January 26, 2022

By Ben Palen, Ag Management Partners LLC

Introduction

In Part I of our case study [see GAI News December 14, 2021], we addressed some macro level topics pertaining to the sub-Saharan part of the African continent, and at the national level for Zimbabwe. They included the following items:

~Large amounts of uncultivated, arable land.

~Substantial water resources in some areas.

~Sizeable labor force, but lacking in skills and training.

~Significant potential for GDP growth to come from agriculture.

~High cost (estimated at close to $90 billion), for importing food and agricultural products into the sub-Saharan region.

~High levels of land degradation.

~Outdated agronomic techniques and lack of access to ag technology.

~Political stability.

~Availability of capital for projects.

~Lack of risk mitigation tools that are available in other agricultural regions.

The Context

The Zimbabwean government was well aware of the above factors when it set forth its Vision 2030 about three years ago. The goal of becoming an upper- middle income society is premised on, among other things, an improved environment for investment, and greater engagement on the regional and international political stages. The tail winds behind Vision 2030 provide some good context for the topics addressed in this report. 

History is full of examples where some people with vision managed to find a way to turn a vision into reality. Such is the case with Dendairy, a Zimbabwean owned company that is the largest dairy products firm in the nation.  

The dairy sector in Zimbabwe has changed dramatically since the land reforms of 2000, and it is estimated that the dairy cow herd now numbers about 36,000, as compared to somewhere in the low 20,000s in 2010. As compared to a national demand of about 180 million liters of milk per year, domestic production is only 65-70 million annually. Zimbabwe used to be a major exporter of milk and milk products. Such is not the case now. Further, the cost of feed is very high, and its availability and quality are often uncertain. Some estimates suggest that feed prices in Zimbabwe have made the cost of raw milk about double that in nearby countries. Given that over 80 percent of the raw milk production cost is estimated to be connected to feed, this is a major factor in the viability of the dairy industry.  

Before the land reform in 2000, it was estimated that 95 percent of the country’s milk supply came from large dairies. Now, the sector features numerous very small dairies, and their lack of access to feed and capital, among other things, has led to milk production per cow falling from over 4,500 liters annually in 2000, to about 2,500 today. Instead of improvements in the dairy sector, and in the other economic sectors that are tied to it, stagnation has occurred. That has impacted the nation’s social and economic situations in the context of a more favorable political climate that is supportive of projects that will improve the nation’s standing in the region, and in the world.

Dendairy

In existence since 2004, Dendairy has endured a number of factors that have buffeted the national economy, and it has grown to a point where EBITDA is forecast to approximate US$10,000,000 in 2022 on revenues of over US$50,000,000. The dairy currently has about 350 employees, and 50 contract laborers. Upstream employment is estimated at over 4,000. The backdrop for this is that annual milk consumption in Zimbabwe is estimated at around 10 liters per person per year versus a World Health Organization (WHO) recommendation of 200 liters per person annually. In neighboring countries such as South Africa, annual consumption is about 65 liters per person. Dendairy is seeking to capitalize on the expected increase in the middle income class in Zimbabwe, and to create a number of other positive economic and social benefits in the course of that effort. 

Dendairy currently has some 2,500 acres of irrigated land near Kwekwe, the sixth largest city in the nation, with a population of about 120,000. This land is used for the production of corn silage, alfalfa, wheat, and some other crops, with much of the crops allocated for use as feed for its own dairy herd.  

The principals of Dendairy have gained perspective through their experiences over the last twenty years in the face of economic, political, and social challenges. Unlike some of the land development schemes that have been promoted in recent years in Africa by outside interests, what the dairy is seeking to do is fundamentally different – to build, from the ground up, a locally owned and managed irrigation development project, on about 12,500 acres,  with several themes in mind:

** Locally managed land, with about 500 acres set aside initially for the indigenous population for their own use. Dendairy will provide the land, water, and certain crop inputs for the local people in the area of the new project, encouraging them to produce food crops for their own use and for sale to others. Rather than a subsistence style of farming, the social focus will be on improving the economic and social lot of the local population. Technical advice will also be provided by Dendairy so that the users of the food plots can employ best management practices. 

