 2.4 2.6 12.2 13.3 29.2 40.4 35.8 26.7

Limpopo - - - - 0.5 0.4 - - Adapted from: (DAFF, 2014)

Even though the Free State is one of the largest beef producers (refer Figure 10), it is the third lowest exporting province in the country, which could be due to its location. The province is situated at the centre of the country and is relatively far from the country’s exit points like international airports, harbours and borders posts. This implies that the province mainly supply beef to other provinces in the country, including those that ultimately export beef and its products out of the country. The trade balance situation generally favours new entrants like the envisaged abattoir, as there is evidence of demand for beef that is currently not met by the available abattoirs in the country.

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Exports 7 2 3 3 4 5 4 4 4 8

Imports 16 20 19 17 7 10 6 11 7 4

0

5

10

15

20

25

Millio

n k

ilo

gra

ms

Exports

Imports


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A.3.2.4. Competition

The competition in LDM for the envisaged new abattoir is presented in Table 25.

Table 25: Red meat abattoirs in LDM

Municipality Town Business Name Capacity

cattle

Nala Bothaville GP & J 20

Wesselsbron Meadow meats 120

Matjhabeng Welkom Sparta 1 300

Ventersburg Ventersburg abattoir 20

Meat 4 U 50

Masilonyana Brandfort Brandfort abattoir 8

Theunissen Theunissen abattoir 20

Tokologo Boshof Boshof abattoir 50

Tshwelopele Bloemspruit Ronnies abattoir 20

Total Capacity 1 608 (Mphuthi, 2016)

The produce of the LDM red meat abattoirs exceeds the demand of the whole Free State province. The situation shows that any new abattoir from LDM will face serious competition from the district and the province, but it will also have to be very competitive as it will most likely have to supply also to neighbouring provinces. This further supports delaying the establishment of a beef abattoir in LDM. A.3.2.5. Conclusion

Considering the LDM and Free State beef production, as well as the emerging farmers’ current situation, it does not seem feasible to establish a new commercial beef abattoir in LDM. This initiative should therefore be delayed until a later stage, when emerging famers have sufficient numbers of cattle than can sustainably supply a commercial abattoir. This situation also implies that downstream agro-processing activities in the beef cattle value chain like tanning and meat processing will be affected as they are dependent on the abattoir being commercially viable. It seems that the most appropriate short-term intervention would be to ensure a well-coordinated service, through which emerging cattle farmers are linked with auctions, feedlots and abattoirs in the Free State, so that they can sell their cattle at competitive prices. There are already emerging beef cattle farmers, who aspire to, at some stage, compete with established commercial farmers. The medium to long term interventions by the AP, which should be done in conjunction with the suggested short-term intervention, should include the following:

Ensuring that more grazing land is available, so that emerging farmers can increase their cattle from the current 2 192 to over 25 000 that can sustain an abattoir or a feedlot if it proves to also be commercially viable

Capacitate the farmers with good cattle breeding practices, business skills (financial and non-financial) and marketing skills.


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A.3.3. Livestock feed A.3.3.1. Industry overview

The International Feed Industry Federation (2014), estimated that the livestock feed industry generated USD 400 billion in 2014. The total global production was projected to be close to 1 billion ton in 2015 and is expected to grow by 60% by 2050, mainly due to a growth in meat demand. The dominant producers are China (19%), the USA (17%), the EU (16%) and Brazil (7%), with the rest of the world producing the remaining 41%. Internationally, poultry is by far the largest consumer of feed, consuming 45% of the total feed produced, followed by pigs (26%), ruminants (20%), aqua (4%) and other animal species at 5% (IFIF, 2014). According to the Bureau for Food and Agricultural Policy (Davids, 2015), the intensive use of feed grains generally puts the profitability of broiler production and processing under severe pressure, as was observed from 2012 to 2014. This is mainly due to high and volatile prices of feed grain, particularly maize. Other factors like the drought in 2015 were also expected to severely affect the maize price (Davids, 2015) and supply – there is already some evidence of that happening. The South African yellow maize imports grew from zero in April 2015 to over seven million tons by the end of March 2016 as can be seen in Figure 12.

Figure 12: South African yellow maize import trend

(SAGIS, 2016)

This trend shows the erratic nature of the industry. It could also imply that in the case of commodity scarcity, as is the case currently, larger and well-established organisations with stronger bargaining power will benefit, with smaller producers being disadvantaged. In addition, the amount of yellow maize processed for livestock feed declined from 12.95 million at the end of April 2015 to 7.39 million tons by the end of February 2016 a depicted in Figure 13.

0

1 000 000

2 000 000

3 000 000

4 000 000

5 000 000

6 000 000

7 000 000

8 000 000

Ton

s


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Figure 13: Trends of yellow maize processed for livestock feed

(SAGIS, 2016)

This situation further underlines the possibility that the smaller producers of both livestock feed and broilers would feel the impact most. Broiler production has been growing, which subsequently results in a growth in the demand for feed. Larger feed-mills and larger poultry abattoirs can negotiate better prices for maize and poultry feed respectively, because of bulk buying. SAPA determined that small broiler producers had by the end of the third quarter of 2015 been paying R336 more per ton of broiler feed, primarily because they could not buy in bulk. The same challenges would apply to smaller feed-mills that cannot buy maize in bulk like the larger ones. The current industry situation is not favourable to a new entrant into the animal feed industry, if such entrant has to compete in an open market. In addition, the livestock feed opportunity cannot be assessed in isolation from the other AP opportunities, because there must be maximum benefits for all enterprises. Also, the AP’s resources must be optimally utilised, which can be achieved with the proper integration of all opportunities. A feed-mill established in LDM, as part of the AP initiative, will therefore have to primarily aim to support emerging farmers, through sourcing and processing grain from emerging grain producers. It will also aim to be the main supplier of feed to emerging producers of livestock, in particular poultry and cattle. It will therefore be not competing with any other feed-mill, and therefore a further market assessment of feed trends will not be necessary. However, it was important to assess if the grain supplied by local emerging farmers would be able to sustain the envisaged feed-mill operations. A.3.3.2. Grain supply by emerging farmers in LDM

The main ingredients for livestock feed are typically maize or bran (wheat and rye), as well as oil seeds (sunflower, soya been, peanuts and linseed). The possible demand for maize and sunflower, the two crops that the LDM emerging famers currently produce, was investigated. The maximum daily feed requirements are 120 g per broiler and 15 kg per cow. The estimated annual broiler production is 1 200 000, and the maximum of 3 000 cattle is based on the available grazing land as determined during situational analysis.

0

2 000

4 000

6 000

8 000

10 000

12 000

14 000

Ton

s


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Table 26 shows the calculated grain demand for the feed-mill. The assumptions and recommendations, including the ration size and grain composition, are based on the EU Reference Laboratories’ information (2010).

Table 26: Estimation of grain demand for the feed-mill

Livestock type

Daily ration

size (A)

% grain matter, maximum (B)

Feed days (C)

Annual production

(D)

Total grain required (kg) (A x B x C x D)

Sunflower Maize Sunflower Maize

Poultry 120 g 10% 70% 42 1 200 000 604 800 4 233 600

Cattle 15 kg 30% 30% 120 3 000 1 620 000 1 620 000

Total 2 224 800 5 853 600

The situational analysis revealed that there is available capacity of 33 000 ton maize or 56 307 ton sunflowers. Therefore, with proper support from the AP grain farmers would be able to adequately supply maize and sunflower to the feed-mill. Other minor and micro ingredients for the feed could be sourced from commercial farmers. A.3.3.3. Conclusion

The feed-mill business opportunity should be explored further. In the case of implementation, full support should also be extended to emerging crop producers. A.3.4. Tannery A.3.4.1. Industry overview and market trends

A tannery is a processing facility that converts raw hides and skin into finished leather. SA has an estimated annual hide production of between 2.2 million and 2.4 million per annum. Approximately 80% (1.9 million) of these hides are consumed by the automotive industry and the remainder goes to the footwear and leather goods industry. The automotive sector requires approximately three million hides annually and therefore the 37% (1.1 million) deficit is met through imports. The significant amount of imports implies that there could be a market gap for a tannery business, provided that it can source hides. However, the majority of tanneries in South Africa have standing agreements or contracts with abattoirs and cattle farmers. The tanneries typically purchase hides from abattoirs in advance, even before the cattle are slaughtered (Heunis, 2014). This means that almost all hides produced by approved abattoirs are already committed and are generally not available to new entrants. Therefore, for any tannery to have sufficient raw materials (hides), it should be integrated with an abattoir. The key issues to consider in deciding the way forward with respect to the tannery opportunity are as follows:

Based on the industry practices and market trends, a tannery must be linked to an abattoir as a prerequisite for being commercially viable

One of the key objectives of establishing the AP is that any agro-processors (currently existing businesses or to be newly established) must be sourcing key inputs from or have a link with emerging farmers


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Mainly due to the insufficient supply of cattle in LDM, a beef abattoir cannot be established at this stage.

Therefore, the tannery should also not be established at this stage, as it will not have input materials to process. A.3.4.2. Conclusion

There is no basis for the establishment of a tannery, as it must be linked to sufficient supply of cattle via a commercially viable abattoir, which will not be the case at this stage. Therefore the tannery, like the beef abattoir, should not be explored any further. However, should a beef abattoir be established in the future, the viability of a tannery could also be assessed then. A.3.5. Cattle breeding and market linkages An intervention is required for the emerging beef cattle farmers in LDM, specifically regarding the marketing and selling of their livestock within the district, neighbouring districts or neighbouring provinces where possible. There is evidence of capacity building for emerging farmers in LDM by the Land Redistribution for Agricultural Development recapitalisation program, particularly with regard to appropriate farming practices. However, there still seems to be a livestock marketing gap for emerging black farmers, due to the following challenges:

Difficulties in earning the trust established markets like auctions, feedlots and abattoirs.

A lack of facilities and infrastructure, particularly for auctions (such as sales pens; and loading and offloading ramps). According to the South African Federation of Livestock Auctioneers and Meat Brokers (SAFLA-MB) (2014), the high cost of constructing auction pens is the reason why auctions are not held in certain areas. There are currently no auctions held in LDM (Maphira, 2016) and as a result farmers have to travel long distances to Kroonstad in the Fezile Dabi district.

Not owning suitable vehicles for the transport of livestock, resulting in having to hire vehicles at a considerable cost.

Owning too few animals to sell to be able to cover transport costs. Sometimes farmers even have to sell livestock at lower prices, to avoid incurring additional costs of transporting animals back to the farm.

Limited marketing information, making it difficult to be fully knowledgeable regarding the markets.

A.3.5.1. Market trends, trade balance and competition

Emerging farmers in LDM are currently not in a position to sustainably supply beef cattle that will contribute to addressing the beef demand gap in South Africa. A minimum herd size of 25 000 cattle will be required to sustainably supply a small commercial abattoir (slaughtering 20 cattle per day), which could in turn possibly lead to further value adding activities. Therefore the two main objectives of the cattle breeding and market linkage service offered by the AP to the emerging cattle farmers will be to:


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Capacitate farmers to employ proper breeding practices and grow their collective herd size to a minimum of 25 000 within five years

Capacitate farmers to be able to meet the market’s requirements – particularly regarding quality – and to sell cattle profitably, while still growing their herd sizes.

Therefore, the AP should offer at least the following support services to emerging cattle farmers in LDM:

Technical support regarding breeding and market intelligence services, including:

Farming practices and appropriate production technologies

Sourcing and optimum utilisation of inputs (such as feed and medication)

Conforming to statutory and regulatory requirements

Understanding customer requirements and how to comply with these

Market trends (including consumption, demand and selling prices).

Logistical support:

Mainly cattle transportation to auctions, feedlots and abattoirs

Provision and management of auction pens at the FPSUs. Assuming that the current cattle stock of the emerging famers will be disregarded, and based on a number of calculations (details provided in APPENDIX B), it was determined that to be able to produce 25 000 cattle after five years, farmers will need parent stock as shown in Table 27.

Table 27: Parent herd size and composition

Cows Bulls Total

Ratio 25 1 26

Quantity 5 708 228 5 936

A.3.5.2. Conclusion

The cattle breeding and market linkages business opportunity should be explored further. In the case of implementation, full support should also be extended to emerging cattle producers.

A.4. SELECTED OPPORTUNITIES After having considered the current local situation with respect to the potential products and services, the following preliminary opportunities were identified as being suitable for the proposed AP:


Livestock feed-mill

Cattle sales and market linkages.


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A.4.1. Poultry (broiler) abattoir A.4.1.1. Supply chain map

The supply chain for poultry meat is depicted in Figure 14.

Figure 14: Poultry supply chain

The broiler supply chain starts with egg fertilisation and chick production, followed by the supply of chickens to farmers. After 42 to 45 days, matured chickens are then supplied to abattoirs for slaughtering and value-addition. Value addition entails the production of products such as polonies, chicken spread, chicken paste and chicken stock.

