The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.

Facebook caused skeptics to blink twice at the beginning of March when it purchased drone manufacturer Titan Aerospace in the hopes of using drones to bring wireless internet to Africa from near-orbital heights. This is not the first time internet from the skies has been proposed; Google announced in May 2013 that it plans to do the same with proprietary balloons. While network infrastructure is important to fuel the growth of the developing continent, drones in Africa may be more useful closer to the ground.

Loss in a Stagnant Industry

Sub-Saharan African economies depend on agriculture, which has been struggling to find comparable crop yields to other developing nations. Drones have the potential to offer immense productivity gains in agriculture – but that’s not an industry secret. Drones have already been used in Japan’s agriculture for decades, with the Yamaha RMAX drone being used to spray 30% of the country’s crops for more than 20 years. In fact, farmers in similarly developed nations have started to implement drone technology to monitor crops, often doing so illegally. With the US Federal Aviation Agency, Transport Canada, and the European Aviation Safety Agency banning drones through various regulations, drone usage in agriculture has failed to take flight. However, these regulations are non-existent in South Africa. With the absence of this major barrier, South Africa can reap the benefits from this astounding technology._

Compared to South America and Asia, which have seen cereal yields rise by 300% over the past 40 years, African agriculture yields have remained comparatively stagnant. Interestingly, while production of major crops such as maize and wheat have not varied significantly since 2000, sugarcane production has seen a persistent decline. This decline is most prevalent in South Africa, dropping 33% from 2000-2011. With sugarcane production accounting for 11% of South Africa’s labour force, the country has a lot at stake if outputs continue to drop. With lack of regulation on drones in South Africa, this revolutionary technology may have the ability to save the country’s sugarcane industry._

South African Spoilage and Productivity Problems

Spoilage is and always has been a significant challenge in the world of agriculture. The United Nations Environment Programme (UNEP) estimates roughly one third of all food produced in the world (1.3 billion tonnes) was lost or wasted in 2013. Yield loss due to pests and disease are particularly high in the sugarcane industry, with spoilage levels as high as 10% of total yield, making it the third most damaged crop out of Africa’s top seven field crops. With such a high percentage of yield and portion of profits being lost due to spoilage, it is imperative that African farmers improve their monitoring and disease prevention techniques to maximize the output of their sugarcane fields.

_Additionally, the sugarcane industry has been affected by poor farming practices across the continent, resulting in decreased productivity on a per acre basis. Farm owners often employ a spray-and-pray approach, where they buy up a large amount of land and spray intensive amounts of crops in the hopes of achieving higher yields. With fertile farmland becoming increasingly scarce, farmers need to focus on optimizing the yield of their property, rather than continuously buying up the finite land._

The South African sugarcane industry, along with the rest of the continent, has consistently lagged behind the rest of the world in regards to agricultural technology. Most global farms are highly capital intensive, while sugarcane farms instead are highly labour intensive, utilizing a large amount of manual labour to plant, monitor, and harvest crops. The reliance on physical labour can lead to higher levels of error, and greater inconsistencies in tending to crops. A key obstacle preventing technological progress is the current lack of infrastructure, specifically roads and access to fuel sources. When moving forward with new agricultural technology, farmers must focus on implementing changes that are independent of existing supporting infrastructure._

Making Drones a South African Reality

Drones have the potential to be the high-flying solution that the South African sugarcane industry needs. According to a Yamaha executive, drones similar to the RMAX could improve crop yields by 15%, a figure unheard of in the past decade. Additionally, implementation of these drones would not be not limited by the lack of South African infrastructure and can be implemented on large-scale farms. But while drones may decrease spoilage and increase productivity, the price and any potential learning curve for the new technology, still presents concerns for farmers._

The RMAX, Japan’s drone-of-choice, requires significant investment, training, and skilled labour which could restrict adoption in South African agriculture. This high investment is due to the drone’s specialized ability to spray crops with pesticides. However, the decrease in yield in the South African sugarcane industry stems from spoilage and productivity problems, which can be reduced through a more efficient monitoring practice. As such, investing in a drone that only monitors the crops, without the pesticide spraying abilities, would offer substantial benefits at a fraction of the cost. The LP960 is one such example, priced at $9,300 compared to RMAX’s $120,000 price tag._

