Where's the money in wildlife ranching?

The history of game farming and conservation in South Africa goes back more than a century, characterised by key events that influenced supply and demand, players, legislation and value chains as it stands today.

My first article Ever dreamt of investing in wildlife ranching? provides a helicopter view on the ranching industry in South Africa - if you have not already read it, maybe do so first. Follow-up articles will deal with investment and participation models. - like article to follow - subscribe for updates

Some species may have been extinct today had in not been for critical intervention.

Major James Stevenson-Hamilton was appointed as the first warden in 1902 of the then Sabie Game Reserve. In 1926, the National Parks Act was proclaimed and the reserve's name was changed to the Kruger National Park, acknowledging Paul Kruger's role in promoting the protection of the animals of the Lowveld since 1884.

1927 marked the dawn of governed conservation and ecotourism in South Africa when the first motorist entered the Kruger National Park for a fee of 1 Pound (R2 in those days). The Park placed South Africa on the map as a wildlife destiny and greatly contributed to increase international awareness and interest.

Today, South Africa is one of the world's most suitable countries for wildlife ventures. What puts us strides ahead of many other African countries is that we maintained a healthy balance in terms of the development and growth of the interdependent industry sub-sectors being - Hunting - Ecotourism - Breeding - Products.

Decline of wildlife

By 1950, our wildlife population radically reduced to the degree that some species were nearly extinct. Some events that caused this include:

• The drought of 1933 claimed thousands head of game across SA
• Outbreak of disease caused widespread culling of game to protect livestock
• Natural habitat suitable for game under pressure competing with farming
• Game was free roaming and of low value as landowners had no ownership
• Game farming was mostly love for nature, responsibility of conservation
• Income from game was limited and low frequency and volume
• Ecotourism was mostly directed towards public national parks
• Travel and logistics challenges deterred International touring visitors

Generally speaking, little commercial motivation existed to breed with wildlife.

The upswing

Around the 60's and onwards, game farming became more popular partly due to changes in financial, conservations, hunting and other legislation.

• During the 70's it was allowed to write off farming expenses against other income and many business people to use this perk. Not all these farms were economically viable and served as weekend retreats and a status symbol.
• 1991 - ownership of wildlife was passed onto landowners following amendments to the Game Theft Act. This generated more interest in the potential and profitability of game, creating a demand for more wildlife.
• 1994 - our constitution incorporated the promotion and protection of the sustainable use of wildlife. Focus was initially on affordable plain species shifting in recent years to include valuable rare game species and variants.
• 1999 - tax regulation changed to the effect that farmers were not required to recognise revenue from game farming as taxable income. This changed again later but certainly spurred many to expand at the time.
• By 2005 game farming was well established and exceptional growth of breeding was recorded from 2010 onwards, peaking around 2013/4.

Speculation that the wildlife industry is a bubble has been largely demystified as unfounded by industry experts. During 2015 prices stabilised, creating a more balanced and sustainable economy. Trends are that interest and commercial participation in the industry are on the rise with little sign of exit.

Demand to exceed supply for next decade

Demand and supply naturally differ from species to species and 2015 earmarked stabilisation in certain areas resulting in a drop in prices in some cases. Though discerning to some, various long-standing players in the industry consider this as a vital tipping point to ensure consistent long-term sustainable growth.

Species like Sable antelope radically declined during the past 2-3 decades. Though the Red List is yet to be published, the provisional conservation assessment is now sadly endangered, no longer just vulnerable.

Interest in plains species are on the increase as the international demand for venison are on the increase and trophy grade wildlife becomes more scarce. In the longer term, other African countries will hopefully attract foreign investment to boost tourism, creating a demand for restocking wildlife.

Hunting

Hunting generates much foreign currency contributing to +-30% of industry GDP, estimated at R9bn ($600m) per annum with steadily increasing growth. Around 55% of revenues are generated from wildlife and the bulk of the balance is associated with goods and support services necessary to fulfil the hunting trip.

Despite being criticised in green circles, much of the wildlife industry and game population would not exist today had it not been for hunting. Also important is to understand the critical importance of culling in conservation management to contain animal populations in proportion to the carrying capacity of ecosystems.