** Creation of a national fodder bank so that the dairy industry in Zimbabwe has a reliable source of high quality alfalfa at a relatively stable price for the other herds. In this regard, discussions are underway between Dendairy, and a major global milk processor that has a significant presence in Zimbabwe for a financial arrangement that would help to ensure that that company’s raw milk suppliers have a reliable feed source, which also would help to ensure that the processor can continue to operate in the country.

** Improving the balance of trade. Zimbabwe has chronically had a trade deficit, and the agricultural/food sector is largely a part of the problem because of how  raw commodities and processed foods are imported.  Agriculture contributes about 17 percent of the national GDP, and there are opportunities within Africa and portions of the Middle East to gain market share from locally produced commodities and finished goods. In this regard, Dendairy is in discussions with one of the world’s largest hay exporters, for a transaction that would supply large quantities of alfalfa, and possibly other forages, to portions of the Middle East. There is a significant cost advantage for Dendairy as compared to, say, forage exporting regions of California. The reasons for such an advantage include costs of water, labor, land, and transportation. A letter of intent is being discussed with this exporter. 

** Job creation. Some 70 percent of the population depends on agriculture for a livelihood. This large project in and of itself will create several hundred jobs, directly and indirectly. There will be a strong emphasis on training and continuing education of that work force. 

 All of the above themes are within an overall focus on sustainability at every level of the project.  And all of them fit, in one way or another, into a key aspect of any African project—political stability. There is little doubt that the above items “check the boxes” when it comes to consideration of ESG goals and supporting those projects that can make a difference at so many levels. That begs the question hinted at in the title of this article—how do you make it happen on the ground? How do you go from idea to implementation? Dendairy is keenly aware of the perceptions surrounding investments in Zimbabwe, and they have sought input from a number of sources in order to anticipate concerns, and address them in a thoughtful manner.

The Operating Plan

Bringing a new parcel of land into agricultural production is always a challenge, no matter the location. In this instance, there are some key steps that have been quietly undertaken over the past two-to-three years by Dendairy. They include:

** Building a relationship of trust and support with the local community in the project area – this grassroots effort is at the top of the list for reasons that go to the essence of this project.

** Negotiating a multi-decade lease from the government on the land for the project. It should be noted that the President of Zimbabwe and the principals of Dendairy have built a relationship that goes back many years.

** Identifying a large acreage in a region of the country that has a climate well-suited for irrigated agriculture, with a relatively predictable band of temperatures and precipitation during the growing season.  At full build out, the site encompasses about 12,500 acres.  

** Site selection based on proximity to the largest dam and reservoir in the nation — the Tokwe Mokosi — with a capacity of 1.4 million acre feet of water. It should be noted that the water captured by this dam is runoff from rainfall that would otherwise run into the Indian Ocean. In other words, unlike some regions of, say, the western U.S., this is a replenishing resource that is not subject to other demands for usage. A filter station and pumping plant will be constructed on the river a few miles downstream of the dam, with the project acreage adjacent to the pumping plant.

** Ensuring proximity to rail transportation that leads to a port in Mozambique, with the intent of exporting alfalfa that is compressed into smaller volume bales for shipment.

Sustainability

 A major focus of the project is sustainable practices.  They include the following:

~Site soil mapping using a VERIS machine, to identify soils by texture and organic matter, followed by creation of zones based on those characteristics, and then soil sampling within the zones.

~Using cover crops after land preparation has been completed to stabilize the new land prior to planting.

~Precision application of fertilizer when needed based on variable rate recommendations derived from the soil test data.

~Focus on alfalfa for 80 percent of the farm to build soil organic matter and a strong ground cover to minimize the chances of erosion.  Other high-value crops such as cotton and citrus fruits will be planted using a small grain cover crop for the same reason of limited erosion from wind and water.

~Establishing benchmarks for monetizing carbon credits.  Most of the project site has never been farmed, and it generally has low organic matter.  There is a strong opportunity to earn carbon credits by agronomic practices that improve that organic matter. This will be monitored on a field level basis.

~State-of-the-art center pivot irrigation in most areas, using a LEPA (low energy precision application) system so that a high percentage of water applied actually reaches the ground, thus reducing evaporative loss. For certain specialty crop areas, drip irrigation will be utilized. A water budget will be created by field, based on soil types and crop needs, and then usage will be monitored as compared to said budget.