- Feed suppliers

- Veterinary suppliers

Broiler producers

Exports

- Meat

Abattoirs

Input

suppliers Farmers

Markets / Consumers/

Processors

Food industry

- Butcheries - chicken cuts, semi-processed (mince, polonies)

- Meat processors - Other food processors

Wholesalers and retailers

Households / end users


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A.4.1.2. Industry role players

The key industry role players in the poultry meat industry regarding the LDM AP are listed in Table 28.

Table 28: Poultry role players

Name Role

Agricultural Research Council (ARC) Support of smallholder farmers, with training and production inputs

Department of Rural Development and Land Reform

Funding and custodian of AP’s creation and development

District Agriculture Management Committee

Represents the interest of the LDM emerging famers, including at different forums

Free State Department of Agriculture and Rural Development

Non-financial support; and provision of some rules and regulations

Poultry Disease Management Agency Monitoring and management of diseases to ensure good health of poultry and also to ensure food security

SAPA Small, medium and micro enterprise support programmes (financial and non-financial)

Vrystaat Landbou / Free State Agriculture

Market intelligence; and development and technical support and mentoring

A.4.1.3. Distribution channels

Meat will be mainly distributed through wholesalers and retailers, both locally and nationally A.4.1.4. Risks

The possible risks that could hinder the smooth running of the enterprise if not adequately addressed are listed in Table 29.

Table 29: Poultry risks

Risk type Detailed risks

Weather Drought and other natural disasters, affecting the supply of

broilers

Biological and environmental Mortality rate of broilers due to disease outbreaks

Infrastructure Disruptions to utility supply (water or load-shedding)

Destruction of buildings/property due to natural disasters or erratic climatic conditions (such as hail storms or earthquakes)

Logistics Breakdown of delivery trucks

Accidents on the road

Market

Decline of meat prices

Change in consumer behaviour re chicken consumption

Increase in imported chickens

Human resources and skills

Labour strikes

Increased labour costs

Inability to source suitably qualified personnel

Injuries at work

Production Machine breakdowns

Deviation from quality standards


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To prevent or counter the effects of all these possible risks, the enterprise has to develop and implement a comprehensive risk management and mitigation plan, which will entail the following:





Documenting and communicating the plan. A.4.2. Livestock feed A.4.2.1. Supply chain map

Figure 15 shows the supply chain for livestock feed production.

Figure 15 : Livestock feed supply chain

Emerging farmers in LDM will supply the feed-mill with the crops required for producing the feed. The feed-mill will process and supply the feed directly to farmers, feedlots and retailers in the district. A.4.2.2. Industry role players

The industry role players are as listed in Table 30.

Table 30: Livestock feed role players

Stakeholder Role

Grain South Africa Provide commodity strategic support and services to South African grain producers

National Chamber of Milling

Represent, promote and advance the interest of wheat, maize and other grain milling industries in general

South African Grain Information System

Gather, process, analyse and distribute agronomic information to all industry role players

A.4.2.3. Distribution channel

Livestock feed will be supplied directly to cattle farmers and broiler producers. A.4.2.4. Risks


Crop

supply Processing Distribution


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Table 31: Livestock feed risks


Environmental and weather Unavailability of grain due to droughts

Grain diseases





Market Increase of grain prices, resulting in famers abandoning the

feed-mill


Labour strikes



Injuries at work

Production Machine breakdowns

Deviation from quality standards






Documenting and communicating the plan. A.4.3. Cattle marketing and sales A.4.3.1. Supply chain map

The supply chain for cattle marketing and sales is as depicted in Figure 16.

Figure 16: Beef cattle trading supply chain

- Feed suppliers

- Veterinary suppliers

- Calf (weaners) suppliers

Cattle farmers –primary producers

Auctions

Exports

Feedlots

Input

suppliers Farmers Market


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A.4.3.2. Industry role players

The role players specific to cattle trading are listed in Table 32.

Table 32: Beef cattle trading role players

Name Role

National Emergent Red Meat Producers’ Organisation

Promote and support black emerging red meat producers

Red Meat Research and Development South Africa

Research – livestock production, health and welfare, value addition and quality

SAFLA-MB Oversees auctioning of livestock, ensuring all parties interest are protected

South African Meat Industry Company

Oversees issues like market intelligence, R& D and exports/ imports

South African Red Meat Abattoir Association

Oversees interests of red meat abattoirs

A.4.3.3. Distribution channel

Cattle will be sold through auctions or directly to feedlots and abattoirs A.4.3.4. Risks


Table 33: Beef cattle trading risks


Weather Drought and other natural disasters

Biological and environmental Mortality rate of cattle due to disease outbreaks





Market

Decline of meat prices

Changes in consumer behaviour re beef consumption

Increase in imported cattle


Labour strikes



Injuries at work





Developing plans for risk monitoring and control Documenting and communicating the plan.


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APPENDIX B - TECHNICAL ANALYSIS


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B.1. INTRODUCTION The technical assessment of the agri-park (AP) in the Lejweleputswa District Municipality (LDM), including the design of the infrastructure and daily operations, was primarily based on the business opportunities identified during market assessment, and the subsequent spin-off opportunities. The AP technical assessment therefore focussed on the following key areas:

Specifications of the business opportunities and the related support services

Concept design of the AP, which will comprise the agri-hub (AH) and the farmer production support units (FPSUs)

Equipment and machinery

Statutory and regulatory requirements

Institutional arrangements.

B.2. OPPORTUNITIES AND SERVICES The results of the local situation assessment, including the inputs made by key stakeholders during the two workshops held on 18 February 2016 and on 19 March 2016 respectively in Lejweleputswa, and the subsequent high level market assessment were used to identify business opportunities and services on which the concept design of the AP is based. The three main business opportunities identified were as follows:


Livestock feed-mill

Cattle breeding and market linkage. It is expected that emerging farmers shall be the co-investors in the poultry abattoir and livestock feed-mill, should these prove to be both technically and financially feasible. The cattle breeding and marketing initiative, which is more an enabler and part of the support and development program for the emerging farmers, is a service that is expected to be offered by the AP, for a nominal fee. Vertical integration of businesses in the value chain or entering into contract supplier agreements with independent businesses is a common practice in the poultry industry to optimise business operations. In line with this practice, the three identified business opportunities, particular the abattoir, will also need to link and synchronise their business operations with the upstream suppliers, to be able to operate efficiently. In addition to the above, some of the guiding principles of the AP establishment are that it must act as catalyst for rural industrialisation and should maximise access to markets by the emerging farmers and rural communities. In support of these principles, but also to broaden the AP products and services range, other business that were not informed by the recent market assessment could also be established within the AP. Therefore, the additional businesses opportunities that will be established within the AP along with the above-mentioned three will be as follows:

Production businesses, which are the abattoir’s suppliers, namely a hatching-egg farm, a hatchery and broiler farms – as these are dependent on the abattoir’s viability, a market assessment has not been done yet.


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Services, primarily utilised by the AP-linked businesses (including the poultry abattoir suppliers), and preferably owned or managed by the AP:

Logistics services, mainly for the transportation of hatching eggs, chicks, broilers, meat, livestock feed, live fowls (broilers and spent hens) and cattle

Technical and business management services like training and development in farming practices and conducting market intelligence (MI) studies

Plant, equipment and machinery rental to primarily the tenant businesses at the AH and at the FPSUs.

Wholesale and retail services, preferably owned or managed by the AP, to sell the following:

“Small-quantity” inputs (like medicine, seeds, pesticides and compost) mainly to all the subsistence and emerging farmers, who generally cannot afford to buy in bulk

Fresh produce supplied by farmers within the LDM, and other products from any of the AP businesses (based at either the AH or FPSUs).

There could be additions to the AP in the medium to long term. This would be in the form of either expansions to some of the existing businesses or the establishment of new businesses. Such developments will be dependent on the initial enterprises as listed above becoming commercially viable and sustainable, as well as capable of handling complex processes (both in terms of business and technology). The emerging farmers (crop and livestock) in general, who are expected to be receiving support from the AP, must by then also show evidence of developing into established commercial farmers, with limited support from the AP. The possible additions could be as follows:

Grain wet milling for cattle feed

A cattle feedlot

A beef abattoir

Further processing of meat (poultry and beef)

A tannery. These businesses opportunities will be mostly based on beef cattle. The emerging cattle farmers will therefore need to demonstrate that that they are using farming best practices, including proper breeding methods. They must also by that time, have grown their collective herd size to a minimum of 25 000 cattle per annum, the minimum amount of live cattle required to sustain a commercial abattoir processing 20 cattle a day. The feasibility studies for each opportunity will then need to be conducted, once all the requirements are met. B.2.1. Poultry (broiler) abattoir B.2.1.1. Opportunity/service description

The planned poultry abattoir will have the capacity to process 5 000 broiler chickens per day, and will be wholly or partly owned by emerging farmers in LDM. It will be either a newly established enterprise or an existing one that is supported by the AP and will:

Source broilers from contract suppliers who will be emerging broiler producers, who in turn must be sourcing their inputs, mainly chicks and feed, from the hatchery and feed-mill respectively established by the AP


28 April 2016 Rev 0


Primarily supply the local market, including independent retailers, the hospitality industry (guest houses and bed-and-breakfast establishments) and local communities with chicken

Supply the same customers as above outside LDM once the enterprise is fully established and able to compete nationally and even internationally.

The poultry abattoir will be the anchor business of the AH, as all other initial business initiatives, except for the cattle breeding and sales, are directly dependent on its viability. In the case of a new abattoir being established, it will rent manufacturing facilities (plant, machinery and equipment) from the AP. If an existing abattoir implements this opportunity, it is expected the AP will be involved during the necessary upgrades to its facilities to ensure the capability of processing 5 000 additional broilers per day. Currently, there is only one abattoir in LDM that has the capacity to process more than 5 000 broilers per day, namely Amalesco Family Chickens. A due diligence will have to be conducted on the existing business, to confirm whether such expansion would be viable from a technical and financial perspective. B.2.1.2. Production process

Figure 17 depicts the process flow of poultry meat production, from the receiving of live broilers from broiler farms until the meat is ready to be dispatched and distributed to the market.

Figure 17: Poultry meat production process

B.2.1.3. Production inputs

The two direct production inputs for poultry processing are the broilers, and water (hot water for scalding the carcass for feather removal, and cold water for washing the meat). Other production inputs include packaging materials (like plastic bags, boxes, adhesive

Broiler receiving

Conveying Stunning Slaughtering Bleeding

Cleaning Depilation Scalding Evisceration Offal

separation

Body washing

Offal washing

Cutting, weighing & packaging

Weighing &

packaging

Store / freeze Despatch


28 April 2016 Rev 0


labels and pallets) and consumables (such as detergents and production code ink). At an estimated throughput of 1 200 000 broilers per annum it is estimated that the required utilities and their costs will be as presented in Table 34.

Table 34: Utilities

Utility Estimated annual consumption

Unit Unit cost Estimated annual cost

Electricity 600 000 kWh R 1.02 R 612 000

Water 26 450 kl R 20.00 R 529 000

Total R 1 141 000

The initial broiler stock might be provided by the AP, and it will cost R 21 960 000 (1 200 000 x 18.30) based on the following:

The quantity of broilers that will be bought will be 1 200 000

The average price of a broiler by the third quarter of 2015 was R18.30 (SAPA, 2015). B.2.1.4. Production facility and equipment

The factory will have a floor area of 300 square metres (m2). Figure 18 depicts the processing area of 108 m2 and 48 m2 for packaging respectively. The remaining 144 m2 is for cold storage and live birds receiving area.

Figure 18: Chicken abattoir floor diagram

Adapted: (KDC Trading, 2016)

. The total building cost is presented in Table 35.

Table 35: Abattoir building cost

Building requirements Cost

EPS structure kit

R 1 857 630 Foundation

Concrete floor

Delivery R 57 000

Installation (consumables and labour) R 294 405

Total R 2 209 035 (KDC Trading, 2016)

The processing plant, made up of the equipment listed in Table 36, will cost R1 134 300. There is no itemised cost, as the equipment will be delivered as a turnkey solution.

6m

CEvisceration

area

BDirty room

process area

7m4m7m8m

DPre-cooling areaE and F

Cutting up and packaging area

ALi

ve

bir

ds

rece

ivin

g a

rea

Viscera packing

area

Viscera Processing

area


28 April 2016 Rev 0


Table 36: Abattoir processing plant equipment

Equipment Quantity

Slaughtering line with hanging conveyor (62 m) 1

Main drive and tensioner 1

Stunner – water bath 1

Blood receiving trough 1

Scalder – steam blowing 1

Plucker – A-frame 4

Automatic head puller 1

Control panel 1 1

Eviscerating trough 1

Viscera receiving trough 1

Carcass washer 1

Automatic feet cutter 1

Automatic feet unloader 1

Shackle washer (carcass cleaner) 1

Screw chiller 1

Dripping drum 1

Carcass receiving trough 1

Control panel 2 1

Gizzard peeling machine 1

Gizzard de-fatting machine 1

Conveying line for cutting-up 1

Main drive and tensioner 1

Control panel 3 1 (KDC Trading, 2016)

The auxiliary equipment as presented in Table 37 will cost R924 366.

