Seed Business Scope and Growth

John MacRobert, 2024

The number of seed businesses in Africa is increasing. In the last forty years or so, many governments liberalized their seed sectors allowing private companies to engage in seed production and marketing. Initially, the larger seed companies, some of which were state-owned or state-sanctioned, took up their independence and grew rapidly. Then, more recently, entrepreneurs have taken opportunities for supplying good seed to farmers and established new businesses in virtually every country. ?Furthermore, Non-Governmental Organizations have promoted local seed businesses based around farmer associations, cooperatives, or small enterprises. This is all good and is increasing the availability of seeds of diverse crops and varieties to farmers. A question that comes to mind, though, is how should these developing companies scope their portfolios and grow their business?

Market Growth

A generally accepted premise is that a business should grow. This growth may be considered in terms of market size and profit. The need for market size growth is unquestionable in most African countries where the use of improved quality seed ranges from near zero up to ~90 % depending on crop and seed sector development. For example, with crops such as Bambara Nut or Pearl Millet, most countries have very poorly developed commercial seed supplies, whereas maize seed supply from private companies may vary from 85 % in countries like Zimbabwe and Kenya, to less than 5 % in D.R. Congo and Madagascar. Vegetable seeds are almost entirely obtained from commercial seed companies, and therefore this article refers principally to field crops.

Growth in a seed company’s market may be achieved in two ways: gaining greater market share by displacing the existing market shares of competitors, or displacing farmers’ own seed systems with certified seed, or both. In a way, these are the same since farmers’ own seed systems are a kind of competitor to the formal seed sector. One may argue that replacing farmers’ seed systems is retrogressive because it results in the loss of local varieties and diversity of germplasm. This is seen, for example, where maize hybrid seed has replaced indigenous crops such as sorghum, millet, and cowpeas, because maize hybrids are higher yielding, and easier to process and market. Furthermore, when large seed companies market one or few [so-called cash-cow] varieties on a wide scale, there is a loss of genetic diversity of that crop in farmers’ fields. One way to mitigate this is through encouraging the development of many local seed businesses that produce and market local varieties or a range of improved varieties of many crop species adapted to particular regions.

The growth in a company’s seed market may be with existing products or with new products or both. Often, there is a tendency to increase the portfolio of products sold to meet the diverse market needs of the customer base. This increase in the number of products sold brings with it increased complexity. The seed production process is lengthy and detailed, and a business can quickly lose focus and order with many products. Of course, diversity is paramount, but so too is efficient operational systems, and so a balance must be achieved between diversity and simplicity. My observation is that large companies tend to focus on enlarging markets with few products for economy of scale, which I think is less than ideal at the farm level. Hence, again, I propose a better way is to promote many small seed businesses that market a range of crops and varieties, even if individual companies are relatively specialized in few crops and few varieties. The important thing is to have a seed system that provides farmers with a wide choice of quality seeds of crops and varieties that maintains diversity, enables resilience, and meets output market requirements.

Profit Growth

Growth in company profits is largely a function of how the business can scale its market, while maintaining consistent gross margins and containing overhead costs. The gross margin is the difference between income and cost of goods sold, which generally remain proportionate with scale. However, increasing scale usually requires more infrastructure, more land and growers for seed production, and access to larger working capital needed to fund operations. Overhead costs remain fairly constant within a certain range of production volume but may jump significantly to a new level when production grows beyond that range into a new higher range. This occurs because greater production requires extra skilled personnel, more operational activities, such as vehicle use and marketing, and a larger administration system.

A question is, how much profit is acceptable? This is an open question difficult to answer because it is a function of many things. At the core, though, is the expectation of the business owner(s), and what the intended uses of the profit are. A generally accepted profit margin is around 25 % of gross income, and thus the actual monetary amount depends on turnover. Every business should have an expectation of what the monetary figure should be for debt-servicing, reserve building, reinvestment, and dividend extraction. Large seed businesses, particularly those that are not owner-managed, have various shareholders who expect direct returns on their investments. While they may re-invest some profits into the business for development and growth, shareholder dividends are naturally a priority, but these tend to remove the profit from the community in which the business operates. On the other hand, small local businesses that are owner-managed will likely retain profits in the community in which the business operates, and this can have a multiplier effect in community development. This again highlights the benefit of promoting owner-managed small seed businesses that operate in local communities.

