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Posted on Friday, 27 April 2012 16:32

Sunny Verghese, Olam's founder and CEO

By Nicholas Norbrook

Olam's founder and chief executive explains how weaving close relationships with farming communities is at the heart of its expansion on the continent.

sunny verghese, founder and CEO of Olam International/ photo/ reutersIn 1986 a fresh-faced Sunny Verghese arrived in Nigeria, charged with building up cotton production for the Kewalram Chanrai Group. Living for years at a time among rural farming communities is an experience that Verghese now insists all top management undergo at Olam.

Proximity to the farm gate has shaped Olam's strategic direction away from its trader roots and towards a wide-ranging portfolio of interlocking upstream and midstream assets: from palm and rubber in Ghana to rice in Nigeria and Mozambique, with cotton ginning and wheat milling operations across the continent.

Also Read: Processing plants reap more for Africa

This is not a speculative bet on commodity prices: "We are investing upstream only when we believe we can develop a cost structure that is below the marginal cost of production," says Verghese. Brazil, at $1.30/kg, sets the cost of production for coffee worldwide. Olam found three places where it can produce coffee cheaper – Laos, Tanzania and Ethiopia – and is setting up plantations in those countries.

Many of the crops Olam produces are based on the outgrower model, where Olam finances seed and fertiliser in addition to guaranteeing a market. This requires high levels of trust. "We have provided $300m in microfinance in Ghana this year," explains Verghese. "It dramatically catalyses the supply chain." The low default rate on Olam's loans – less than 1 percent in Côte d'Ivoire – would delight most banks.

By helping small holders to form cooperatives and giving advice on best practices, Olam has been able to weave close relationships with farming communities – avoiding the free-rider problem that can dog companies that depend on outgrowers. Verghese also believes that fears of low small-holder productivity  are "hogwash". He says "In Africa, in particular, you need large-scale nucleus plantations, but they will still account for only 10 percent of production – 90 percent will be small holders."

Also Read: Palm-oil springs in Africa

 

This article was first published in the 2012 April edition of The Africa Report, on sale at newsstands, via our print subscription or our digital edition.



Last Updated on Friday, 27 April 2012 17:25

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