Table 37: Abattoir auxiliary equipment

Equipment Quantity Total cost

Portion cutter – table model 2 R 22 196

Boot washer – galvanised 3 R 7 524

Hand wash basin 5 R 31 863

Apron hooks – galvanised 5 R 1 055

Knife steriliser – stainless steel 3 R 8 550

Crate wash stand – galvanised 2 R 2 519

Meat tray – medium 50 R 6 384

Waste bins 6 R 4 309

DOA bin 1 R 1 362

Slathering knives 4 R 771

Eviscerating spoons 4 R 1 596

Neck slitting knives 4 R 1 026

Bulk scale – portable 1 R 9 114

Check scale 1 R 2 109

Labelling scale 2 R 24 966

Over wrapper (380 mm) 3 R 4 063

Bag sealer (400 mm) 2 R 2 253

Live bird crate with hinged door 100 R 27 930

Agri/meat crate 100 R 5 130

Chiller room 2 R 193 800

Freezer room 2 R 216 600

Giblet cleaning table 1 R 13 680


28 April 2016 Rev 0



Mala cleaning table 1 R 14 542

Stainless steel table (TABSS) 8 R 36 024

Boiler for auto chicken scalder 1 R 285 000

Total R 924 366 (KDC Trading, 2016)

The total cost of the construction, the processing plant and auxiliary equipment is R4 267 701. B.2.2. Broiler farms B.2.2.1. Opportunity description

It is proposed that the AP set up 25 emerging broiler farmers, mostly situated around Odendaalsrus, as this is the town that were identified as having some broiler production activities. These farmers will become contract suppliers to the poultry abattoir.

It is estimated that the broiler farmers will need to have a total of 1 320 000 broiler chickens per annum, in order to be able to produce the required 1 200 000 (1 320 000 x (100% – 9.1%)), based on the mortality rate of 9.1%, which is based on the following:

The broiler mortality rate among experienced small scale broiler farmers was 5.6% during the third quarter of 2015 (SAPA, 2015)

Considering that the broiler farmers will be mostly inexperienced, the mortality rate of 5% to 10% was assumed (knowledge of feeding requirements, as well as poultry diseases and control thereof, are among some of the challenges that unskilled farmers are faced with, leading to a higher than normal mortality rate

The 1 320 000 was a round figure that could be equally divisible among the 25 farmers, but would most importantly result in a mortality rate closer to the upper limit 10%.

Each farmer will therefore have a broiler house with capacity of 6 600 broilers at any given time (1 320 000 broilers per annum ÷ 25 farmers ÷ 8 cycles per annum), producing 143 broilers (6 600 ÷ 42 day cycle x 90.9% survival rate) per day ready for slaughtering, and a total of 48 048 broilers per year (143 x 42 x 8) based on the 8 cycles of 42 days (six weeks) each per annum, after considering mortality. B.2.2.2. Production process

The production process entails sourcing the day old chicks, feeding them and ensuring that they stay healthy, minimising the mortality rate during the six weeks (42 days), which is when they are ready to be slaughtered. Figure 19 depicts the process from receiving day-old chicks to delivering broilers to the abattoir.

Figure 19: Broiler production process

Day-old chick

receiving

Starting phase (3 weeks)

Growing phase (3 weeks)

Finishing phase (3 weeks) – optional, for small market

Loading and delivery to abattoir


28 April 2016 Rev 0



Broiler houses generally require electricity for lighting purposes only, when necessary. Each broiler drinks approximately 0.108 litres of water per day (Cobb Vantress inc., 2008). At an estimated throughput of 1 320 000 broilers per annum it is estimated that the annual utilities and the related costs, will be as shown in Table 38.

Table 38: Broiler farms utility cost



Electricity 140 000.00 kWh R 1.02 R 142 800

Water 142.56 kl R 20.00 R 2 851

Total R 145 651

The initial day-old chick stock, which might have to be provided by the AP, will cost R8 118 000 (1 320 000 x 6.15) based on the following:

The quantity of chicks that will be bought will be 1 320 000

The highest chick cost was R 6.15 (SAPA, 2015) by the third quarter of 2015. The total feed cost for the first cycle (first 42 days of broiler production) only, also possibly to be provided by the AP, will be R14 823 600 (1 320 000 x 11.23), based on the following:

The quantity of day-old chicks that will be bought will be 1 320 000

The feed cost per broiler for the cycle was R 11.23 on average during the first three quarters of 2015 (SAPA, 2015).

B.2.2.4. Production facility and equipment

Each broiler house with a capacity of 6 600 broilers will have a floor area of 300 m2 as shown in Figure 20.

30m

10m

Broiler pan feeders and nipple watering systemData

Feed silo

Figure 20: Broiler house floor plan Adapted from: (KDC Trading, 2016)

Therefore a total of 7 500 m2 will be required for the 25 farmers. The construction of each broiler house will cost R374 490. Therefore, the total construction cost of 25 broiler houses will be approximately R9 362 250. Table 39 shows the equipment costs for one broiler house.


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Table 39: Broiler house equipment


Environmental control computer 1 R 9 995.00

Digital thermometer with min/max 3 R 435.00

Exhaust fan – 1 000 mm 4 R 16 200.00

Cooling panel 3 R 8 850.00

Circulation pump 1 R 3 250.00

Heater LPG 1 R 3 785.00

High pressure gas regulator 2 R 1 019.76

Gas cylinder 2 R 3 000.00

Electrical system broiler house 1 R 15 625.00

Pan feeding system 1 R 28 861.50

Nipple drinking system 1 R 24 375.00

Silo 1 R 46 375.00

Total R 161 771.26 (KDC Trading, 2016)

Therefore the total equipment cost for the 25 houses will be R4 044 281.50. The total cost of the broiler houses construction and the equipment will therefore be R13 406 531. B.2.3. Hatchery B.2.3.1. Opportunity/service description

The proposed hatchery will have the capacity to process (hatch) 1 650 000 eggs per annum, which will translate to the 1 320 000 day-old chicks required by the broiler farmers. This is because the hatchery efficiency is around 80% (KDC Trading, 2016). It will be situated at the hub and possibly owned by the abattoir owners The main equipment in a hatchery is the incubator and the cold room. The incubator comprises of setters in which eggs are placed for the first 18 days; and hatchers in which eggs are placed for the last three days of incubation, leading up to hatching (chicks typically hatch on the twenty first day). B.2.3.2. Production process

Figure 21 depicts the process flow of day-old chick production, from receiving fertilised eggs from the hatching-egg farm until the chicks are delivered to the broiler farms.

Figure 21: Day-old chick production process


The direct production inputs are fertilised eggs and it is estimated the only major utility, that is electricity, will cost R56 100 per annum (55 000 kWh X R1.02/kWh). Water

Fertilised eggs

receiving

Place eggs in a setter (18 days)

Place eggs in a hatcher

(3 days)

Picking and packaging

day-old chicks

Transport chicks to the broiler farms


28 April 2016 Rev 0


consumption is negligible as day old chicks are transported almost immediately after hatching, and any cost related to their nourishment is not borne by the AP. The initial hatching-egg stock might be provided by the AP, and it will cost R4 950 000 (1 650 000 x R3.00) based on the following:

The quantity of fertilised hatching-eggs that will be bought will be 1 650 000

The average cost of a fertilised hatching-egg was R3.00 (SAPA, 2015) by the third quarter of 2015.


The hatchery will have a floor area of about 508 m2 as shown in Figure 22.

30m5m

3m

14

.5m

60 incubators

Pac

kin

g ar

ea

Chilled egg storage

Figure 22: Hatchery floor diagram Adapted from: (KDC Trading, 2016)

The hatchery will be divided into 435 m2 for the incubator area and 73 m2 for the packaging and storage area. The total cost of the building is presented in Table 40.

Table 40: Hatchery building cost

Building requirements Total Cost

EPS structure kit R 3 145 587 Foundation

Concrete floor

Delivery R 139 423


Total R 4 005 130

(Suretech, 2016)

Table 41 shows a list of the hatchery equipment and cost.

Table 41: Hatchery equipment


Setter 40 R 1 319 700

Hatcher 20

Cold room 1 R 85 000

Total R 1 404 700

Therefore the total cost of the hatchery including construction and equipment will be R5 409 830.


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B.2.4. Hatching-egg farm B.2.4.1. Opportunity/service description

The proposed hatching-egg farm, which will be supplying the hatchery with fertilised eggs, comprises of two main sections. There is the rearing section in which the parent stock, which are the chickens that eventually produce the hatching-eggs (eggs to be hatched in the hatchery) are themselves produced. The ration of hens (females) and roosters (males) in this section is approximately 2:1. The mature fowls are then moved to the egg-laying section, and the ratio changes to 1 male for every 10 females Based on the production of approximately one hatching-egg every second day or “a half egg per day” (NWK, 2016), at least 13 200 hens (and 1 320 roosters) will be required to produce the 6 600 eggs per day required by the hatchery. Therefore a total of 14 520 chickens (13 200 + 1 320) will be required in the egg-laying section at any given time. A ratio of 2:1 of egg-laying stock to the rearing section must be maintained all the time. Therefore rearing section will require approximately 7 260 (14 520 ÷ 2). Therefore a total of 21 780 (14 520 + 7 260) chickens will be required at the hatching-egg farm at any given time. B.2.4.2. Production process

Figure 23 depicts the process flow from receiving chicks (about two-day old) from the hatchery until the hatching-egg is ready to be supplier to the hatchery.

Figure 23: Hatching egg production process


The production inputs in the rearing stage are chicks from the hatchery, and inputs into the egg-laying phase are the chickens from the rearing section. The annual utility costs in Table 42 are estimated for the four houses.

Table 42: Hatching-egg farms utility cost




Water 142.56 kl R 20.00 R 2 851

Total R 38 551

The initial egg layers stock might have to be provided by the AP, and it will cost R265 708 (18.30 x 14 520) based on the following:

Receiving chicks from the hatchery

Rearing - growing phase (± 21 weeks)

Egg-laying phase (up to one year)

Egg delivered to hatchery

Spent hens to be culled (processing or wholesale / retailed as live fowl)

Hatchery for hatching-eggs


28 April 2016 Rev 0


The quantity of egg layers will be 14 520 (the farm will produce its rearing stock)

The average price of a fowl was R18.30 (SAPA, 2015) in 2015. Assuming that the AP will provide feed for the first 42 days as would be the case with broiler farmers, it would cost approximately R163 060 (14 520 x 11.23)

The quantity of egg layers will be 14 520

The feed cost per egg layer is estimated to be R11.23 (SAPA, 2015). B.2.4.4. Production facility and equipment

Four chicken houses will be needed, namely two houses for egg-laying stock and two for housing the parent stock. The floor plan for one house is shown in Figure 24.

15

m

Chicks pan feeders and nipple watering systemData

Feed silo

42m90m

Figure 24: Hatching-egg chicken house floor plan

Adapted from: (KDC Trading, 2016)

The construction of a single house will cost R1 358 937. Table 43 shows the equipment costs per house.

Table 43: Hatching-egg chicken house equipment


Environmental control computer 1 R 9 995.00

Digital thermometer with min/max 3 R 435.00

Exhaust fan – 1 000 mm 4 R 16 200.00

Cooling panel 3 R 8 850.00

Circulation pump 1 R 3 250.00

Heater LPG 1 R 3 785.00

High pressure gas regulator 2 R 1 019.76

Gas cylinder 2 R 3 000.00

Electrical system broiler house 1 R 15 625.00

Pan feeding system 1 R 28 861.50

Nipple drinking system 1 R 24 375.00

Silo 1 R 46 375.00

Total R 161 771.26 (KDC Trading, 2016)

Therefore the total cost for the farm will be R6 082 833, including the following:

Four houses at R5 435 748

Equipment for the four houses at R647 085.


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B.2.5. Livestock feed-mill B.2.5.1. Opportunity/service description

The proposed feed-mill will be established solely for supplying livestock feed, initially mainly for poultry (hatching farm and broiler farms), but also cattle at a later stage if the feedlot is established. It will be situated at the AP and will source grain primarily from emerging grain farmers. The other minor ingredients will be sourced from established businesses. The feed-mill will process 5 000 tons of feed per annum, which will comprise mainly of yellow maize. B.2.5.2. Production process

The process flow of the feed milling process from raw material receiving to the despatch of feed is depicted in Figure 25.

Figure 25: Feed processing


The production inputs will be mainly yellow maize and minor ingredients like salt and limestone. The utilities consumption and the related costs will be as shown in Table 44.

Table 44: Feed-mill utility cost




Water 20 kl R 20.00 R 400

Total R 255 400

The AP might have to assist with the procurement of yellow maize that, according to DAFF (2016), averaged approximately R2 100 per ton from 2011 until 2015, without sharp

Raw material

Storage Grinding

Pelleting

Mixing Storage Packaging

Dispatch


28 April 2016 Rev 0


decreases or increases. The feed-mill, processing approximately 2 500 tons (about half of the total feed) will need to spend R5 250 00 (R 2 500 tons x R 2 100 per ton). B.2.5.4. Production facility and equipment

The factory will have a floor area of 600 m2 as shown in Figure 26.