~Installation of a data gathering system—soil moisture sensors, weather stations, and a platform to pull that data together in a way that is usable every day by farm personnel, and for purposes of demonstrating to outside observers the farm’s sustainability practices. The Kwekwe farm is presently using the AgWorld platform which has been helpful in bringing a desired level of precision to recordkeeping.

~Finding the right balance between use of relatively low cost (relative to California and similar competitive regions) labor, and the need for mechanization to speed up certain processes.

~Use of on-site agronomists, supplemented by NDVI imagery, to monitor crop conditions by field on a regular schedule.

Many of the above practices are in place, or are about to be implemented, at the existing farm near Kwekwe. Dendairy is utilizing that project as a testing ground for certain practices, along with hardware and software that suits their needs, and is identifying certain strategic partners who have the tech tools to help Dendairy in its quest for success on the large project.

Risk Mitigation

There is risk mitigation inherent in the various sustainability and operating practices that we have just noted. Others that Dendairy has identified are as follows:

**A 3-5 year business plan and financial model.  Establishment of, and monitoring of success in reaching, Key Performance Indicators (KPIs).   Monthly financial reporting.  

** Management team with a mix of local and international knowledge.

** Training and education of personnel at all levels of the company, with a special focus on nearby indigenous people.

** Quality control/quality assurance. This is especially critical for building and maintaining long-term relationships with export customers, all of whom have tight specifications.   

** Being as self-contained as possible in regard to  equipment maintenance and repair, and maintaining sufficient inventories of key crop inputs so that delivery risk is minimized.

** Potential for electricity to be generated by wind and solar power at the site.  

** Transparency in providing information to stakeholders and the public at large.

Financial Aspects

Clearly, a project of this magnitude will require tens of millions of dollars in expenditures. Dendairy is fully aware of the challenges faced by any venture in Africa to get off the ground and has tried to address that point in several ways:

** Long-term relationships with key government officials that have been slowly built up over time. It is apparent to all interested parties that this is a project of national importance, and that demonstrating a strong government backing at both local and national levels is critical to its success.

** Building an operations and management structure from the ground-up, rather than from the top-down. Lessons have been taken from other efforts at ag development projects in Africa that were initiated by outside interests.

** Full buy-in from the indigenous population. A genuine commitment to improve their standard of living.

** Identifying buyers for its intended primary export crop—alfalfa—and procuring letters of intent from such buyers.

** Significant investment of its own funds into the project. An objective look at this project would rightly give this factor a good deal of weight, particularly in light of Dendairy’s major presence in the nation to start with, a presence which has continued through challenges that might have deterred others. 

Summary

This project has elements of a public/private partnership – something that makes it unique when one looks at the past couple of decades of African agriculture, and investments that have been made, or which have been proposed, in that sector. 

In the course of doing research for this article, this author has had discussions with parties inside and outside of Zimbabwe who are not involved with the project, but who are aware of it. Without exception, they have noted the things that distinguish this project from others that have been attempted in Africa in the past couple of decades.

They have highlighted the following factors:

~No relocation from their homes for the local outgrowers.

~More reliable income for the outgrowers due to irrigation and technical assistance.

~Better markets for the crops produced by the outgrowers.

~The establishment of a community forum to provide a way for interaction between project managers, financial stakeholders, and the local communities.

It is fair to say that Dendairy recognizes the challenges associated with raising capital for a project in Africa. Clearly, that is one of the reasons why it has taken many of the steps outlined above, so that the comfort level of potential investors is satisfied. But those steps are also in recognition of the social value of the project. That is a unique element that is rooted in the home-grown nature of the project, and most certainly that is at, or near, the top of the list of reasons when one considers the likelihood of a successful outcome. This is a project of national importance for Zimbabwe.  Indeed, its success will have ramifications for this entire region of sub-Saharan Africa.

ABOUT THE AUTHOR:

Ben Palen is a fifth generation farmer with experience in many aspects of agriculture, including projects in the United States, Africa, and the Middle East.  The focus on all projects is sustainable practices based on a mix of boots on the ground work and selected use of agtech tools.

** All views, data, opinions and declarations expressed are solely those of the author(s) and not of Global AgInvesting, GAI News, or parent company HighQuest Group.

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