Free State Maize: Securing the Best Deal

In recent years South Africa’s farmers have enjoyed the benefits of technological advances that have significantly improved crop-growing conditions. Helping to manage both the financial and farming environment, Free State Maize (Vrystaat Mielies) has become an essential element to South Africa’s grain market.

The company is a grain trading company in the agricultural business sector, operating with a vision is to enhance the value of grain traded on stock markets.

Free State Maize (FSM) was founded in 1996 as a grain trading company, but by 2001 had entered the input financing market by financing farmers to produce grain. Today the business offers a range of financial products, lending money to farmers who pay the loan in grain, with Free State Maize helping to ensure they get the maximum value for their grain on the market.

The company also operates a growing subsidiary called RSA Agri, who buys in with existing farmers.

023aIn 2012 Profert Holdings bought shares in FSM and is today a majority shareholder in the company with the management of Free State Maize and Land Bank as minor shareholders. Adriaan Snyman, Managing Director at FSM, takes up the story:

“FSM has the skills to help farmers to get maximum value for their grain on the market. How do we do it?

“There are several ways: firstly by financing grain purchases. We lend farmers money to produce grain but they don’t repay the loan in money, they pay it in grain. We manage the value of the grain to its maximum so that the farmer can pay off the loan as easily as possible.

“Secondly, FSM and producers farm together. We have a subsidiary, RSA Agri, where we own 70 per cent and Profert 30 per cent. RSA Agri buys in with existing farmers. In this way we and Profert help the farmer to perform better, to increase his net farming income by lowering input costs and increasing output, i.e. the value of the grain, and we use Profert’s ProGro Programme to add value so that the farmer can produce more tons per hectare.

“We are headquartered in Potchefstroom, about 120 kilometres south west of Johannesburg. We have around 100 permanent employees in the Free State Maize group, including a number of relationship managers who are based around the country. At harvest time we usually take on an additional 150 temporary workers in the group.”

Snyman says that the company owns approximately 4.6 per cent market share of South Africa’s grain and works with 80 farmers spread across 7 provinces (but none in KwaZulu Natal or the Western Cape and Eastern Cape). Most of the farmers producing grain for FSM are located in Mpumulanga, the North West and Free State.

During 2012 the company turned over roughly R1.8 billion, as grain prices settled down. Increasingly, FSM is benefitting from its relationship with Profert Holdings, who have been involved with the business for just under two years:

“We are the market leader on two fronts: our financing products are the best on the market. We have creative financing products at very low prices. We don’t raise fees on inputs bought by farmers through our financing products. Another advantage is that we’re not prescriptive on where to buy. Farmers can buy inputs wherever they want,” states Snyman.

“That’s how we positioned ourselves – a market leader with good products. It’s the same with price and risk management. FSM manages grain value in portfolios and here we are market leaders. We endeavour to end in the top 75 per cent of the price spectrum. If we end up there, no customer will be dissatisfied with the price he fetches.  The benefit is that the farmer can relax and focus on his farming activities. We absorb the pressure by looking after the price management of the farmer’s grain.

“In 2010 our management and Profert met to make an offer to buy FSM. Management and Profert succeeded in buying FSM and in the process Land Bank, the financier of FSM, also entered and declared they also wanted to own part of the capital issued. So today FSM belongs to Profert as a majority shareholder, to the management of FSM and to Land Bank.

“Various synergies between FSM and Profert benefit both parties. Firstly, Profert is in the input supply business. So FSM and Profert don’t compete although we both do business in the agri sector. Profert sells fertilisers on roughly 700,000 hectares of maize, while FSM finances inputs used for maize production. So we have a big advantage in financing Profert debtors to produce maize.

“The second benefit is that Profert owns facilities in Durban harbour as well as mixing plants in the interior. Some of the mixing plants are converted to reception points for grain from where the grain is transported on the return trip to Durban, fertiliser from Durban to the interior and maize on the return trip to Durban. It’s a huge competitive advantage to get maize so cheaply in Durban harbour.

