The Facts

You are a dairy farmer.  You farm the family farm as did your father and his father before him. You sell your milk to an incumbent retailer. You know your employees well as you know their parents and their parents before them.  Indeed, your employees reside on the farm and have done so since time immemorial.

On a Monday morning, and at about 10h00, you receive a visit from an official from the Department of Land Affairs. During the course of discussion he advises you that a land claim had been registered over the farm.
In response to your query as to the identity of the claimants, you and your employees representative are advised that the group of claimants comprises not only the full complement of your employees, but also a large group of persons about whom you and your employee representative have no knowledge. 

What do you do?

Legal and financial advice

In consultation with your attorney, you are presented with a vast body of common law and statutory provisions relating to the regulation of land ownership and reform in modern South Africa.

In particular, you are referred to the Constitution and in turn a vast of array of delegated legislation dealing with, and primarily in your view, rights in and to land, the protection thereof, the rationale for expropriation, and substantial detail concerning the subject matter of planning law.

In turn, your attorney discusses with you the various options and issues relating to inter alia the sub-division of agricultural land, the use of Trusts, the use of equity sharing arrangements, public private partnerships, leasehold rights in and to land, and the like.

What becomes immediately apparent to you is that whilst a vast body of remedial regulation is indeed in place, the issue is one of implementation.

Uppermost in your mind in this regard is the spectre of the failing farm syndrome. 

Analysis

Donating or selling land to your farm workers, by whatever means as suggested by your attorney or otherwise, is simply unhelpful.  Similarly, evicting your workers or relocating them to the local township is equally unhelpful. 

Indeed, you realise that the issue before you is not about colonisation, not about apartheid, not about land availability or politics, or even expropriation, but rather one about pure economics.

Your view in this regard was confirmed when you attended the land summit ("the summit") held in Stellenbosch during the course of late 2014.

During the course of discussions with various bankers presenting papers at the summit, they advised quite categorically that extending loans to would be or actual farmers who are unable to service the loans only serves to entrench and indeed aggravate the environment of grinding poverty.

Further, and as you were reminded, all banks, including the Land Bank, are commercial lenders and subject of course to the principle of risk and reward. Indeed, say the bankers, in the absence of underlying commercial viability, "no money"! Indeed, they say, grant funding is no different and increasingly so.

In your view, heaping blame on the colonists is accordingly unhelpful. Similarly, criticizing Government for failure to implement land reform policy is equally unhelpful. The availability of land is also not the issue.  There are many willing sellers of land. Government too has land available for development.

Rather, the issue is as to commercial viability and more simply, the economics of the matter. 

Why should government purchase farms which are not viable or not capable of becoming viable? Unless viability can be established and maintained there is simply no point to expropriation. With regard to the determination of a selling price, many professionals are at hand who value all manner of projects and services in the marketplace, on a daily basis. As in all cases, commercial operations are valued in accordance with known and tested criteria.  Placing the burden of valuation on the courts, as has been suggested, is simply what sportsmen refer to as a "hospital pass" or "kicking for touch".

Whilst not emotionally or politically satisfying, is the approach adopted by the bankers not correct?

If the bankers are correct, and we believe they are, is it not now time to deal with the issue, an economic issue, foursquare? Is it not now time to terminate the endless policy debate and address implementation, and do so from an economic perspective?

It is to this issue that we now turn.

The Fruitspot case

How do we make Land Reform economically viable? How do we make the agri-industry "sexy" to the younger generation? 

We do so by having regard to the chain of supply.

This issue was analysed by the Competition Tribunal of South Africa in the Fruitspot matter reported under case number 55/LM/JUL11.