40m

15

m

Sto

rag

e a

nd

d

isp

atc

h a

rea

Harmer mill

Data

Data

Batch mixer Pellet mill

Pellet cooler

Tip-scale Bagger

Bag stacker

Silos for grain storage

OfficeKitchen

Figure 26: Feed-mill floor diagram

The factory will be divided into 495 m2 for the processing area and 105 m2 for the packaging and storage area.

The building cost estimates are shown in Table 45.

Table 45: Feed-mill building cost estimates

Building requirements Cost

Pre-fabricated structure kit

R 748 980 Foundation

Concrete floor

Delivery R 192 308


Total R 1 934 557

The turnkey delivery of the feed-mill plant, comprising of equipment as listed in Table 46, will cost R1.8 million.

Table 46: Feed-mill equipment

Equipment Quantity

Grain storage (silos) 2

Roaster 1

Hippo hammer mill 1

Batch mixer 1

Pellet mill 1

Pellet cooler 1


28 April 2016 Rev 0


Equipment Quantity

Tip scale bagger 1

Forklift (Barloworld) 1

Bag stacker 1

Therefore, the total cost of the feed-mill, including construction and equipment will be R3 794 557. B.2.6. Cattle breeding and market linkages service B.2.6.1. Opportunity/service description

Emerging farmers are currently not in a position to sustainably supply beef cattle that will contribute to addressing the beef demand gap in South Africa. A minimum 25 000-cattle herd will be required to sustainably supply a small commercial abattoir (slaughtering 20 cattle per day), which could in turn possibly supply further value adding activities. Therefore the two main objectives of the cattle breeding and market linkage service, offered by the AP to the emerging cattle farmers will be to:

Capacitate farmers to employ proper breeding practices and grow their collective herd size to a minimum of 25 000 within five years

Capacitate farmers so to be able to meet the market’s requirements – particularly regarding quality – and to sell cattle profitably, while still growing their herd sizes.

Therefore, the AP should offer at least the following support services to emerging cattle farmers in LDM:

Technical support regarding breeding and market intelligence services, including:

Farming practices and appropriate production technologies

Sourcing and optimum utilisation of inputs (such as feed and medication)

Conforming to statutory and regulatory requirements

Understanding customer requirements and how to comply with these

Market trends (including consumption, demand and selling prices).

Logistical support:

Mainly cattle transportation to auctions, feedlots and abattoirs

Provision and management of auction pens at the FPSUs.

Based on several scientific studies, particularly the Department of Primary Industries of the New South Wales (Parnel, 2007) and the University of Nebraska-Lincoln (UNL-Beef, 2015), the assumptions listed below, including those presented in Table 47 for determining calf crop, were made for the breeding programme.

Cattle mortality after weaning is negligible (0%)

The bull to cow ratio is 1:25

Heifers (that is female cattle that have not calved) will calf for the first time when they are two years old

Heifers with high probabilities of being barren will be replaced by 10% of the male weaners

A cow’s birth frequency is every year

The lifespan of a cow is 10 years

The average “active” lifespan of a bull is 6 to 7 years

The male to female ratio of calves born is 1:1

A cow will alternate female vs male births annually


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Calving will start at the beginning of the year, implying that cattle have to be purchased a year prior to the actual production year (for financial modelling purposes)

The parent cattle (cows and bulls) will be not be considered as part of the target 25 000 by the end of fifth year (the AP could sell them or reallocate them to a similar project).

The key variable in Table 47, namely calf crop, measures the efficiency of the breeding programme, as it compares the total number of number calves that are successfully weaned to the total number of cows that were exposed to the bull and conceived.

Table 47: Calf crop estimation

Variable Description %

(A) Pregnancy % Percentage of cows that were exposed to the bull and fell pregnant, (cows that fell pregnant ÷ cows exposed to the bull)

90%

(B) Calving % Percentage of total calves born (= full pregnancies) alive or stillborn to pregnancies (calves that survived birth ÷ cows that fell pregnant)

90%

(C) Weaning % Percentage of calves that survived birth and calving stage, to weaning (cows born alive, less calves that died ÷ calves that reached weaning

90%

(D) Calf crop Percentage of calves weaned compared to the cows that fell pregnant (calves weaned ÷ cows that fell pregnant), also = A x B x C =0.9 x 0.9

73%

Adapted: (UNL-Beef, 2015)

Based on the above assumptions a simplistic but realistic breeding scenario is as depicted in Table 48.

Table 48: Cattle breeding

Pre-production Production

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

Purchase of parent cow (F)

Fa Ma Fb Mb Fc

Faa Maa Fbb

Faaa

Where: F = first, parent cow Fa = first female calf of F (first generation) Fb = second female calf of F (first generation) Fc = third female calf of F (first generation) Faa = first female calf of Fa (second generation) Fbb = first female calf of Fb (second generation) Faaa = first female calf of Faa (third generation) Ma = first male calf of F Mb = second male calf of F Based on the above scenario, if the calf crop was 100%, this particular cow (F) would have bred an additional six females at the end of the fifth year as highlighted. Therefore, at a calf crop of 73% there will be approximately 4.73 (6 x 0.73) females, excluding the parent cow. Therefore the total parent stock required in the first year will be a as presented in Table 49.

Table 49: Parent herd size, composition and costs


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Cows Bulls Total

Ratio 25 1 26

Quantity needed in Year 0 to reach 25 000 in 5th year

5 708 228 5 936

Cost per unit R 7 000 R 26 000 N/A

Total cost R 39 954 338 R 5 936 073 R 45 890 411

Based on the 1:1 ratio there will be approximately 2 854 male weaners produced annually (5 708 ÷ 2). Assuming that calving will happen throughout the year, 238 weaners (2 854 weaners ÷ 12) per month will be sold. It is expected that 10% of these will be exchanged or sold to replace heifers that have a high possibility of being barren, and therefore only 2 568 (2 854 x 0.9) will be sold for cash. B.2.6.2. Production process and inputs

The farmers will bear all the input costs, including feed and utilities. The processing, as depicted in Figure 27, will entail the sourcing of parent stock; breeding to increase the stock (mainly females) to 25 000; and selling male weaners.

Figure 27: Process flow for the breeding and sales program


The production facility and equipment will be auction pens to the value of R165 000. B.2.7. Transport service B.2.7.1. Opportunity/service description

Cattle farmers typically sell male weaners, which needs to be transported to auctions or feedlots. This service will be provided by the AP, as part of the cattle breeding and market linkages initiative. Two cattle FSPUs are proposed to support cattle farmers. One must serve the south western region and will be located in Dealsville. The other one has to serve the north eastern region and will be located in Ventersburg. The total distance covered by the delivery trucks will be 37 968 kilometres per annum as shown in Table 50

Parent stock (bull and cows in

1:25 ratio) receiving

Breeding program (heifers reproducing when 24 months old and cows

reproducing every year) No selling of females except replacing heifer

Male weaners sold for cash or exchanged for

female (heifer replacements)


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Table 50: Total distance for transporting cattle

FPSU Total

distance per trip (km)

Trips per

month

Number of

trucks

Months per

annum Total (km)

1: Dealsville 569 4 1 12 27 312

2: Ventresburg 222 4 1 12 10 656

Total 37 968

The cattle transportation routes on which the total trip distance is based are as highlighted in Figure 28, namely the red one for FPSU 1 and the green one for FPSU 2.

Figure 28: Transport routes to AP sites

The AP will also need to transport eggs, day-old chicks, broilers and chicken between the AH (poultry abattoir and hatchery) and FPSU 1 (hatching-egg and broilers farms). It is assumed that grain farmers will transport grain to the AH – therefore no transport service, except for the internal moving of goods using forklifts, will be provided to the feedmill, another AH based business. The total annual distances covered for transporting each of these products will be as presented Table 51.


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Table 51: Transportation for the AH and FPSU based businesses

Products Routes Total

distance (km)

Trips per

month

Number of

trucks

Months per

annum

Total (km)

Cattle Boshof 44 8 1 12 4 224

Bothaville 68 8 1 12 6 528

Hertzogville 106 8 1 12 10 176

Verkeerdevlei 155 14 2 12 52 080

Ventersburg 94 20 2 12 45 120

Sub-total 118 128

Chicken Local (LDM) 150 40 2 12 144 000

Gauteng 360 8 1 12 34 560

Bloemfontein 160 16 1 12 30 720

Sub-total 209 280

Broilers & day-old chicks

Odendaalsrus to Wesselsbron 40 40 1 12 19 200

Wesselsbron to Odendaalsrus 40 40 1 12 19 200

Sub-total 38 400

Eggs Wesselsbron to Odendaalsrus 40 40 2 12 38 400

Sub-total 38 400

TOTAL 404 208

B.2.7.2. Equipment

The equipment required for the transport business will be the vehicles listed in Table 52.

Table 52: List of AP vehicles

Vehicle type Quantity Unit cost Total cost

Ten (10) Ton truck 3 R 1 098 991 R 3 296 974

Three (3) Ton refrigerated truck 3 R 450 000 R 1 350 000

One (1) Ton Bakkie 5 R 235 000 R 1 175 000

Forklift 5 R 448 695 R 2 243 475

Total R 8 065 449


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B.3. AGRI-PARK CONCEPT The concept design was guided by the strategic objectives of the AP which are to:

Kick-start rural economic transformation in LDM

Promote the skills of and support smallholder farmers through the provision of capacity building, mentorship, farm infrastructure, extension services, production inputs and mechanisation inputs

Enable joint ownership of the AP equity between state and commercial interests or partners

Bring underutilised land (especially in communal areas and land reform farms) into full production over the next three years

Expand irrigated agriculture. In line with these objectives the design was meant to eventually achieve the desirable outcomes of the AP, which are to:

Develop a ‘new’ class or pool of skilled black farmers that have the necessary technical expertise and ability to supply the market sustainably, at the desired quality

Encourage black farmers to form joint ventures to supply the AP

Encourage private or commercial farmers to co-invest in the AP

Develop partnerships with other government stakeholders that will enable the establishment of critical economic infrastructure like roads, energy, water, ICT and transportation or logistics corridors that support the AP value chains (VCs).


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Figure 29: AP concept

Livestock Feed-mill (AH)

Primarily for supplying the “AP livestock” (cattle and poultry farms)

Hatching-egg farm (FP)


Main ingredients (maize, soya, sunflower), others to be sourced elsewhere

Emerging grain farmer (FP)

Emerging Broiler farmers (FP)

Clustered / synchronised to ensure efficiency in the value chain

Poultry abattoir – (AH)

Capacity – 1.2 mil broilers per annum (expand to 2.5 mil broilers in future)

Increase collective herd size to ±25 000 of “pure breed” to sustain a feedlot

Emerging cattle farmers (FP)

Meat processing

Possibly to process chicken and beef in one factory

Feedlot

Highly dependent on the success of the emerging cattle farmers

Beef abattoir


Wholesaler / retailers (AH & FP)

Meat (fresh and processed)

Livestock feed (bulk and small packages / bagged)

Fresh produce (vegetables)

Spent and unfertilised eggs (those that will not hatch) from hatching-eggs farm

Agricultural inputs (medication, seeds, fertilizers / compost etc.)

Agricultural implements

Hatchery (AH)


Tannery

Majority of hides sourced from the AP abattoir, the rest to sourced elsewhere

Leather processing & goods


Greenhouse

Primarily for vegetable production

Compost

Cattle feed ingredient

Waste / By-products – AH

Key / legend:

To be implemented immediately when the AP is established

To be implemented at the AP in future (thy could also be existing businesses for now)

High-Level Master Agri-Park Business Plan: Lejweleputswa District Municipality

28 April 2016 Rev 0


Based on the current agricultural situation in LDM particularly regarding emerging famers; the market assessment of the business opportunities; and the results of the technical assessment as presented in in section A.2, the AP concept is as depicted in Figure 29. The opportunities highlighted in green are expected to be established immediately when the AP is established. Those in orange are dependent on the success of the cattle breeding and market linkages initiative and will be implemented only after the fifth year. The anchor businesses will be the poultry abattoir (section A.2.1), the livestock feed-mill (section A.2.5) and the cattle breeding and market linkage support (Section A.2.6). The AP design was guided by the following key considerations:

The primary beneficiaries should be the emerging farmers who have already demonstrated keen interest in the sector, including cattle, grain and poultry

There must be strong and logical linkages among all the business opportunities, to optimise capacity building and resources utilisation

Additional future business opportunities and their potential linkages with those that will be established immediately at the AP should also be identified.

In line with the industry practice of integrating the poultry value chain or having contract suppliers, broiler abattoir suppliers (broiler farms, hatcheries and hatching-egg farms) also need to be established – these will all be dependent on the abattoir for success. The livestock feed-mill and hatching-egg farms may not lucrative businesses on their own (to be determined after a financial assessment), and will therefore most likely need to be owned by the same owners as the abattoir. B.3.1. Agri-hub Based on the high level analysis of the opportunities and services identified, the AH will comprise of the following facilities and services: B.3.1.1. Facilities

The facilities at the AH will be the following:

AH administration and support services building

Poultry abattoir

Hatchery

Livestock feed-mill

Wholesale or retail facility, including a fresh produce market B.3.1.2. Services

The services that will be provided from the AH will be as follows:

Cattle breeding and market linkage service

Facilitation of technical and business management support services to primarily livestock and grain (maize and sunflower) farmers, as well as other farmers

Manufacturing plant and equipment hiring service.


