Small can also be beautiful for big player Olam
Singapore-based agribusiness focuses on agritech to improve financials and help sustain small-holding farmers
The food and agribusiness giant Olam International recently announced an ambitious plan to re-organize its business by establishing two new operating groups, Olam Food Ingredients and Olam Global Agri.
This strategy will unlock and exploit Olam’s long-term value and could lead ultimately to a pair of initial public offerings from the progressive industry player, says the firm’s chief executive officer Sunny Verghese.
Headquartered and listed in Singapore, Olam International currently ranks among the top 30 largest primary listed companies in terms of market capitalization on the SGX.
The firm’s 2019 results were at the upper end of market expectations giving Verghese some added influence going into the company’s annual general meeting scheduled for April.
Verghese will hope to use the opportunity to convince the firm’s major investors, which include Singapore’s sovereign wealth fund Temasek, of the merits of his vision.
The Asset recently met with senior executives of the firm to delve into initiatives the company is applying to stay ahead of its peers while cementing its place in its home region of Asia.
The complex multi-layered infrastructure technology Olam has constructed with its customers and producers has given the firm what it thinks is a robust competitive edge.
It now boasts substantial strength in its global origination, processing, trading, logistics, distribution and risk management capabilities.
“Agritech has a very critical role to play in transforming the supply chain, ‘the first mile’ as we call it. It enhances the value for the farmers, reduces wastage and helps educate farmers to adopt better practices,” says Suresh Sundararajan managing director and group head, global corporate services, at Olam International. “It also adds value to Olam.”
Sundararajan points out that that providing small farmers with cutting edge technology is vital to consumers as well and argues that small producers should not be allowed to go out of business.
Around the world he says there are approximately 500 million small-holding farmers supporting two billion families and if their way of life is not viably maintained and this production capacity is lost, it could in turn lead to serious food security issues.
To date Olam is directly or indirectly connected with more than 4.8 million farmers. The firm’s digital initiative was first rolled out in 2016, in part to deal directly with farmers and to cut out the “middle men” in the classic supply chain.
Olam now has around 450,000 farmers connected on the Olam Farmer Information System (OFIS). Its direct buying model has already digitized procurement at the farm gate level for more than 66,000 farmers.
The use of agritech, which allows Olam to deal directly with the producers, has seen a compression in price leakage. Through the app, the farmer receives real-time market prices for a specific commodity so he or she can sell at the optimum price.
With no intermediary, the bottom line is enhanced for both the farmer and the SGX-listed firm. By using agritech, Olam aims to keep the smaller and family-run farms in business.
The Olam Food Ingredients unit is also now benefitting as more health-conscious and environmentally aware consumers turn towards sustainable and natural food products.
With this trend likely to see exponential growth, the firm is ramping up its e-commerce offering in this value-added segment to increase its profit margins. Last year, this business generated about US$30 million in sales.
Sundararajan sees it as a powerful growth engine, and this year is targeting a “few hundred million dollars of sales” in online business. This will be driven by the firm’s strong position in high-value crops like nuts, coffee, cocoa and spices. And, the dilution of the intermediary channel, where possible via agritech, should be positively reflected in Olam’s financials.
Olam meanwhile continues to enhance its use of digitization and could be said to be revolutionizing the farming business. The firm’s sweet spot, and one of its unique advantages, is how it has deeply engaged with small and family-owned farmers.
Through its on-the-ground presence in emerging markets for more than three decades, Olam has cultivated a deep understanding of the market. By using smart censors, for example, it is also harvesting not only good quality crops, but masses of invaluable data that can be shared with the farmers and customers in its global network. The data, in turn, can be finely calibrated to run specific programs for customers in the last mile of the crop cycle.
A recent example Sundararajan gives is of a major household name chocolate manufacturer and substantial cocoa buyer who required a specific sustainability criteria to be met. Tapping the pertinent data, the firm was able to charge a premium price for this product for both itself and its network of small suppliers.
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