Leaving aside the legal issues in debate, and for present purposes, we here deal with the subject matter of the Tribunal's analysis of the supply chain pertinent to the agri-produce market and we do so briefly as follows:

1. farmers have the following markets open to them namely:

1.1 the municipal market;
1.2 the intermediary market; and
1.3 the retail operator market

2. as at 2011, there were some 20 registered municipal markets in South Africa where agents sell produce to buyers at a commission of some 12.5%;

3. the Johannesburg market traded some 4.18 billion in turnover in 2011/12, being revenue in a market in which the farmer participates;

4. however, the real value in the market lies in the consequential markets, namely the beneficiation and retail markets, or secondary markets, being markets far larger than the underlying production market;

Of interest to us is the role of the intermediatary. The supply of fresh produce market, at the Johannesburg market, is dominated by 15 market participants whose task it is to purchase from the market and distribute to the incumbent retailers i.e. Spar, Pick n Pay, Checkers and the like. This end of the market, a market in which the farmers does not participate, is highly concentrated and highly lucrative;

Given competition between farmers, be it at the municipal market level, the intermediate or retail operator level, the farmer is reduced to a price taker and not a price maker, the latter being the prerogative of the market  participant next in line to the farmer in the value chain;

What strikes us of concern is that the farmers general lack of participation in the beneficiation or distribution markets, post farm gate, particularly given the relative absence of barriers to entry to these markets, effectively secondary or "downstream" markets.

In our view, this is the core issue at hand and hence the issue here to be addressed.

Addressing the issue

Having the regard to the demands of land claimants, what emerges is that the demand is centrally for small parcels of land, i.e. generally less than 5 hectares per claim.

What further emerges from a market analysis is that the formal market sector i.e. the incumbent retail market is not readily open to small scale farmers for reasons of both pricing and scale. 

What is however open to small scale farmers is the informal market, a burgeoning market fuelled by ongoing mass urbanisation. A visit to central Johannesburg, for example, bears this out.

What small scale farmers need to do is to collectivise and to do so as shareholders in appropriately placed outlets from where they can trade in the wholesale and retail space. 

Put more simply, this class of farmer needs to integrate vertically. Imagine if your local Spar was owned by and supplied by the farmer? 

In this event, the "mark up" (i.e. profit) would accrue to the farmer, not the middleman. In turn, and following this model, land reform becomes viable, indeed "sexy"!

Overview

As recently reported by the Minister of Agriculture, Forestry and Fisheries, it is estimated that more than 50% of young South African citizens between the ages of 15 and 24 are unemployed.  In this regard it was further reported that South Africa has the third highest unemployment rate in the world for person falling within this grouping.

Further, agriculture in South Africa contributes around 10% of formal employment, a relatively low figure compared to other parts of Africa.

Given ongoing mass urbanisation, better and more equitable use is needed to be made of the resources at hand particularly so to address long term structural unemployment. The market issue needs to be addressed. 
Repeatedly proposing that new market entrants address the market issue by entering into off-take agreements within incumbent retailers in the marketplace is naive at best. 

Similarly, repeatedly tweaking legal policy, and promising more, simply takes the matter no further. At best, and for present purposes, the function of the law is to structure and house relationships within an environment of regulatory even-handedness. The law cannot compel the incumbent retail chains to pay more to the farmer for product.  The law cannot compel bankers to lend at lower rates.

Conclusion

And so Mr dairy farmer, the lie of the land is clear. Take the most successful farmer in the valley and link him to the least successful farmer in the valley as co-shareholder in an appropriate wholesale and retail outlet owned by the farmers. 

In this way, place yourself, and your value-added products in the face of the consumer through appropriately situated and collectivised wholesale and retail outlets. Racial harmony and economic development will flourish.
In support of this approach, we need merely refer you to the "farm-to-plate" revolution taking place around the world.

Finally, take your workers with you, they have been loyal to you for three generations. Show a man a profit and you will have a fellow collaborator for life. It is indeed this latter approach we believe Adam Smith had in mind when he referred to the "Invisible hand" of the market place.

Duncan Okes is an attorney with offices in Gauteng and the Western Cape.  A copy of his website can be viewed at www.duncanokes.co.za.  All comments and participation will be appreciated.