The way in which agrarian capital chooses to organise production is no accident. It tells one something about how capital is responding to the particular pressures inherent to a commodity market and the wider political economy. Capital must organise in ways that are profitable if it is to survive. In South Africa, the sharemilking model cannot be explained as a pathway to eventual farm ownership, as is commonly explained in New Zealand (Pepper, 2013; Gardner, 2011; DairyNZ, 2015).
My research reveals, that in sum, sharemilking in the South African context is a means by which to avoid tying capital up in costly fixed assets and land, as these are instead provided through government grants and communal land. This allows agribusiness to free up capital to
120 Although both these Amadlelo Agri farms are within the period of 3-5 years of operation, noted by most key respondents as a reasonable period to ‘settle a dairy farm down’.
121 When you look at sharemilkers operating white commercial farms in the Eastern Cape, the ratio is even less. On three different farms operated by the same sharemilker I found a mean ratio of 1 worker for every 62 cows with the sharemilker rotating labourers across nearby farms to save on labour costs. All of these farms had rotary dairy parlours except for one using a herringbone system, generally requiring more labour to milk, so variations in the factors and means of production are unlikely explanations for such radically different employment of labour. As one indication one white commercial farm under a sharmilking agreement was milking 800 cows, 320 has with a rotary dairy parlour milking 54 cows at a time (very similar conditions to Shiloh) but only hiring 13 people which is half the amount of labourers at Shiloh.
122 If sharemilking is to remain a key model in South Africa’s land reform, it is suggested that an in depth comparison is conducted of the relative benefits of Amadlelo Agri’s sharemilking model as opposed to Grassland Agriculture’s model.
rather accumulate large herds of valuable dairy cows. Amadlelo Agri benefits from a 10%
management fee and 50% of the remaining profits, while investing far less capital in movable assets as compared to the value of the land, irrigation infrastructure and milking parlour. The model is thus a good return on investment for the sharemilker. Other incentives include: access to scarce irrigated pastures (which provide a differential rent as discussed below), increasing political creditability within the context of land reform, and the opportunities for investment in other parts of the dairy value chain, which arise from sharemilking ‘empowerment deals’.
In many cases ‘main-stream economic logic’ states that strategic partners prefer to invest where there is private title. Besides difficulty in accessing credit, the main explanation for this is that tenure insecurity doesn’t provide adequate insurance on investments, especially for crops that require long-term investments e.g. tree crops (Bitzer, V & Bijman, J., 2014; Derman et al., 2006). For dairy, this restriction can be more easily overcome because of the nature of the commodity being produced, which involves twice-daily milking. If government invests in the fixed assets, as they have in a number of Amadlelo’s farms, risk is reduced for agribusiness, which can easily withdraw their cows or movable assets. The nature of dairy, as a commodity, provides a lot more manoeuvrability for agribusiness, as compared to say Macadamia where nuts can only be harvested after six years, or pineapples after two years.
However, in some cases these investments go forward in spite of the perceived risks, since these crops involve far higher profit margins than milk does, with its low and unstable producer prices. To make dairy investments profitable, additional investments must be sought in the extended value-chain.
Another declared disincentive to invest on communal land is that it creates complications for the JV business in terms of loan funding. For initial capital investment this conundrum can be easily overcome if government invests in the fixed assets for dairy farms, as was the case for Keiskammahoek and Shiloh. However, these grants seldom cover operating costs and once the five years of support runs out, if the farm wants to expand this may require taking out loans from financial institutions, which are generally hesitant to loan money without title deeds.
Even in circumstances where landowners have tenure security, for example at Middledrift, there still remains the challenge of accessing loan funding at affordable interest rates. A key informant from Amadlelo Agri explains some of the dynamics involved:
“The problem we have with all the projects in communal environment is infrastructure money, the land ownership or tenure model is such that there is no security on taking my money and putting milking infrastructure on someone else’s land. In Middledrift, it was possible because the community not government owns the land. But bar all the others, except Keiskammahoek where some land is owned, who is going to lend you money? Which bank would do it where there is no security of tenure?
However title doesn’t solve the problem, the problem is money at the right price first.
Title helps, but we borrowed money at Middledrift, but not at a good price… To set up these dairy farms a component of the infrastructure would have to be grant funding or a soft loan, there would have to be an element of subsidy somewhere in the system.
However, for operating capital you need funds to help you, for example, to survive through winter while your milk production is down. You can’t get those facilities with communal land because you can’t give the bank a tangible asset. So the only way we could possibly get small facilities is against our milk check. They may lend us R500, 000 and then if we can’t pay them back, they take the milk cheque back”.
