roy fujimoto, amanda hat, diego otarola, agustina sacerdote haas school of business, university of...

Roy Fujimoto, Amanda Hat, Diego Otarola, Agustina Sacerdote

Haas School of Business, University of California Berkeley

May 30th, 2012

P.E.A.C.E. Foundation: Establishing a Secondary-Tier Agricultural Cooperative Model in South Africa

Final Presentation International Business Development

Proprietary and confidential. Do not distribute. 2

Agenda for Today

• Introductions

• Project Objectives

• Project Approach

• Findings & Implications

- Qualitative Research

- Planning & Implementation

- Financial Assessment

• Q&A


Team Introductions

Roy Fujimoto Amanda Hat Diego Otárola Agustina Sacerdote

Tokyo, Japan

Before Haas• 7 years in business

development and project management, IT

• Intercultural Studies, Kobe University, Japan

Mexico City, Mexico

Before Haas• 5 years in marketing &

brand strategy consulting

• Marketing & Finance at The Wharton School, University of Pennsylvania

Central Valley, California Before Haas• 5 years in business

development, financial services

• Business & Economics, University of Arizona

Santiago, Chile

Before Haas• 4 years in investment

management • Assistant Professor at

Catholic University of Chile Business School


Project Objectives

• P.E.A.C.E. oversees a number of agricultural primary cooperatives across different regions of South Africa. These cooperatives are currently struggling to achieve scale and lack a go-to-market strategy

• Cooperatives’ ability to produce value-add goods is hindered by a lack of resources and limited access to processing facilities and distribution networks

• P.E.A.C.E. would like to understand what services and functions can be pooled at a second-tier level in order to take advantage of scale opportunities across primary-tier cooperatives

1

2

3

PROJECT OBJECTIVES

Create an implementation plan for a second-tier cooperative that:

• Commercializes value-added products and/or services

• Addresses institutional factors posed by the local social and political environment

• Provides a sustainable source of economic growth for South African rural communities


Our aim is to create a plan for P.E.A.C.E. that leverages global best practices and addresses the challenges posed by the local context

1 2 3QualitativeResearch

Planning & Implementation

Financial Assessment

• Benchmarking Exercise

• Qualitative Interviews• Farmers• Farm Managers• Agronomists• Academics• Local

Government Officials

• Financial Analysis & Conclusions

• Assumptions• Net Income &

Land Productivity Requirements

• Break-Even• Cash Flow

• Implementation Approach

• Key issues• Primary activities

• 4 – Stage Implementation Plan

• Objectives• Key Activities• Estimated Timing• Current Status

PROJECT APPROACH


We chose to study a number of cooperatives that represent a range of structures, operations and markets

Primary Tier

Local Reach

Third Tier

Multinational Reach

Mut Vitz

Not Pictured: e-Choupal

BENCHMARKING EXERCISE

ZAHVAC


At an overall level, the services provided by each structure increase in sophistication and scale

Tertiary

PRIMARY TIER

SECONDARY TIER

TERTIARY TIER

• Land • Labor for planting, growing and

harvesting• Investments in small assets• Access to basic funding

• Access to markets• Farm management

training• Capital investments• Bulk purchasing• Improved access to

technology• Access to credit • Market price data

• Access / expansion to markets (often international)

• Political representation and advocacy

• Major capital investments• Transportation / access to

distribution networks• Decision-making and

governance• Social impact• Investments in large assets• Market research

FARMING OPERATIONS BUSINESS OPERATIONS STRATEGIC PLANNING


6 Success Factors For Cooperative Development

Bottom-up Organization

Farmers proactively recognize the need and believe in the benefits of cooperative structures

Aligned Incentives

Cooperative provides compelling reasons for members to join organization, and customers to buy from it

Empowerment Through Education

Cooperatives provide skill-building training in farming and business administration and disseminate best practices

Product Marketing

Cooperatives sell their products under strong consumer brands driven by a social mission

Value Creation

Cooperatives play a critical role in creating value along the supply chain and expanding markets

Emphasis on Efficiency

Cooperatives strive to maximize efficiency through geographic proximity, supply chain management, and economies of scale

1 2 3

4 5 6

Corporate Governance

7Fair compensation and revenue sharing policies, organizational system of checks and balances


We’ve identified four primary institutional factors that impact the development and success of agricultural cooperatives

Members forming cooperatives have significantly varied levels of productivity, assets and farming expertise• Inefficient cooperative operations• Difficulty in achieving economies of scale

Perception of cooperatives as local organizations formed purely to serve the interests of the community • Overreliance on government funding • Lack of market orientation and business management