The Limits to Growth

Growing a seed business takes time and requires perseverance. Seed business is intimately engaged with nature, and nature has its ways to disrupt or multiply growth. Thus, the risks and opportunities of natural events must be built into the market and profit growth projections and activities. While profit may grow by constraining and reducing costs, generally, profit grows most with increasing market size. To grow a market requires increased production, and this is where seed companies often struggle.

Increasing seed production requires time, capital, land, and growers. Time is needed to multiply the seed through the generations from Breeders, Pre-Basic, Basic to Certified Seed. Hence, it takes two to three seasons to achieve saleable seed, and this presents risk and sunk costs. When the multiplication process starts from Breeders Seed, the company needs to have confidence that it will be able to sell the Certified Seed in the future, and who knows the future? Hence, seed companies are often cautious in the early stages of new product introduction. In-house Early Generation Seed (EGS) production also requires working capital, with no immediate return. The return only comes with the sale of Certified Seed, and while this is potentially extremely high relative to the cost of EGS, seed companies often fail to make sufficient investment in EGS and so limit the early growth potential of new products. In the case of public varieties, EGS supply from the public sector may be insufficient and costly, or poorly planned between the seed company and the supplier, thereby also limiting growth potential. Initiatives such as Qualibasic Seeds and Ecobasic Seeds are trying to address this issue, but the model is still to develop for a wide range of crops and varieties. Hence, it is better in the long-term for seed businesses to take control of their own EGS supplies.

Finally, land and growers are often a constraint to the growth of a seed company. For example, for hybrid maize, the production of 1 t of Certified Seed requires about 0,25 ha, whereas for beans, groundnuts or cowpeas, the production of 1 t of Certified Seed requires about 1 ha of land. Thus, to produce 100 t of Certified Seed of maize requires 25 ha, but for the legumes noted above it requires about 100 ha. Many small seed companies start with their own (usually small) land holding, and growing seed on that land is manageable and cost effective. But when the production requirements exceed this available land, contract growers need to be engaged, and this presents a host of problems that may limit growth. For example, do the farmers have sufficient skills, isolation, resources, and organization to be competent growers of seed, and does the company have the resources and support services to manage and pay the growers, and will the added costs of contracting growers impact negatively on profits? These issues need to be addressed for a company to grow its seed production capacity. While large-scale farmers who could produce much seed exist in many countries, this is also not the case in many communities. Furthermore, large-scale farmers are often not interested in certain crops that have low yields, production difficulties or that cannot be mechanized. Hence, for many crops, small-holder farmers organized into producer groups by local seed companies is a better model for growing the supply of improved seed of diverse crops and varieties.

Conclusion

With the increasing demand for food, feed and fiber in Africa, there is a corresponding need for an increase in crop and forage production. To support this, the supply of quality seed of improved and adapted varieties is required, and this will come about by the proliferation and growth of seed businesses. While this is a good and necessary development, somehow it should not be at the expense of crop diversity and loss of local genetic resources. Large seed businesses are able to meet widespread and large market demand for seed, but they tend to dominate with a few highly profitable crop species and a narrow variety portfolio. Small seed businesses, on the other hand, can exist profitably in local communities by meeting the seed needs of context-specific crops and varieties, with less impact on genetic erosion, and may even support farmer variety maintenance and utilization. However, small local companies are often constrained in their growth potential by resources and market scope, but this can be compensated for by the proliferation of small seed companies in numerous communities. Some small seed businesses may be able to grow, others not, but all can be profitable in their own right and be important components of the African seed scape.