If the discourse around strong disincentives to investing on communal land is so pervasive, then how do we explain the proliferation of investments in the former homelands? What is incentivising agribusiness to enter into JVs, if communal tenure or lack of clear property rights inhibits the ability to raise funds for example?
Goodwill and political pragmatism
A strong discourse on the part of Amadlelo Agri is the desire to actively participate in agrarian transformation, poverty alleviation and black economic empowerment, as this quote from a key respondent indicates:
“For Amadlelo to do business in a communal areas is a hot issue, there is no logic for it from a business point of view. From a social perspective, entrepreneurship, empowerment perspective-yes! But those are not things that carry a rand value. In fact they carry a negative rand value. The motivation is to do something for unemployment in the Eastern Cape and utilise assets that are just lying there deteriorating. To protect them and do proper conservation farming on them”.
To be fair, one should not rule out altogether that agribusiness may in part be motivated by
‘goodwill’. Primary research and interviews with an array of key informants does support the notion that there is indeed a great deal of ‘goodwill’ at work on these farms, whether or not one agrees with the underlying logic of the model. However, there are also incentives from a profit perspective in investing in communal areas, some of which were expressed by management at Amadlelo Agri. Joint ventures are also driven by a sense of political pragmatism. They are white agrarian capital’s strategy for surviving within a changing political environment, within the context of land reform.
Labour disciplining strategies
The specific social relations of production on these farms, in various ways seem to have a disciplining effect on labour. This is especially the case in the context of sharemilking arrangements where the landowning shareholders are simultaneously in the class position of labour on the farm they own, or have household members and/or extended networks of kin who are workers. There are three main ways in which I have seen the disciplining effects of labour on these farms.
Firstly, in many cases the presence of landowners among other labourers in the workforce seems to have an overall disciplining effect in the work environment, since the former is invested in the outcomes of their work through their share in profits. These landowning
workers are less likely to make demands on management, strike or undermine production in other ways. The quote below from a manager at Amadlelo Agri illustrates this point. However, it also indicates that they have not always managed to retain landowners and their relatives in the workforce. In some cases, this reflected the class position of these households. Along with their dividends, households tended to have access to alternative income sources that rendered a demanding job on the dairy farm unnecessary.
“At Keiskammahoek we find the children that are not of the farmers are the ones that stick around… the farmers children come and go. We want it to be the opposite way ...
It takes us out of labour strikes etc.”
Secondly, in some cases the agribusiness partner/ sharemilker may also have given workers shares in their holding company. These workers are not employed on the JV dairy farms but are employed in processing factories or on the farms of shareholders. This is the case in this model where the 50 white commercial farmers from Amadlelo Milk Producers have given 500 workers from their farms a 15.1% share in the Amadlelo Agri firm. As discussed in Chapter 3, there is a tendency under contemporary capitalism towards giving workers equity shares in a discourse of ‘empowerment’ but which in reality has a labour ‘disciplining’ effect (Minn, 1996).
Apart from the fact that sharing equity in firms is a requirement of BBBEE policies in South Africa, these types of arrangements also have the effect of obscuring class positions. This is clear when one looks at the shareholders of Amadlelo Agri. Who is capital and who is labour?
We can’t plainly claim that it is white agrarian capital exploiting labour or exploiting black customary landowners, which are the ‘beneficiaries’ in these JV deals. Black farm workers and black empowerment partners like Vuwa Investments are also shareholders of Amadlelo Agri.
Intended or not, these arrangements make disentangling fundamental class relations and class exploitation very murky and haphazard.
Lastly, at Grassland Agriculture’s Schoonfontein Farm, the landowners’ right to benefit from the income generated from the sharemilking arrangement is made conditional on their continued employment on Grassland Agriculture’s other dairy farms. In this case, they remain beneficiaries if they retire but not if they leave employment willingly or by dismissal. Their position as a landowner and membership on the farm operating trust is thus made conditional on their continued commitment as a worker. This seems to be, at least in part, motivated by the intension to ensure a stable and disciplined labour force.
Investing in movable assets is more profitable and less risky
“Amadlelo owns the cows, so if we stop tomorrow I could take my cows and go.”
(Respondent from Amadlelo Agri)
Investing in movable assets in the production process and in other parts of the value chain is believed to be both more profitable and less risky. As the quote above illustrates, it allows for more freedom in moving capital if farming ventures turn out to be unprofitable. Because of the
active rental market for dairy cows, these cows could easily be rented to other commercial farms. The analysis above indicates that the capital investment in movable assets was far less than that made by government in fixed assets. This also frees up capital to be invested in other parts of the value chain that can reap higher rates of profit. Amadlelo Agri, for example, has invested in processing, through COEGA Dairy.