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B.3.2. Farmer production support units There will be a total of three FPSUs, as informed by business opportunities and the AP services to be provided. One FPSU will be for serving the primary poultry farmers (hatching-egg farm and broiler farms), and the other two, which will be identical, will be providing support to the cattle farmers. B.3.2.1. Facilities

All FPSUs will have a wholesale or retail facility, including a fresh produce market. The additional facilities for the poultry FPSU will be the actual poultry farms (hatching-egg and broilers), and the related administration site. The two cattle FPSUs will have offices for the agricultural advisors, as well as cattle auction pens. B.3.2.2. Services

The poultry FPSU will provide technical and business management support to poultry farmers, including the hatching-egg and broiler farmers. The agricultural advisors will be based at the FPSU. The two FPSUs for the cattle breeding and market linkage programme will also provide technical and business management support to the cattle farmers.

B.4. LOCATION B.4.1. Agri-hub The AH will be located in Wesselsbron. B.4.2. Farmer production support units The exact locations of the FSPUs have not yet been determined, but it is proposed that the poultry FPSU be situated in Odendaalsrus because that is where broiler farmers are concentrated. Cattle farmers are spread throughout the district and therefore the two cattle FPSUs are proposed to be located in Dealsville and Ventersburg.

B.5. EQUIPMENT The manufacturing plant, machinery and equipment that will be owned by the AP and rented to the tenant businesses or utilised as part of service offered by the AP will be as presented in Table 53.

Table 53: AP plant and equipment cost


AH office equipment 1 R 447 640 R 447 640

Truck (10 ton) 3 R 1 098 991 R 3 296 974

Truck (3 ton) - Refrigerated 3 R 450 000 R 1 350 000

Auction pens 2 R 165 000 R 330 000


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Abattoir plant and equipment 1 R 4 267 701 R 4 267 701

Broiler houses 1 R13 406 531 R 13 406 531

Hatchery plant and equipment 1 R 5 409 830 R 5 409 830

Hatching-egg farm houses 1 R 6 082 833 R 6 082 833

Feed-mill 1 R 3 794 557 R 3 794 557

Bakkie (1 ton) 5 R 235 000 R 1 175 000

Forklift 5 R 448 695 R 2 243 475

Total R 41 804 541

B.6. SPACE REQUIREMENTS A total of 16 728 m2 for the production space was presented in the individual sub-sections of section B.2, as summarised in Table 54.

Table 54: AP space requirement

Opportunity Space (m2)

Poultry abattoir 300

Broiler farms 7 500

Hatchery 508

Hatching-egg farm 5 400

Feed-mill (excluding feed-mill admin space) 520

Cattle breeding and marketing 2 500

Total 16 728

The total space requirements for the AH and FPSUs, including the wholesale or retail and administration buildings, will be 2 788 m2. More details are provided in the sections below. Therefore the AP will need a total effective space of 19 516 m2 (2 788 + 16 728) excluding parking and garden. B.6.1. Agri-park layout B.6.1.1. Agri-hub

The total space required at the AH for all the administration activities will 1 750 m2 as shown in Table 55.

Table 55: AH space requirements


AH administration 500

Abattoir administration 250

Hatchery administration 250

Feed-mill administration 80


Total 1 780

The layout of the AH administration building (500 m2) is depicted in Figure 30.


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25m

20m

Kitchen24 m2

Restroom9 m2

Restroom9 m2

Main boardroom

50 m2

Internal boardroom

20 m2

Maintenance team 39 m2

Mee

ting

ar

ea

10.2

5 m

2

Technical team 30 m2

Logistics/Transport service manager

23 m2

Agriculture support manager

30 m2

Personal Assistant

20 m2

General manager30 m2

Shared services manager

25 m2

Technical/Operations

manager25 m2

Waiting area

Foyer

Main entrance

D

D

Back entrance

Figure 30: AH administration building

The AH site, including the AH building and the businesses, is shown in Figure 31.


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Abattoir adm

in office 250 m

2

zChicken Abattoir

300 m2 Hatc

hery

ad

min

offi

ce25

0 m2 Hatchery

508 m2

Agri-Park Admin offices 500 m2

Security

Agri-Hub entrance

Delivery

Staff parking

Visitors parking

Feed mill520 m2

Fresh produce market200 m2

Selling stalls500 m2

Market packing

Space provision for further development

Space provision for further development

Feedmill admin office

80 m2

Figure 31: AH site map


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B.6.1.2. Farmer production support units

The total floor area for the administration buildings and wholesale/ retail areas of the FPSUs will be 1 008 m2 as shown in Table 56.

Table 56: FPSUs total area


FPSU 1 – Poultry (1 site) 136

FPSU 2 and 3 – Cattle (2 identical sites) 272

Wholesale / retail facilities 600

Total area 1 008

Assuming that poultry farmers will be clustered, the poultry FPSU is as depicted in Figure 32.

FPSU entrance

Delivery

11m

20m

Ablution50 m2

Kitchen50 m2

Agriculture admin offices

40 m2

Agriculture supplies store (

Wholesale/Retail)200 m2

25m

14m

Hatching-egg farm cluster

Broiler farm cluster

Figure 32: FPSU 1 – Poultry

Each of the two cattle FPSUs, which will be identical, will be as depicted in Figure 33.


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Security

FPSU entrance

Delivery

Auction pen

25m

25m11

m

20m

Ablution50 m2

Kitchen50 m2

Agriculture admin offices

40 m2

25m

14m

50m

50m

Strip

Dim

ensio

ns31

809m

m x

1025

2mm

Stal

l wid

th25

00m

mSt

all l

engt

h50

00m

mSt

all a

ngle

70de

g

No. S

talls

21

Traders parking

Agriculture supplies store (

Wholesale/Retail)200 m2

Figure 33: FPSU 2 and 3 – Cattle

B.7. SUPPLY CHAIN LOGISTICS The AP is designed such that all the business are linked, with some the operations synchronised (like the poultry abattoir and its upstream supply). In that respect the AP will as part of technical and business management support be an integrator, ensuring that logistics are addressed, among other issues. The AH will therefore offer transport services to all the businesses, transporting inputs and finished products to and among the businesses in the value chain, as well as to external customers in the case of the poultry abattoir and cattle sales.

B.8. REGULATORY COMPLIANCE B.8.1. General legislation Some of the applicable legislation is listed in Table 57.

Table 57: General legislation

Regulation Requirement

Occupational health and safety The hub shall provide an environment that is safe and healthy

Environmental (Housekeeping) Maintain unimpeded work space for every employee.

Noise Prohibit any person from entering a noise zone without wearing hearing protectors.


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Fire Precautions Emergency escape door from any passage shall be hung to open outwards

SARS Value Added Tax Employee Tax

Department of Labour Unemployment Insurance

B.8.2. Food safety The food industry in South Africa is regulated by various acts, regulations and guidelines. The consumer has the right to safe and wholesome products. Several laws protect this right. The departments responsible for the execution of food safety and related matters are the Department of Health (DoH), the Department of Agriculture, Forestry and Fisheries (DAFF), and the Department of Trade and Industry (the dti). Food manufacturing operations are required to comply with regulations and this affects the AH enterprises. The requirements of an acceptable facility include adequate lighting and ventilation; work surfaces in a good state of repair; cleanable floors, walls and ceilings; and a safe water supply. According to CSIR Bioscience (2015), products offered for sale must conform to legal standards as published regularly. The following laws apply:

Labelling of fruit and vegetables

Foodstuffs, Drugs and Disinfectants Act (Act 54 of 1972)

Additives allowed, if any

Fill and drained weight of cans

Agricultural Products Standards Act 1990 (Act 119 of 1990)

Trade Metrology Act. Other applicable legislation is listed in Table 58.

Table 58: Food safety legislation


Meat safety Act Provide meat safety and safety of animal products and essential national standards in respect of abattoirs

Government notice 30/07/1999 Governing general hygiene requirements for food premises and transport of food

Government notice 26/07/1992 Regulation regarding the classification and marketing of meat

B.8.3. Environmental requirements It is estimated that all environmental compliance work related to the AP will cost a total of R3 million. B.8.3.1. Environmental Impact Assessment

In terms of the Environmental Impact Assessment (EIA) regulations, Government Notice (GN) R545 of 2 August 2010, as read with the National Environmental Management Act (Act No. 107 OF 1998) as amended, all environmental regulatory requirements need to be


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addressed before an enterprise can be established. An environmental impact assessment (EIA) study, that may include ecological, heritage and other specialist studies, needs to be performed by an independent environmental expert, to determine the potential environmental impacts. B.8.3.2. Waste management license

A Waste Management License (WML) with a Basic Assessment may be required if one or more of the following listed activities in Category A of Schedule 19(1) of the National Environmental Management: Waste Act (Act Nr 59 of 2008) is triggered:

The disposal of general waste to land covering an area of more than 50 m² but less than 200 m², and with a total capacity not exceeding 25 000 tons.

The disposal of domestic waste generated on premises in areas not serviced by the municipal service where the waste disposed does not exceed 500 kg per month.

Please note that should the site and its activities be serviced by the local municipality in terms of waste management, including the management of on-site sanitation, a WML will not be required. Written confirmation from the Municipal Manager, however, is to be obtained to this effect. B.8.3.3. Water Use License

In terms of Section 21 of the National Water Act, 1998 (Act Nr 36 of 1998) (NWA), the following water uses will require authorisation, if applicable:

21(a) – taking water from a water resource;

21(b) – storing water; and

21(g) – disposing of waste or water containing waste in a manner which may detrimentally impact on a water resource.

B.8.3.4. Potential specialist studies

The purpose of the National Environmental Management: Biodiversity Act, 2004 (Act No. 10 of 2004), is to provide for the management and conservation of South Africa’s biodiversity within, the framework of the NEMA and the protection of species and ecosystems that warrant national protection. This Act is applicable to the application for environmental authorisation, in the sense that it requires the project applicant to consider the protection and management of local biodiversity. Accordingly, an ecological specialist assessment will have to be undertaken. This assessment will be done during the warmer months of the year, as part of the EIA. This study entails the investigation into faunal and floral species that may occur on the site earmarked for construction of the abattoir. The National Heritage Resources Act (NHRA), 1999 (Act No. 25 of 1999), legislates the necessity for cultural and heritage impact assessments in areas earmarked for development. According to Section 27(18) of the Act, no person may destroy or damage, deface, excavate, alter, remove from its original position, subdivide or change the planning status of any heritage site without a permit issued by the heritage resources authority responsible for the protection of such a site. In accordance with Section 38 of the NHRA, an independent heritage consultant has to be appointed to conduct a Heritage Impact Assessment to determine if any sites, features or objects of cultural heritage significance occur within the boundaries of the areas earmarked for development of the project site. This is relevant to areas exceeding 0.5 hectares (ha) and where linear developments


28 April 2016 Rev 0


(including roads) exceed 300 metres in length. The Act makes provision for the potential destruction to existing sites, pending an archaeologist’s recommendations, through permitting procedures. Permits are administered by the South African Heritage Resources Agency (SAHRA). This study may be required as part of the EIA process. A geo-hydrological specialist study of the site will be required for purposes of the Water Use License application in terms of Section 21 of the National Water Act, 1998 (Act Nr 36 of 1998), if applicable. B.8.4. Land tenure The AP will have to conclude agreements in collaboration with stakeholders, to establish a mutually beneficial relationship with land owners.

B.9. ORGANISATIONAL DESIGN B.9.1. Institutional arrangements B.9.1.1. Agri-park

The AP will comprise of an agri-hub, located in Wesselsbron, as well as 3 farmer production support units (FPSUs) in Dealsville, Ventresburg and Odendaalsrus Rural urban market centres (RUMCs) will not be established in every district municipality (DM), but rather in large commercial centres linking a number of DMs. Therefore, no provision has been made for the establishment of a RUMC as part of this AP. Figure 34 illustrates the structure of the AP.

Figure 34: AP structure

The AP will be registered as a private (Pty Ltd.) company. Initially, all the shares of the company will be held in trust by one of the organisations that is part of the District Agri-Park Management Committee (DAMC). As the AP’s operations develops and grows,

Agri-Hub

FPSU 1 FPSU 2 FPSU 3


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shares will be sold or transferred to private sector entities, community structures and emerging farmers up to the following maximums:

30% held by private sector entities (including commercial farmers and agro-processing companies)

70% held by emerging farmers, communal farmers and community structures. B.9.1.2. Business opportunities

The potential opportunities identified for the AP would be implemented in the form of either expansions to existing businesses, or the establishment of new businesses. In both cases, the same 30%-70% shareholding in the expansion or new operations will apply. In the case where a new enterprise is established, the most suitable legal entity (such as cooperative or private company) will be determined. The new enterprise will then rent manufacturing facilities (plant, machinery and equipment) from the AP. If an existing enterprise implements the opportunity, it is expected the AP will be involved during the necessary upgrades to its facilities to ensure the expanded processing capability. A due diligence will have to be conducted on the existing business, to confirm whether such expansion would be viable from a technical and financial perspective. B.9.2. Human resource requirements The human resource requirements, based on the operational activities of the AP, will be as detailed in Table 59.

