SENWES Integrated Report 2020 | Page 43

STRATEGIC AND OPERATING CONTEXT ECONOMIC OUTLOOK OF OUR SECTOR The sobering thought within any strategic conversation in the food and fibre value chain is the FAO Food Price Index, shown here in both nominal and real terms. 250.00 200.00 150.00 FAO Food Price Index in nominal and real terms 2002-2004 = 100 Nominal Real* The reality is that in real terms, we are at the same level as 1960 – 1970, which has the following consequences: � The supply side of food commodities is, for the most part, in an oversupply situation. � Farmers have become so effective through technology, management practices, size, genetic improvements and in some international production areas and subsidies, that they consistently produce more from less hectares. � It has the effect that the Input Channel is oversupplied and will continue to restructure and consolidate. This means that commodity prices of most grain and protein products will remain under pressure. Input Channel businesses will be under 100.00 50.00 - 1961 1965 1970 1975 1980 1985 1990 1985 2000 2005 2010 2015 *The real price index is the nominal price index deflated by the World Bank Manufacturers Unit Value Index (MUV). financial stress, which will lead to further consolidation of not only that sector, but also to much lower liquidity in the financial services sector and therefore agri-businesses in general. At primary producer level, the ability to produce at export parity will remain the norm and will also have a direct effect on marginal areas of production of grains and subsequently land values in those areas. 2020 FINANCIAL OVERVIEW OF OUR SENWES GROUP The Senwes Group delivered satisfactory results in a difficult environment and sector. The fundamental driver of the group’s results remains grain volumes. The constant and maintained dividend flow of the Senwes Group reflects the nature of the share value as a defensive equity in an investment portfolio. � Input Supply Channel 393,3% � The Input Supply Channel continues to perform better year on year, but the primary producer remains under financial pressure and consequently his capital expenditure is limited, which directly affected our equipment business. Both the new acquisitions, namely Staalmeester and Falcon, are performing well and according to schedule, given the specific market and client segments they target. Hinterland’s operational performance is much better than the previous year and the strategic overview of the partnership with AFGRI is constantly being reviewed. Bastion performed well, given timeous cost restructuring work done and is in the process of considering further acquisitions to add volume to its portfolio. � Financial Services Channel 19,6% � The Financial Services Channel continues to perform well, despite the challenges of lower commodity prices, client cash flow pressure compared to the previous year, and the lack of clarity on land ownership policies implemented by the government. Senwes Credit performed better than the previous year, but there is still some concern regarding individual accounts, where cash flow and balance sheet risks are involved. The Certisure Group paid specific attention to cost control, which reflects positively in this year’s results. The longer-term business model challenge remains to be addressed. � Market Access Channel 37,9% The Market Access Channel’s results are driven by volume and the lower result than the previous year concurs with the lower volumes in this business channel. Grain quality problems experienced by the client base of this channel, reflected throughout the grain value chain and had a negative financial impact on all concerned. Silo operations were influenced by lower volumes, Eskom load shedding, rural infrastructure decline and massive failure by Spoornet in respect of rail deliveries. Regional and geographic challenges relating to specifically grain quality, influenced the whole sector and losses were, and still are, experienced by role-players in this business segment. Tradevantage was also negatively impacted by Transnet Freight Rail infrastructure failure, particularly in respect of contract deliveries, while they also elected not to tender for specific contracts which posed inherent risks. ESC delivered the same results as the previous year, while Senwes Seed continued to deliver satisfactory growth and returns. Grainovation delivered better results than the previous year and acts as the consolidation link between Grainlink and Tradevantage. SENWES INTEGRATED REPORT 2020 41