As discussed above, accumulating cattle is a profitable investment and the rental market is allowing Amadlelo to grow its dairy herd on the JV farms. Amadlelo Agri plans to try and buy the full herd at Keiskammahoek and Shiloh, where they own 100% of the Keiskamma and Shiloh Livestock companies. For Amadlelo Agri, a key motivation in accumulating dairy cows is the tax benefits. If they continue to invest profits in purchasing dairy cows, they avoid the burden of taxes. If they can get to the stage that they accumulate sufficient surplus of dairy cows, they can actually lease their dairy herd out, which amounts to a 2% return on investment above the prime lending rate (Du Preez, 2011). Within the current volatile and unpredictable environment regarding land reform, the strategy of investing in movable assets is a pragmatic alternative for agribusiness.
Differential rent from specific conditions of land
As discussed in Chapter 6, pasture based systems in the milder coastal regions of the country have become crucial to farming competitively in the dairy industry. Access to scarce irrigation, particularly gravity irrigation where one doesn’t have to pay the price of pumping water increases profit margins. Keiskammahoek has gravity irrigation123 and at Shiloh there are plans to change to gravity irrigation, but government currently pays the price of pumping the water.
The following comment by a key informant from Amadlelo Agri is illustrative:
“Don’t underestimate the competitive advantage of gravity irrigation! To give you a simple story, the top 25% of dairy farmer currently would make R20 to 25, 000 per hectare, but pumping is R5000 per ha. So immediately we have a R5000 advantage because we don’t have to pump. On a 200ha farm that’s a million rand we don’t have to spend on pumping”124.
A differential rent is accrued, in contexts where differing soil fertility and varying applications of capital allow individual capitals with access to superior soil or water sources, for example, to produce at lower prices than the ‘socially necessary price of production’ and therefore generate a surplus profit. The price of production in agriculture is determined by the average socially necessary conditions of production. Therefore, those with access to above average conditions will make surplus profit, above the average rate of profit. Landed property would, however, usually intervene to appropriate this surplus profit as a differential rent (Patnaik, 1983). In other words, higher rents are usually paid for more fertile land. However, in the
123 This means that there are no electricity costs. Water comes from a high water source under pressure on its own without having to incur an energy cost.
124 However, the manager at Amadlelo goes on to qualify that, “Empowering people takes a lot of time and effort that the average competitive commercial farmer, fully established, passed down from father to son don’t have to invest in… so they have a massive leap on us”.
sharemilking model this doesn’t happen because ‘the land’ is the landowners’ contribution to the business.
The 50% of profits (after deduction of the 10% management fee), that the landowners receive, can be conceptualised as a rent. However, the differential rent from the soil quality and ‘free’
irrigation accrues to all the shareholders, including the sharemilker (agribusiness partner). In other forms of tenure, like a fixed rent, this surplus would instead be directed, more or less in its entirety, to landed property through a differential rent. In New Zealand, the strict separation of assets, sharing of the milk cheque rather than the profits, and the various types of share contracts (sharing different proportions of milk income in line with capital contributions) aims to ensure a fair return on capital investments. In Amadlelo Agri’s model, however, the sharemilker also benefits from the differential rent because of how they share in the profits from the JV business. The rent that they pay to landed property can in essence be seen as a form of absolute ground rent (discussed below).
The low rents that are paid to landowners in sharemilking agreements in South Africa can possibly be explained by the relative weakness of landed property in its class relation with agrarian capital. This relationship is further enforced by the state, which mediates these agreements. This cannot be explained by ‘communal tenure’, since the majority of Keiskammahoek’s landowners have private titles, and the share contract is structured in the same way in Shiloh where landowners have communal tenure rights.
Accessing capital intensive dairy production and vertical integration of the value-chain Entering into JVs facilitates access to government funding (for fixed-assets), allowing agribusiness to access a highly capital-intensive stream of agriculture. Without government investment it might be impossible to enter the dairy value chain and compete effectively. The fact that it took R66 million worth of government investment in fixed assets to set up Keiskammahoek farm, is evidence of the immense costs involved in setting up a profitable dairy farm (Whytske Chamerlain, 2015).
The potential political credibility gained in supporting black emerging farmers through JVs, also opens up opportunities for investment and access to funding in other parts of the value chain. This is demonstrated by Amadlelo Agri’s investment in COEGA Dairy through the JV farms. The low and volatile producer milk price in South Africa is a key motivation for agribusiness to find other ways to improve profitability. Increasing vertical integration of the dairy value chain enables firms to capture value at different points in the chain, and to disperse risks. Respondents from Amadlelo Agri also mentioned the incentive of markets that are becoming increasingly interested in sourcing products from black emerging farms at a premium. Amadlelo Agri already managed to secure a lucrative contract with Famous Brands, whose cheese is made exclusively from milk procured from its JV farms.