Table 59: AP human resources requirements

Position Responsibilities Requirements Qty

Annual salary

per person

(R)

Total annual

salary (R)

General Manager

General management and marketing of the AP

Liaison with external parties

Minimum BSc (Hons) Agric / B. Eng. and post-grad management qualification

Minimum 10 years, five at middle to senior management level

1 650 000 650 000

Personal Assistant / AP Secretary

Assist GM with daily management activities

Provide secretarial support to the other managers

Minimum N6 / National Diploma in Administration

Minimum 8 years relevant experience

1 240 000 240 000

Shared Services Manager (HR, finance and

Manage finances and HR functions of the AP

Assist GM with marketing

Minimum B.Com (Hons) Accounting / Finance plus post-grad management qualification

1 500 000 500 000


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Annual salary

per person

(R)

Total annual

salary (R)

marketing) Minimum 8 years agriculture experience, three at middle management

Technical / Operations Manager

Manage capacity building of the emerging farmers

Management of the AP (AH and FPSU) facilities

Minimum BSc (Hons) Agric / B. Eng. plus post-grad management qualification

Minimum 8 years agriculture experience, three at middle to senior management level

1 500 000 500 000

HR Coordinator

Manage daily HR activities of the AP

Coordinate training activities

Minimum B Degree in HR

Minimum 5 years HR experience, three at junior management / supervisory level

1 380 000 380 000

Management Accountant

Management accounting functions

Financial advisor to the AP businesses

Manage transport service

Minimum B Degree in Accounting

Minimum 6 year experience, two at supervisory level

Mentoring and coaching experience

1 380 000 380 000

Agricultural technician / advisor

Perform agricultural research and extension services

Minimum NHD in Animal production

Minimum 10 years animal production experience, 3 at supervisory level

4 380 000 1 520 000

Maintenance technician

Manage daily maintenance (building and production) of the AH and FPSU, including management of the artisans

Minimum N6 Dip / preferably N.Dip (Mechanical / Electrical)

10 years maintenance experience, five at supervisory level

1 300 000 300 000

Artisans Perform maintenance duties at the AH and FPSU

Minimum N4 and Trade test

Minimum 8 years maintenance experience

3 240 000 720 000

Drivers Drive the trucks and forklift

Matric Plus Code 10 driver’s licence

5 92 000 460 000


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Annual salary

per person

(R)

Total annual

salary (R)

Minimum 10 years relevant experience

General workers

Assist with general maintenance of the facilities

Perform cleaning duties

Matric

Minimum 2 years work experience

3 48 000 144 000

Total 22 5 794 000

B.9.3. Organogram The organogram, matching the human resources requirements, is depicted in Figure 35

Figure 35: Agri-Park Organogram

B.10. RISK MANAGEMENT

General Manager

Shared Services Manager

Technical / Ops Manager

Facilities / Maintenance Technician

Agricultural Advisor /

Technician x 4

Management Accountant /

Transport Manager

Artisans x 3

General Workers x 3

HR Coordinator / Administrator

Drivers x 5

Personal Assistant


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Every intervention is faced by risks which can cause it to fail, if such risks are not properly managed. To prevent or counter the effects of all possible risks, the AP will develop and implement a comprehensive risk management and mitigation plan, which will entail the following:





Documenting and communicating the plan. Some of the potential risks to the AP are as listed in Table 60.

Table 60: Agri-Park risks

Potential risk Likelihood Impact Overall

risk rating

Mitigation

8. Low occupation rate

Medium High High Affordable rental fees

9. Food poisoning and contamination

High High High Implement quality standards (like HACCP or ISO 22 000)

10. Inferior equipment High High High Reputable suppliers to be used

11. Labour unrest Low High Medium Comply with all applicable labour legislation

12. Crime and robbery Low Medium Medium Employ security personnel to safeguard the premises

13. Lack of buy-in from key stakeholders

Low Medium Medium Adequate stakeholder engagement prior to the establishment of AP

14. Unaffordable rent or fees (for tenants)

High High High AP to link opportunities with the market to maximise opportunity profits


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APPENDIX C - FINANCIAL ANALYSIS


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C.1. INTRODUCTION The results from the market and technical assessments were used to model the finances of the proposed Lejweleputswa District Municipality (LDM) Agri-Park (AP). The financial model projects the financial statements and also gives an indication of financial viability of the proposed business. The key assumptions that underpin the model are as follows:

The financial model is based on 100% grant funding – a discount rate of 7% is used.

The Agri-Hub (AH) and Farmer Production Support Units (FPSUs) will be located on state-owned land.

Supplier accounts are payable in 30 days, and customer payments will only be received after 60 days.

The AP will rent out space and machinery to the following enterprises as a revenue stream:

Poultry abattoir

Broiler farm

Broiler hatchery

Hatching-egg farm

Livestock feed-mill

Cattle breeding and sales service.

The potential revenues of the respective enterprises were estimated based on the production of the following products’ quantities (determined based on a high-level market analysis):

Slaughtered chickens – 1 200 000 units

Broiler chickens – 1 200 000 units

Day-old chicks – 1 320 000 units

Fertilised eggs – 1 650 000 units

Livestock feed – 5 000 tons

Cattle – 4 800 heads.

The AP will receive 10% of the revenue generated by the respective businesses, as rent for the equipment and space, as well as services rendered by the AP through the AH or FPSUs.

A zero dividends policy is assumed, meaning that all revenue earned will be retained in the AP business.

Grant funding will be invested into the AP to cover all setup or establishment costs, as well as working capital for the first year of operation.

C.2. COSTS For the purpose of modelling the finances of the AP, there are three types of costs that were taken into consideration. These are investment costs and direct and indirect operating costs.


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C.2.1. Investment costs Investment costs are once-off costs incurred during the set-up or establishment of the AH and FPSUs for items such as:

Capital expenditure

Pre-production expenses

Working capital. The total of investment for the establishment of the AP is estimated at R118.2 million. The investment costs for the establishment of the LDM Agri-Park are listed in Table 61.

Table 61: Investment costs

Type of investment Items for purchase Investment

costs (R)

Civil works, structures and buildings

AH administration building

29 901 005

FPSU1-Poutry Administration building

FPSU2-Cattle Administration building

Abattoir administration building

Hatchery administration building

Hatching-egg farm administration building

Poultry abattoir

Broiler farmhouses

Hatchery

Hatching -egg farmhouse

Livestock feedmill

AH Wholesale / retail building

AH Fresh produce stalls

AH Warehouse/Workshop

Plant machinery and equipment

Auction pens

10 284 733

Abattoir plant and equipment

Broiler houses

Hatchery plant and equipment

Hatching-egg farm houses

Feedmill

Auxiliary and service plant equipment

Telephone connections

3 657 500 Utilities(Electricity & water)

IMS(ISO 9001/22000/ISO 14001/OHSAS 18 000)

EIA

Incorporated fixed assets

Pastel software

8 497 342

Microsoft Office software

Office furniture (per office)

Computer

Telephone handsets - portable

CO2 fire extinguisher per unit

First aid kit - mountable box

10 ton Truck

Forklift

Bakkie

3 .5 ton truck - Refrigerated

Till machine( warehouse and retail)

Pre-production Develop technical/training manuals 46 586 201


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Type of investment Items for purchase Investment

costs (R)

expenditure Technical & business training

Marketing & roadshows

Recruitment

Business registration

Quality systems

Cattle purchase

Contingencies 9 892 678

Working capital (Year 1) 9 369 519

Total fixed investment costs 118 188 978

The breakdown of the fixed investment costs is shown in Figure 36.

Figure 36: Total fixed costs breakdown

Pre-production expenditure, which covers all the expenditure required to get the business operational by its first year, is the main cost item at 40%. An example is that the cattle that need to be purchased before the first year, accounts for a significant amount of R45 953 361. C.2.2. Direct and indirect costs These are costs incurred once operations start and these costs are incurred during the provision of services by the AP to its customers (tenant businesses). The total costs for the first year of operation is estimated at R12 979 256. These costs will escalate annually by 7%. The contribution by the respective cost items is depicted in Figure 37.

25%

9%

3%

7% 40%

8% 8%

Civil works, structures andbuildings

Plant machinery and equipment

Auxiliary and service plantequipment

Incorporated fixed assets(project overheads)

Pre-production expenditure

Contingencies

Working capital


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Figure 37: Indirect costs breakdown

The largest component of the costs is labour at 51%, followed by depreciation and raw materials respectively at 23% and 14%.

C.3. SALES It is envisaged that the AP will generate income by collecting a maximum of 10% from the revenue generated by the respective businesses that rent space or equipment from the AH or FPSUs. Table 62 shows the AP’s sales revenue projections, based on the various revenue streams. All revenue in the table is calculated at current prices – however, in the financial model prices and revenue will escalate at 7% per annum.

14%

1%

0%

51%

0%

0%

10%

23%

1%

Raw materials

Utilities

Repair and maintenance

Labour

Labour overhead costs

Factory overhead costs

Administrative overheadcosts

Depreciation


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Table 62: Sales forecast for AP

Revenue streams

Unit of measure

Maximum capacity

Average market prices

Maximum enterprise revenue

Maximum AP revenue (10% of enterprises)

AP revenue (Y1-Y3, 50% of maximum)



Poultry meat Kg 1 200 000 R 39.00 R 46 800 000 R 4 680 000.0 R 23 400 000.0 R 37 440 000.0 R 46 800 000

Broiler chickens Each 1 200 000 R 18.30 R 21 960 000 R 2 196 000.0 R 10 980 000.0 R 17 568 000.0 R 21 960 000

Day-old chicks Each 1 320 000 R 6.15 R 8 118 000 R 811 800.0 R 4 059 000.0 R 6 494 400.0 R 8 118 000

Fertilised eggs Each 1 650 000 R 3.50 R 5 775 000 R 577 500.0 R 2 887 500.0 R 4 620 000.0 R 5 775 000

Livestock feed Ton 4 992 R 4 992.00 R 24 960 000 R 2 496 000.0 R 12 480 000.0 R 19 968 000.0 R 24 960 000

Weaners Each 5 708 R 4 000.00 R 22 800 000 R 2 280 000.0 R 11 400 000.0 R 18 240 000.0 R 22 800 000

Cows / steers Each 4 800 R 8 000.00 R 38 400 000 R 3 840 000.0 R 19 200 000.0 R 30 720 000.0 R 38 400 000

Total R 168 813 000 R 16 881 300 R 84 406 500.0 R 135 050 400.0 R 16 881 300

C.4. PREDICTED TEN YEAR FINANCIAL STATEMENTS Based on the cost and sales assumptions, a projected ten year income statement, balance sheet and cash flow statement were prepared. C.4.1. Income statement The primary purpose of the income statement is to report the enterprise’s earnings to interested and affected parties such as investors, shareholders, employees and creditors, over a specific period of time. It matches the corresponding expenses to the revenue. The income statement, also referred to as the statement of earnings or statement of operations, describes the enterprise’s profitability over the entire period of time covered. Table 63 shows the ten year projected income statement of the AP.


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Table 63: Projected income statement

Description Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Yea 8 Year 9 Year 10

Sales revenue 11 507 564 12 313 093 13 175 010 17 622 069 83 958 497 22 555 275 28 601 506 30 603 612 32 745 864 35 038 075

Less variable costs 1 789 781 1 915 066 2 049 120 3 508 096 3 753 663 4 016 419 5 371 957 5 747 994 6 150 354 6 580 879

Material 1 789 781 1 915 066 2 049 120 3 508 096 3 753 663 4 016 419 5 371 957 5 747 994 6 150 354 6 580 879

Less fixed costs 11 189 475 12 340 633 12 987 807 13 709 131 14 455 901 16 023 228 16 911 592 17 826 417 18 792 258 19 880 542

Material 409 874 575 770 616 074 659 199 705 343 754 717 807 548 864 076 924 561 989 280

Personnel 6 633 551 7 211 485 7 716 289 8 256 429 8 834 379 9 452 786 10 114 481 10 822 495 11 580 069 12 390 674

Marketing 41 216 44 102 47 189 50 492 54 026 57 808 61 855 66 185 70 817 75 775

Depreciation 3 022 671 3 022 671 3 017 588 3 040 997 3 040 997 3 809 281 3 842 669 3 842 669 3 829 648 3 870 549

Other fixed costs 1 082 163 1 486 605 1 590 667 1 702 014 1 821 155 1 948 636 2 085 040 2 230 993 2 387 162 2 554 264

GROSS PROFIT (1 471 692) (1 942 605) (1 861 918) 404 841 65 748 933 2 515 627 6 317 957 7 029 201 7 803 253 8 576 655

TAXABLE PROFIT (1 471 692) (1 942 605) (1 861 918) 404 841 65 748 933 2 515 627 6 317 957 7 029 201 7 803 253 8 576 655

NET PROFIT (1 471 692) (1 942 605) (1 861 918) 404 841 65 748 933 2 515 627 6 317 957 7 029 201 7 803 253 8 576 655

in % of sales revenue (13) (16) (14) 2 78 11 22 23 24 24

The projected income statement shows that the AP will be making a loss for the first three years, when enterprises are still building capacity, and operating at 50% of the maximum factory throughput. Although the AP does not necessarily yield large profits, the profit margins are healthy for a business with developmental objectives like the AP.