“Another synergy is that Profert has 120 agents all over SA, so FSM, via Profert, has a network of 120 “footprints” of people to roll out our products and services in the field. This is a huge benefit too.

“Profert is also a grain consumer, for example the FeedPro feed plant needs maize and FSM is instrumental in managing maize purchase hedging and secondly to physically deliver the maize. One of the main benefits of Profert, which isn’t visible, is that Profert understands the FSM business environment.

“On Directors’ level, where investment decisions are made, it’s a major benefit to have people who know and understand your business.”

That synergy between the two businesses further strengthened in May, when FSM opened a new bunker silo in the eastern Free State. The site is capable of storing 50,000 tons of grain and is located close to the border with Lesotho (where the company has a good presence) and also has good accessibility to Durban.

“We lease the site from CMI and the silo has given us access to our own storage facility, from where we can trade and procure – this initiative will enable us to trade more effectively locally,” Snyman affirms.

The seasonality of FSM’s business can put a strain on cash flow and the ability to store vast quantities of grain provides the company with the opportunity to sell “out of season” – generally between October and February, which of course helps to generate additional revenue across the calendar year.

Whilst storage space has an important part to play in FSM’s success, the role of technology cannot be overplayed, as Snyman explains:

“Technology plays a very important role both in the production of grain (we make use of the latest seed technology from international seed companies) and in our financial activities. We make use of actuaries (we actually employ three) for hedging, whilst IT is crucial when it comes to communications through the ProgGro Agronomist system, which is programmed into FSM and allows farmers and relationship managers to provide real-time data from an exact GPS in a field, providing soil, temperature and fertilizer data.”

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Snyman is very aware of the risks associated with crop failure, particularly given FSM’s reliance on grain as repayment on loans. He says that Profert’s expertise helps to reduce risk through its ProgGro programme, stabilizing production in normal years and helping to enhance crops in better years.

“We aim to mitigate our risks in two ways: the farmer has to repay the loan and takes out an insurance policy, so if the crop fails, the value of the loan is covered.

“We also hedge the grain we produce in a series of options. We visit the farmer on a monthly basis to determine the size and condition of the crop – and we produce three reports: an emergence report (3 weeks into the operation), a progress report and a crop estimate report. We use these reports to assess change on the exchanges and we operate a very cautious approach.”

Snyman suggests that equity poses a big challenge for the business, as it looks to grow its RSA Agri Business over the next few years and believes that the introduction of land funds – where people can invest in land, may offer an opportunity to bolster revenue in the future.

“On the financial side, we are constantly looking to launch new innovative products and we have just introduced another 6 services after extensive market research,” he states.

“South Africa currently exports around 12.5 per cent of our grain although that figure has a 5 per cent variable from year to year. Profert’s involvement has changed our role in the market as we are now perceived to have a big brother in the market and that in turn has given us more access.

“We are able to make use of Profert’s fleet (important given FSM transports around 70,000 tons of grain each month) and their access to the Port of Durban means that as they bring fertilizer from the Port to various inland points, they are then able to transport our grain to Durban on the return journey.

“We would definitely like to open up the Western Cape,  KwaZulu Natal and the Eastern Cape and we will look at ways to grow our own grain farming activities (the company owns just shy of 10,000 hectares), subject to raising sufficient capital.

“In terms of managing the farmer’s grain and prices, we are the only company in South Africa of our kind. Our Intellectual Property gives us an advantage and I’m very excited about the future, especially in collaboration with Profert.

“Firstly, there’s the possibility, and it’s already happening, that FSM shows a phenomenal growth. On a year to year basis we more than doubled our debtors’ book. We tripled our grain book within a year. FSM has a value in the company which is the following:

“We don’t talk, we deliver”- over the next five years we’ll deliver growth, profitability and strong synergy with Profert,” he concludes.