Lack of awareness and education around rights and responsibilities associated with joining cooperatives• Lack of compliance to membership laws • Members join with wrong expectations

• Set minimum standards for potential productivity and infrastructure as requirements for membership

• Position cooperatives as self-reliant, market-oriented enterprises

• Proactively identify cooperative candidates

• Provide mandatory trainings at time of enrollment

• Perform preliminary data gathering and evaluation on potential members

1

2

3

4 Unclear public funding application processes and guidelines• Inefficient allocation of government grants• Wrong incentive for cooperative members

INSTITUTIONAL FACTOR WAYS TO ADDRESS

















PROJECT APPROACH


Leveraging Global Best Practices

Bottom-up Organization

• Proactive identification of potential cooperative members

• Productivity assessment

Aligned Incentives

• Compensation / revenue sharing structure

• Pricing strategy

Empowerment Through Education

• Comprehensive education curriculum

• Mandatory training as part of membership agreement

Product Marketing

• Branding and packaging initiative

• Marketing communications plan

Value Creation

• Secondary cooperative mission

• Bulk purchasing • Marketing communications

plan

Emphasis on Efficiency

• Crop planting program and other standard procedures

• Bulk purchasing • Financial management

1 2 3

4 5 6

Corporate Governance7

FROM SUCCESS FACTORS TO ACTIONS

• Organizational structure• Roles and responsibilities• Revenue sharing policy


Implementation Plan

Phases & Objectives

Phase Feasibility & Standardization

Planning & Assessment

Structure & Governance

Implementation

Duration Ongoing 4 – 6 months 6 – 12 months 6 – 12 months

Objectives Ensure potential primary cooperative members are meeting minimum productivity and asset benchmarks

Establish mission for organization and identify operational needs of primary cooperatives and the most effective way to meet them

Define secondary cooperative management, revenue sharing and corporate governance

Build operational plans for key function, associated costs and timing

Key Strategic Areas

• Data Gathering• Definition of

Standards• Initial Evaluation• Existing Minimum

Standard Support

• Demand, Revenue and CostForecasting

• Financial Strategy & Management

• Stakeholder and Ownership Assessment

• Market Data Analysis

• Operational Needs

• Membership Participation

• Human Resources• Revenue

Distribution and Governance

• Operations• Member Education• Product Marketing• Community

Engagement

1 2 3 4

IMPLEMENTATION PLAN OVERVIEW


Phase 1: Feasibility and Standardization

Data Gathering and Definition of Standards

Strategic Area Key Activities Objective Timing Status

Data Gathering

Identify pool of potential primary cooperatives members based on geography

Gain solid understanding of potential primary cooperative members to proactively select those with greatest possibility of success

Ongoing

Gather necessary data for initial assessment: - Land ownership- Farm size- Infrastructure: irrigation,

warehouse, processing- Membership structure- Financial records- Services provided- Motivations and objectives

2 – 4 weeks

Definition of Standards

Define minimum operational standards for potential member cooperatives- Irrigated, cleared and fenced land- Evidence of potential productivity- Long-term objectives

Standardize primary cooperatives’ operations before finalizing membership to secondary tier organization

1 month

Discuss and reach operational standards agreement for primary cooperatives

1 month

Not started In progress Complete

ILLUSTRATIVE

















PROJECT APPROACH


Our financial analysis is focused on assessing profitability across the different tiers that form the cooperative system

Individual Farmers

Primary Cooperative

Secondary CooperativeFOR 10-YEAR PERIOD

• Break-Even Analysis• Productivity• Required hectares

• Cash Flows

• Funding Requirements

• Economic Profit

ANALYSESCOOPERATIVE SYSTEM


We leveraged internal and external data sources to model the financial performance of a secondary-tier agricultural cooperative in South Africa

GlobalBest Practices

• Crops Produced / Yields• Investments Made• Primary Cooperative Cost

Structures• Average Prices

SicabaziniProjections

ECIAfricaMarket Data

1

2

3

Mut Vitz ZAHVAC

• Services Provided• Investments Made• Secondary Cooperative

Cost Structures• Value Added

DATA SOURCES KEY ASSUMPTIONS


2012

F

2013

F

2014

F

2015

F

2016

F

2017

F

2018

F

2019

F

2020

F

2021

F

2022

F

-2,000,000

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

0

10

20

30

40

50

60

70

80

90

100

110

COOPERATIVE SYSTEM NET INCOME

Net Income Growth of Land Productivity

RA

ND

% I

ncr

ease

in

Lan

d

Pro

du

ctiv

ity

1st-TIER INVESMENTS& EXPENSES

2nd-TIER INVESMENTS& EXPENSES

• Land clearing• Fencing• Irrigation• Other investments and

expenses

• Trucks• Warehouse• Office management• Salaries, training

and investments in 1st tier cooperatives % Increase in Land Productivity

For a cooperative system to be sustainable in the long term, a secondary-tier organization must increase productivity by 28 - 30%