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C.4.2. Balance sheet The balance sheet, also known as a “statement of financial position”, reveals the enterprise’s assets, liabilities and owner’s equity (net worth). The purpose of the balance sheet is to provide an idea of the enterprise’s financial position, along with displaying what it owns and owes. Table 64 shows the ten year projected balance sheet of the AP.

Table 64: Projected balance sheet

Apart from the initial investment of R118 188 978 there will be no need to source further financing for the AP throughout the ten years’ life of the project. The net worth of the equity increased from R118 million year 0 (set-up year) to R266 million in year 10. This indicates that the proposed AP has potential to grow the value of investment made into it.

Description Set-up Year Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10

TOTAL ASSETS 118 188 978 118 216 651 118 220 181 118 222 366 119 560 686 188 398 915 190 107 856 197 937 304 206 580 799 216 111 355 226 536 224

Total current assets 0 2 184 313 3 915 967 5 410 733 9 790 050 70 780 353 77 858 590 89 530 707 102 016 870 114 842 048 129 137 466

Inventory on materials & supplies - 5 410 5 789 6 194 10 282 11 002 11 772 15 581 16 671 17 838 19 087

Work in progress - 23 837 27 115 29 013 34 699 37 127 39 726 45 492 48 676 52 083 55 729

Finished product - 27 543 31 080 33 256 39 238 41 985 44 924 51 053 54 627 58 450 62 542

Accounts receivable - 27 657 31 203 33 387 39 378 42 135 45 084 51 225 54 810 58 647 62 752

Cash-in-hand - 22 132 25 291 27 062 28 956 30 983 33 152 35 472 37 955 40 612 43 455

Cash surplus, finance available 0 2 077 733 3 795 488 5 281 821 9 637 497 70 617 121 77 683 932 89 331 885 101 804 131 114 614 417 128 893 900

Total fixed assets, net of depreciation 118 188 978 115 166 307 112 143 636 109 482 558 106 441 561 115 621 807 112 249 266 108 406 597 104 563 929 101 269 307 97 398 758

Fixed investments - 68 341 743 68 341 743 68 341 743 68 698 253 68 698 253 80 919 496 81 356 237 81 356 237 81 356 237 81 891 262

Construction in progress 68 341 743 - - 356 510 - 12 221 243 436 740 - - 535 026 -

Total pre-production expenditures 49 847 235 49 847 235 49 847 235 49 847 235 49 847 235 49 847 235 49 847 235 49 847 235 49 847 235 49 847 235 49 847 235

Less accumulated depreciation - 3 022 671 6 045 342 9 062 930 12 103 927 15 144 924 18 954 205 22 796 874 26 639 543 30 469 191 34 339 740

Accumulated losses brought forward - - 866 031 2 160 578 3 329 074 1 996 755 - - - - -

Loss in current year - 866 031 1 294 547 1 168 496 - - - - - - -

TOTAL LIABILITIES 118 188 978 118 216 651 118 220 181 118 222 366 119 560 686 188 398 915 190 107 856 197 937 304 206 580 799 216 111 355 226 536 224

Total current liabilities - 27 672 31 203 33 387 39 389 42 135 45 084 51 233 54 810 58 647 62 752

Accounts payable - 27 672 31 203 33 387 39 389 42 135 45 084 51 233 54 810 58 647 62 752

Total equity capital 118 188 978 118 188 978 118 188 978 118 188 978 118 188 978 118 188 978 118 188 978 118 188 978 118 188 978 118 188 978 118 188 978

Reserves - - - - - - 68 171 046 71 873 793 79 697 093 88 337 010 97 863 729

Retained profit - - - - 1 332 319 70 167 802 3 702 747 7 823 299 8 639 917 9 526 719 10 420 764

Net worth 118 188 978 117 322 948 116 028 400 114 859 904 116 192 223 186 360 025 190 062 772 197 886 071 206 525 988 216 052 708 226 473 471


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C.4.3. Cash flow statement The cash flow statement discloses how the enterprise raises money and how it spends those funds during a given period. It also measures its ability to cover its expenses in the short term. Generally speaking, a business that is consistently earning more cash than it spends is considered to be of good value. Table 65 shows the projected cash flow statement of the AP.

Table 65: Projected cash flow statement

The projected cash flow indicates that the proposed AP would have sufficient funds to pay for its current liabilities.

Description Set-up Year Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 Y9 Y10

TOTAL CASH INFLOW 118 188 978 12 140 897 12 964 682 13 870 616 18 555 548 88 380 111 23 745 344 30 112 997 32 217 905 34 473 168 36 886 289

Inflow funds 118 188 978 27 672 3 531 2 184 6 002 2 746 2 949 6 149 3 577 3 837 4 105

Total equity capital 118 188 978 - - - - - - - - - -

Total short-term finance - 27 672 3 531 2 184 6 002 2 746 2 949 6 149 3 577 3 837 4 105

Inflow operation - 12 113 225 12 961 151 13 868 432 18 549 546 88 377 365 23 742 394 30 106 849 32 214 328 34 469 331 36 882 184

Sales revenue - 12 113 225 12 961 151 13 868 432 18 549 546 88 377 365 23 742 394 30 106 849 32 214 328 34 469 331 36 882 184

TOTAL CASH OUTFLOW 118 188 978 10 063 165 11 246 927 12 384 283 14 199 871 27 400 488 16 678 533 18 465 044 19 745 660 21 662 882 22 606 806

Increase in fixed assets 118 188 978 - - 356 510 - 12 221 243 436 740 - - 535 026 -

Fixed investments 68 341 743 - - 356 510 - 12 221 243 436 740 - - 535 026 -

Pre-production expenditures 49 847 235 - - - - - - - - - -

Increase in current assets - 106 580 13 899 8 434 23 641 10 679 11 426 24 164 13 918 14 892 15 934

Operating costs - 9 915 369 11 188 926 11 972 151 14 125 738 15 114 540 16 172 558 18 379 026 19 665 558 21 042 147 22 515 097

Marketing costs - 41 216 44 102 47 189 50 492 54 026 57 808 61 855 66 185 70 817 75 775

SURPLUS (DEFICIT) - 2 077 733 1 717 755 1 486 333 4 355 676 60 979 624 7 066 811 11 647 953 12 472 246 12 810 286 14 279 484

CUMULATIVE CASH BALANCE - 2 077 733 3 795 488 5 281 821 9 637 497 70 617 121 77 683 932 89 331 885 101 804 131 114 614 417 128 893 900


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C.5. FINANCIAL ANALYSIS The information presented in the financial statements was analysed and interpreted using the NPV and IRR. The analysis also investigated how long it will take for the AP to pay back the investment made, and how sensitive it is to changes in its revenue stream. C.5.1. NPV The Net Present Value (NPV) compares the value of money today to the value of that same money in the future, taking into account inflation and returns. Investors prefer a positive NPV to a negative one. If a discount rate of 7% is used, the NPV for the proposed AP is R16 320 078, which indicates a marginally positive return from the AP, considering the R118.2 million investment required. However, considering that the AP will not only result in the social uplifting of local communities, but will also lead to local economic growth and possibly wealth in the long term, it is an acceptable return. C.5.2. IRR The Internal Rate of Return (IRR) measures and compares the profitability of investments to each other. It is also called the discounted cash flow rate of return. The IRR should be equal or above the discount rate for the investment to be attracted into a venture. The IRR for the proposed AP is 8.88%, which is just above the discount rate of 7%. Therefore, the AP could be marginally financially viable. Viewed in the context of the developmental goal of the AP and local economic growth, it is a fair return. C.5.3. Payback period The payback period gives an indication of how long the business would have to operate to generating sufficient profits to be able to repay the initial investment. The payback period for the AP is 11.67 years. It would have been ideal for the payback to be achieved before the estimated lifespan of the project which is ten years. However, considering that this is a developmental project and that other measures like the NPV and IRR are positive, it is acceptable. C.5.4. Sensitivity analysis A sensitivity analysis was conducted on two variables, to determine the impact they would have on the financial returns of the business. The variables used for this exercise were:

Revenue

Labour costs


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C.5.4.1. Revenue

The results of revenue sensitivity analysis are as presented in Table 66. The original model was based on the AP receiving 10% of each enterprise’s revenue as income for the AP.

Table 66: Sensitivity – Revenue collected

Original model 9.5% revenue collection 9.0% revenue collected

NPV R16 320 078 R6 222 968 -R3 874 141

IRR 8.88% 7.72% 6.54%

Payback period 11.63 years 11.87 years No payback found

The AP’s financial sustainability is very sensitive to the revenue collected, with only one percentage point decrease leading to the AP not being viable. This indicates that the 10% revenue from each enterprise is the minimum to be collected from businesses, for the AP to survive. However, half a percentage decrease still yields positive results indicating financial viability though marginal. C.5.4.2. Labour

The results of the labour analysis are as presented in Table 67

Table 67: Sensitivity analysis – labour costs

Original model 10% increase 20% increase 50% Increase

NPV R16 320 078 R10 117 456 R3 914 835 -R14 693 030

IRR 8.88% 8.17% 7.46% 5.27%

Payback period 11.63 years 11.92 years 11.92 years No payback

The AP is not very sensitive to labour costs. This is good, considering that salaries are the highest component of the operational costs. The estimated salaries of senior managers have been modelled at slightly lower than the market rates – therefore these salaries could be increased. Also, if the AP grows and needs to recruit more personnel, it should still be able to sustain its operations.

C.6. ECONOMIC BENEFITS OF THE PROPOSED AGRI-PARK C.6.1. GVA The gross value added (GVA), also known as the localised gross domestic product (GDP) is a measure of the value of goods and services produced in an area, industry or sector of the economy. It takes into account revenues, final sales and net subsidies, which are incomes to the business, as well as salaries, wages and dividends. The GVA is an indication of the economic activity that can take place in a certain geographical area, brought about by the establishment or operation of a venture. The GVA for the grant funded AP is expected to average at R 21 112 209.90 per annum. This excludes the GVA that could accrue from the respective businesses opportunities and


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this can only be estimated during phase 3 when detailed assessment of each opportunity is done. C.6.2. Jobs The ability to generate jobs is usually considered as one of the economic benefits for any economic initiative. It is anticipated that the proposed AP will generate direct jobs through the management and operation of the AH and FPSUs, as well as through the respective enterprises that will be established as tenants of the AP. It is also expected that the number of jobs will grow over the ten years. For example, as there is demand for good quality beef cattle, an initiative like the cattle breeding programme (which is only dependent on the dedication of famers and support from the AP) could be replicated, if successful, resulting in more jobs at the AH and the farms. C.6.2.1. Jobs created by the AP

The AP is expected to create 22 permanent jobs as per the staffing requirements. These jobs would include the following:

Qualified staff: 19

Grade 12 or lower level jobs: 3 C.6.2.2. Jobs created by enterprises

Table 68 outlines the jobs that could potentially be created by the different business opportunities. These estimates are only indications, as detailed feasibility studies for the respective opportunities have not yet been carried out.