Ecotourism

The general definition of ecotourism is any form of tourism to an unspoilt nature destination and considered to be the fastest growing of all tourism sub-sectors. It generates 20% of global tourism revenues according to the World Tourism organisation. Considering South Africa's climate and diverse offerings, ecotourism likely contributes on a much higher scale than this global average.

Ecotourism creates many revenue-generating opportunities such as - adventure - wilderness - camping - travel - accommodation - hospitality - educational - scientific - curios - hiking - photography - birdwatching - 4x4 routes - etc.

Game ranches and farms alike are critical to our ecotourism as 80% of nature conservation is nowadays managed on privately owned farms and ranches. Wildlife, farm holidays and outdoor activities in recent years became increasingly popular.

From a local economic development perspective, this creates many opportunities for growth, infrastructure development and job creation. The capital layout required for land, infrastructure and operations present huge entry barriers.

The prevailing challenge is maintaining a balance between managing the increasing demand for ecotourism and associated commercial development - whilst minimising impact on the environment and ensuring ecological and cultural sustainability. Education is key.

Products

The potential for production, harvesting, processing and exporting game meat is exceptional but largely untapped. International demand is considered to be high and the primary issue reported is the lack of consistent and reliable supply. Biltong alone contributes in the region of R1.5bn ($100m) in annual revenues.

The nature of the game farming and hunting industry makes it difficult to fully comply to meat processing legislation given that abattoirs are legally not allowed to accept dead carcases for processing. More discerning is the inability of South Africa's veterinary services to maintain our foot-and-mouth disease-free export status.

It is anticipated that this sub-sector will receive a lot more attention in due course - the government has to its act together. Simply too many economic development and job opportunities are wasted as a result of not fixing this.

Breeding

Looking beyond the press hype on multi-millions paid for unique breeding wildlife stock, this sub-sector, in general, showed consistent and good growth over the past decade or two. Main revenues are generated from trade between breeders, sales to hunting outfitters and exports. Though auctions became more popular, the bulk still exchanges hands via private deals.

The main drivers behind this growth include scarcity, being highly specialised and exotic, the attraction of outdoors and to a degree the status going along with it - generating exceptional returns. The high cost of capital to acquire land, infrastructure, breeding stock and sustain operations as well as it being a long term return business model, makes it very exclusive being inaccessible.

Industry players are well educated with more than 50% having a university degree or higher diploma. The majority is male with at least half being over 50 years of age. Most entered the market through acquiring land and less than 20% through inheritance.

Breeding categories areas are mainly - high-value species (buffalo, sable, etc) - colour and morphological variants (black impala, golden wildebeest, etc) - plains species (kudu, eland, etc.) and common species (nyala, bontebok, etc.). The economics of each category differs significantly given the respective commercial outputs and other objectives.

Geographically, ranchers are spread throughout most of South Africa with the highest concentration in the “Bushveld” (Limpopo region). The region’s ecosystem and vegetation lend itself well to wildlife farming in general and is historically a popular game farming and wildlife destination, given it is located a few hours drive from Gauteng.

The economics of game breeding is based on progeny (multiplication by means of offspring). For instance, a Sable heard can increase 8 times or more over a period of 5 years. The examples below depict a 100% pregnancy rate and a male-female split of 50:50. The numbered bullet reflects the year of operations in which the calf is born.

In summary

Game ranchers can generate significant returns in the long run and there are potential tax benefits in the model, depending on commercial and revenue recognition practises. Generally speaking, the primary objective is to expand the herd and female progeny is often more valuable than male, given its reproduction capability.

During the early years, little or no taxable income is generated with the effect of an accrued loss. Recognising progeny results in an increase in wildlife stock and income at fair value with deferred taxation that only becomes payable once wildlife stock is sold.

Potentially very lucrative if you can scrape the cash and know-how together

In my next article, I’ll be delving into more detail on models how to enter the wildlife ranching industry without the need to fork out multi-millions and importantly doing so at manageable risk.

To learn more about our Wildlife Ranching initiatives and programmes - visit www.ukuma.co.za