Flying Towards an Efficient Future

The LP960 detects damaged crops by taking aerial images with a thermal camera, while also monitoring moisture levels, pests, and diseases. With motion, heat and infrared detectors, these drones are able to identify pest infestations and upcoming diseases before they spread, preventing wide scale crop loss. By identifying crop diseases before they spread, farmers can significantly reduce spoilage, increasing yield and productivity. Farmers can also spray a precise amount of supplements over the crops that are most in need, rather than an entire field, thereby reducing the number of crops that become unusable from over-spraying or under-spraying._

Additionally, productivity can be increased as the number of farmers’ labour hours needed to monitor the crops is reduced, allowing them to focus on higher value added tasks. By utilizing drones, a strategic shift can be made by using saved labour hours to instead analyze the information collected by the drones regarding the sugarcane, soil, and growing conditions; all information unavailable in the past. Access to this data may reveal significant improvement opportunities and trends in planting and harvesting operations that large-scale farmers can focus on in order to improve their farming practices in the long-term._

The Value Cane

The South African sugarcane industry is comprised of small and large-scale farmers. These farmers supply the sugar cane to larger multi-national milling corporations (MNMC’s), the largest of which are Illovo, TSB, and Tongaat-Hullet, all of which own their own sugar estates. Due to the fragmentation within the farming stage of the market, successful implantation of drones will have to be integrated from the top of the value chain. This presents an opportunity for milling companies, which could purchase fleets of drones and offer an operating lease program with the large-scale farmers. These MNMC’s will be able to offer the drones at a reduced cost, while also offering training to farmers that would be unavailable if the drone was purchased individually. While large-scale farms only account for 5% of the industry, they produce 85% of the industry’s crop yield. Given that scale, MNMC’s will be able to invest significantly less in drones on a per farm basis with the greatest possible gains in yield, eliminating the need for capital expenditure from cash-strapped farmers._

More Cane, More Coin

By offering drones to large-scale farmers through an operating lease, MNMC’s will see returns from incremental operating lease revenues and also increased crop yield volume due to improved product yields. Tongaat-Hullet (TH) for example values a hectare’s worth of sugar cane at approximately $1,000, considering the average size of a large-scale farm is approximately 1,200 hectares. The total value of cane produced by a large-scale TH customer is roughly $1.2 million. This implies that the breakeven point for the MNMCs would be reached at a marginal 0.77% increase in yield. This makes an operating lease an attractive proposition. Considering such a low breakeven point, TH experiences very little risk by investing in drones. Furthermore, the low cost on a per drone basis would allow for MNMC’s to risk very little capital on the project._

However, TH and other MNMCs will only be able to reap the benefits of this investment if large-scale farmers are willing to pay for the operating lease. The best option is for MNMCs to lease the equipment on an ‘as-required’ basis, circulating the asset between farms in the interim. Farmers would require the drones every six weeks to monitor the crops prior to spraying pesticides. If the MNMCs can share the asset among three farmers, and assuming a five-year lifetime, MNMCs could charge up to $65 per day before farmers would be better off buying their own drone. At that cost, the value proposition to sugar cane farmers is immense. Considering that the LP960 can scan a 1,200 hectares area in a day’s time, and that the total labour cost for preparing land reaches approximately $26 per hectare per year, should these costs drop by as little as 2%, large scale farmers would experience cost savings through the use of drones. This, compounded with yield increases, would further improve profitability._

While farmers worldwide seek the added benefits of implementing drones, the South African sugar cane industry may be one of the sectors where it can have the most drastic impact. The use of drones by single large-scale farmers is far too capital intensive and offers little benefit to the industry as a whole, given the upfront cost. By maintaining the control of the assets at the top of the value chain, MNMC’s can ensure substantial increases in product yield, while simultaneously passing cost savings onto its suppliers, the farmers. Through this model, the South African sugar cane industry can continue to grow, potentially reaching unforeseen heights in the future.

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