Table 68: Jobs created at opportunity level

Business Jobs

Poultry abattoir 35

Broiler farms 150

Broiler hatchery 20

Hatching-egg farm 35

Livestock feedmill 15

Cattle farmers 100


Total 365


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APPENDIX D - FINANCIAL ASSUMPTIONS


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Assumptions for the financial model

Description Value Sources/Notes

1.Project ID

Project Type:

level of Analysis: Feasibility Study

Project Title Lejweleputswa

Project Classification: • New project

Depth of Analysis: Financial

Special Features: • Inflation= 7%

• Escalate first year= 0 times

• Stock model=By total

2.Planning Horizon

Month of Balance (month in which annual reporting needs to be done)

Construction phase • Beginning month & year=01/2017

• length=12 months

Production phase • length= 10 years

• length of start-up phase=months(included in above years)

• Reference year=10 (no of years after start by which payback will happen)

3.Products Name Start of Production

End of Production

Nominal Capacity

Products: Poultry abattoir 2018 2027 120 000 Broiler carcass

Broiler farm 2018 2027 120 000 Broilers - live

Hatchery 2018 2027 132 000 Day1 chicks

Hatching -egg farm 2018 2027 165 000 Fertilized eggs

Livestock feedmill 2018 2027 500 Ton

Cattle breeding and market linkages -

2018 2027 286 Weaners


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Weaners

Cattle breeding and market linkages - Cows

2018 2027 480 Cows

Wholesalers / retailers

2018 2027 10 000 Items

Transport - 10 ton truck for cattle

2018 2027 144 096 Km

Transport - 10 ton truck for Broiler and chicks

2018 2027 192 960 Km

Transport - 3 ton truck for Broiler meat

2018 2027 76 800 Km

Transport - 2 bakkies for eggs

2018 2027 19 200 Km

4.Currencies

Currency • Type=Local

• Name=South African Rand

• Abbreviation=ZAR

• Exchange Rate=N/A

5.Inflation

Inflation Rate: 7% for each year, except for first year(All costs and sales prices will be increased annually by this percentage)

6.Joint Venture Partner

Joint Venture Partner Not applicable

7.Discounting rate: 7%

Total investment: • Rate (%) = Use annually updated Calculation (middle rate first)

• Length=Automatic (Construction + Production years)

Total equity capital: • Rate (%) = Use annually updated Calculation (middle rate first)


For all Joint Venture Partners:

• Rate (%) = Use annually updated Calculation (middle rate first), unless specific partner(s) require a different rate



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8.Fixed Investments:

Fixed Investments: Description Supplier Depreciation Years (Use SARS Wear & Tear Rates)

Years of Purchase

Quantity Cost(ZAR) Total

Land Purchase

Site preparation & Development

Civil works, structures & buildings

AH administration building

50 Y0 1 R 2 989 650 R 2 989 650

FPSU1-Poutry Administration building

50 Y0 1 R 374 490 R 374 490

FPSU2-Cattle Administration building

50 Y0 2 R 624 150 R 1 248 300

Abattoir administration building

50 Y0 1 R 312 075 R 312 075

Hatchery administration building

50 Y0 1 R 312 075 R 312 075

Hatching-egg farm administration building

50 Y0 1 R 436 905 R 436 905

Poultry abattoir Contractors 50 Y0 1 R 2 209 035 R 2 209 035 Facilities required for the entire agri-park

Broiler farmhouses 50 Y0 25 R 374 490 R 9 362 250

Hatchery 50 Y0 1 R 4 005 130 R 4 005 130

Hatching -egg farmhouse

50 Y0 4 R 1 358 937 R 5 435 748

Livestock feedmill 50 Y0 1 R 1 934 557 R 1 934 557.01


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AH Wholesale / retail building

50 Y0 1 R 249 660 R 249 660

AH Fresh produce stalls

50 Y0 1 R 282 150 R 282 150

AH Warehouse/Workshop

50 Y0 1 R 748 980 R 748 980

R 29 901 005

Fixed Investments: Plant machinery & equipment:

Auction pens 10 Y0 2 R 165 000 R 330 000

Abattoir plant and equipment

10 Y0 1 R 2 058 666 R 2 058 666

Broiler houses 10 Y0 1 R 4 044 282 R 4 044 282

Hatchery plant and equipment

10 Y0 1 R 1 404 700 R 1 404 700

Hatching-egg farm houses

10 Y0 1 R 647 085 R 647 085

Feedmill 10 Y0 1 R 1 800 000 R 1 800 000

R 10 284 733

Auxiliary & service plant equipment:

Y0

Telephone connections

Telkom Y0 20 R 2 500 R 50 000 Telephone lines

Utilities (Electricity & water)

LDM rates Y0 1 R 7 500 R 7 500 Connection of electricity & water supply

IMS(ISO 9001/22000/ISO 14001/OHSAS 18 000)

Consultants Y0 1 R 400 000 R 400 000 Once-off

EIA Consultants Y0 1 R 3 200 000 R 3 200 000 For the AH & FPSUs

R 3 657 500


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Incorporated fixed assets(project overheads):

Pastel software 3 Y0,Y3,Y6,Y9

2 R 2 600 R 5 200

Microsoft Office software

Makro 3 Y0,Y3,Y6,Y9

18 R 3 999 R 71 982

Office furniture (per office)

10 Y0 18 R 7 524 R 135 432

Computer Makro 3 Y0,Y3,Y6,Y9

13 R 10 000 R 130 000

Telephone handsets - portable

Makro 5 Y0,Y5 20 R 599 R 11 980

CO2 fire extinguisher per unit

ADRE Tools

5 Y0,Y5 34 R 1 650 R 56 100

First aid kit - mountable box

ADRE Tools

5 Y0,Y5 14 R 800 R 11 200

10 ton Truck Man Truck 5 2Y0,3Y5 3 R 1 098 991 R 3 296 973

Forklift 5 Y0,Y5 5 R 448 695 R 2 243 475

Bakkie Nissan 5 Y0,Y5 5 R 235 000 R 1 175 000

3 .5 ton truck - Refrigerated

Isuzu 5 Y0,Y5 3 R 450 000 R 1 350 000

Till machine( warehouse and retail)

Makro 3 Y0,Y3,Y6,Y9

5 R 2 000 R 10 000

R 8 497 342

Preproduction Expenditure

Develop technical/training manuals

Consultants Y0 1 R 200 000 R 200 000

Technical & business training

Consultants Y0 2 R 48 000 R 96 000 Business + technical training (two days each)

Marketing & In-house Y0 1 R 150 000 R 150 000 During the


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roadshows inception of the project

Recruitment Recruitment agent

Y0 1 R 26 840 R 26 840 1% of skilled labour

Business registration Consultants Y0 1 R 60 000 R 60 000 CIPC , labour, SARS etc.

Quality systems Consultants Y0 1 R 100 000 R 100 000 For managing the production system

Cattle purchase Y0 1 R 45 953 361

R 45 953 361

R 46 586 201

Contingencies R 9 892 678

9.Production Costs

Indirect Costs: Description Years Quantity Cost(ZAR)

Utilities:

Water (Domestic) Y1-Y10 12 R 1 000 R 12 000 Admin buildings

Electricity (Domestic) Y1-10 12 R 5 000 R 60 000 Admin buildings

Fuel(diesel) Y1-10 12 R 6 000 R 72 000 For extension officers and maintenance staff

Maintenance

Spare parts consumed & equipment maintenance Y1-10 1 R 257 118.31

R 257 118 2.5% of total equipment costs

Royalties Y1-10

Labour:

General Manager Y1-10 1 R 650 000 R 650 000 Manage the agri-park operations

Personal Assistant Y1-10 1 R 240 000 R 240 000


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Shared services Manager

Y1-10 1 R 500 000 R 500 000 Oversee the agri-park operations

Technical/Operations Manager

Y1-10 1 R 500 000 R 500 000 Manage facilities

HR Co-ordinater Y1-10 1 R 380 000 R 380 000 Reception & admin

Management Accountant

Y1-10 1 R 380 000 R 380 000 Truck driver

Agricultural technician/Advisor

Y1-10 4 R 114 000 R 456 000 Lab testing & product development

Maintenance technician

Y1-10 1 R 300 000 R 300 000 To address all technical issues

Artisans Y1-10 3 R 240 000 R 720 000 Responsible for Marketing & promotion activities

Drivers Y1-10 5 R 92 000 R 460 000 Business support, develop opportunity BP & business development

General workers Y1-10 3 R 48 000 R 144 000 Facilitate all FPSU activities, including training & incentives

R 4 730 000

Labour overhead costs (taxes etc.):

SDL Y1-10 1 R 47 300 R 47 300 1% of labour costs UIF Y1-10 1 R 47 300 R 47 300

Factory overhead


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costs:

Safety clothing Y1-10 40 R 500 R 20 000 For all the agri-park staff

Kosher certificate Y1-10 1 R 37 000 R 37 000 Annual fees

Halaal certificate Y1-10 1 R 15 000 R 15 000 Annual fees

Quality management system

Y1,Y3,Y6,Y9

1 R 40 000 R 40 000 After every three years

Administrative overhead costs

Stationary Y1-10 20 R 500 R 10 000 per month

Accounting & Audit fees

Y1-10 1 R 60 000 R 60 000 Once-off annual fees

Bank Y1-10 12 R 1 000 R 12 000 per month

Internet & telephone monthly costs

Y1-10 20 R 3 000 R 60 000 per month

Security costs Y1-10 8 R 6 000 R 48 000

Landscaping costs Y1-10 12 R 2 500 R 30 000

Insurance Y1-10 1 R 952 693 R 952 693 1% of total investment

Marketing overhead costs:

Marketing & promotion

Y1-10 12 R 3 000 R 36 000 For exhibitions, website updates etc.

10. Direct costs


Description: Years Quantity Price(ZAR) Total

Y1-Y3 72 048 R 8.00 R 576 384.00

Y4-Y6 115 277 R 8.00 R 922 214.40

Y7-Y10 144 096 R 8.00 R 1 152 768.00



Y1-Y3 96 480 R 8.00 R 771 840.00

Y4-Y6 154 368 R 8.00 R 1 234 944.00


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Y7-Y10 192 960 R 8.00 R 1 543 680.00



Y1-Y3 38 400 R 4.80 R 184 320.00

Y4-Y6 61 440 R 4.80 R 294 912.00

Y7-Y10 76 800 R 4.80 R 368 640.00



Y1-Y3 9 600 R 3.20 R 30 720.00

Y4-Y6 15 360 R 3.20 R 49 152.00

Y7-Y10 19 200 R 3.20 R 61 440.00

11.Sales Programme

Poultry abattoir Years Quantity Price(ZAR)

Y1-Y3 60 000 R 39.00 R 2 340 000.00 Broiler carcass



Broiler farm Years Quantity Price(ZAR)

Y1-Y3 60 000 R 18 R 1 098 000.00 Broilers

Y4-Y6 96 000 R 18 R 1 756 800.00 Broilers

Y7-Y10 120 000 R 18 R 2 196 000.00 Broilers

Hatchery Years Quantity Price(ZAR)

Y1-Y3 66 000 R 6.15 R 405 900.00 Day-old chick



Hatching -egg farm Years Quantity Price(ZAR)

Y1-Y3 82 500 R 3.5 R 288 750.00 Fertilized eggs



Livestock feedmill Years Quantity Price(ZAR)

Y1-Y3 250 R 4 992 R 1 248 000.00 tonnes

Y4-Y6 400 R 4 992 R 1 996 800.00 tonnes


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Y7-Y10 500 R 4 992 R 2 496 000.00 tonnes

Cattle breeding and market linkages - Weaners

Years Quantity Price(ZAR)

Y2-Y5 286 R 3 000 R 857 400.00 Weaners

Cattle breeding and market linkages - Cows


Y6-Y10 480 R 8 000 R 3 840 000.00 Cow

Wholesalers / retailers Years Quantity Price(ZAR)

Y1-Y3 5 000 R 100 R 500 000.00 Item

Y4-Y6 8 000 R 100 R 800 000.00 Item

Y7-Y10 10 000 R 100 R 1 000 000.00 Item



Y1-Y3 72 048 R 10 R 720 480.00 km

Y4-Y6 115 277 R 10 R 1 152 768.00 km

Y7-Y10 144 096 R 10 R 1 440 960.00 km



Y1-Y3 96 480 R 10 R 964 800.00 km

Y4-Y6 154 368 R 10 R 1 543 680.00 km

Y7-Y10 192 960 R 10 R 1 929 600.00 km



Y1-Y3 38 400 R 6 R 230 400.00 km

Y4-Y6 61 440 R 6 R 368 640.00 km

Y7-Y10 76 800 R 6 R 460 800.00 km



Y1-Y3 9 600 R 4 R 38 400.00 km

Y4-Y6 15 360 R 4 R 61 440.00 km

Y7-Y10 19 200 R 4 R 76 800.00 km

12.Working Capital

Inventory •Raw Materials=30 days

•Work in Progress =1 day


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•Finished Goods 7 days

•Utilities=1 day

•Energy= 1 day

Description Value

Account Receivable • 60 days

Cash-in-hand: • Cash-in-hand-local=7 days

Account Payable: •Raw Materials=30 days

•Utilities=30 days

•Energy= 30 days

•Repair, maintenance, materials= 30 days

•Labour= 1day

•Labour Overheads = 1 day

•Factory Overheads= 30 days

•Administrative Costs = 30 days

•Direct Marketing Costs = 30 days

13. Sources of Finance (Default for most ECD Projects = Grant Funding, Loans could be included in Scenarios)

Equity, Risk Capital Joint Venture Partner Year Amount paid in

Total % of profits distributed

% of dividends Received(split between partners

None

None

None

None

None

None

14.Tax Allowances

Income •Tax rate=28 % (or use SARS rates for small business)

Description Value


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APPENDIX E - REFERENCES


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BC. (2016, March). www2.gov.bc.ca. Retrieved March 17, 2016, from www2.gov.bc.ca: http://www2.gov.bc.ca/gov/content/industry/agriculture-seafood/food-safety/meat-inspection-licensing/class-a-b-licences

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IFIF. (2014). www.ifif.org. Retrieved March 17, 2016, from www.ifif.org: http://www.ifif.org/pages/t/The+global+feed+industry


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KDC Trading. (2016, April 04). www.kdctrading.co.za. Retrieved 04 04, 2016, from http://www.kdctrading.co.za/chicken-farming-abattoir-kits.htm

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