There is a minimum combination of productivity and hectares managed to ensure the viability of the secondary tier

INDIVIDUAL FARMER LEVEL SECONDARY TIER COOPERATIVE LEVEL

Productivity x Farm Size

Number of Farmers

RANDS earnedper farmer=

1 Calculate RANDS earned per farmer

2 Compare to opportunity cost (farming alternative)

3 Break-even productivity per hectare per farmer

Increase in Productivity 0% 20% 40% 60% 80%

Hectare / Farmer 0.58 0.48 0.40 0.35 0.3

Fixed Expenses / Inv

Total Hectares

Expenses per Hectare=

1 Calculate fixed expenses and investments per hectare

2 Break-even productivity per hectare

Increase in Productivity 0% 20% 40% 60% 80%

Minimum Hectares 251 202 166 140 120

2 Compare to incremental value generated by secondary tier cooperative


Cash flows both at the secondary and system-wide levels will be negative for the first 8 years, stressing the need for a long-term view

2012

F

2013

F

2014

F

2015

F

2016

F

2017

F

2018

F

2019

F

2020

F

2021

F

2022

F

-3,500,000

-3,000,000

-2,500,000

-2,000,000

-1,500,000

-1,000,000

-500,000

0

500,000

1,000,000

SECONDARY TIER CASH FLOWS

RA

ND

2012

F

2013

F

2014

F

2015

F

2016

F

2017

F

2018

F

2019

F

2020

F

2021

F

2022

F

-8,000,000

-6,000,000

-4,000,000

-2,000,000

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

COOPERATIVE SYSTEM CASH FLOW

RA

ND


Negative cash positions illustrate the need for funding, primarily in the form of long-term debt

2012

F

2013

F

2014

F

2015

F

2016

F

2017

F

2018

F

2019

F

2020

F

2021

F

2022

F

-20,000,000

-15,000,000

-10,000,000

-5,000,000

0

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

COOPERATIVE SYSTEMCASH POSITION

RA

ND

2012

F

2013

F

2014

F

2015

F

2016

F

2017

F

2018

F

2019

F

2020

F

2021

F

2022

F

-10,000,000

-9,000,000

-8,000,000

-7,000,000

-6,000,000

-5,000,000

-4,000,000

-3,000,000

-2,000,000

-1,000,000

0

SECONDARY COOPERATIVECASH POSITION

RA

ND

Margin (Value Added) - Expenses• Salaries• Training• Marketing • Other admin Expenses• Net Working Capital• Secondary Cooperative

Investments

Price of Goods Sold - • Cost of Goods Sold• Irrigation, clearing and

fencing Investments


Although the secondary tier cooperative does not become profitable for 8 years, member primary cooperatives begin to turn a profit earlier

2012

F

2013

F

2014

F

2015

F

2016

F

2017

F

2018

F

2019

F

2020

F

2021

F

2022

F

-40,000

-20,000

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

SICABAZINI: PROFIT / MEMBER

Co-operative 5 Co-Operative 1 Co-Operative 2

Co-Operative 3 Co-Operatie 4

Eco

no

mic

Pro

fit/

Mem

ber

(R

AN

D)

2012

F

2013

F

2014

F

2015

F

2016

F

2017

F

2018

F

2019

F

2020

F

2021

F

2022

F

-2,000,000

-1,000,000

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

SECONDARY COOPERATIVEREVENUE & NET INCOME

Net Income Revenues

RA

ND

Cooperative 1

Cooperative 2

Cooperative 3

Cooperative 4

Cooperative 5


Financial Analysis: Key Takeaways

1. In order for a secondary cooperative to be financially sound, all farms it serves should have a) access to irrigation b) cleared land and c) fencing before joining

2. Beyond basic infrastructure investments, land productivity and the creation of value (i.e. margins) are critical to long-term sustainability

3. Break-even levels at the primary and secondary level may be achieved through either a) larger farms or b) increased productivity per hectare. These break-even figures are not the same for primary and secondary cooperatives

4. The secondary tier cooperative will incur negative cash flows for 8 years, 5 years for primary cooperatives; consequently funding will be required at both levels

5. Assuming an adequate combination of investment, farm size and land productivity, secondary cooperatives represent a sustainable structure for farming and economic development in the longer term

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2

3

4

5


GEESE STORY


Thank you

roy fujimoto, amanda hat, diego otarola, agustina sacerdote haas school of business, university of...

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