Finance solutions for emerging farmers to become more innovative

As drought maintains its grip on farmers’ crops, emerging farmers face a double whammy as they battle to access finance without land ownership as collateral.

Photo by Dave Hoefler on Unsplash

The prolonged drought has exacted a toll with a negative impact on the yields of major summer crops this year. According to Statistics SA, the production of maize, soybeans and sunflower seeds for this year is expected to be down 13%; 16% and 29% respectively from last year.

However, drought impact aside, emerging farmers who do not own land find it near impossible to get a loan from a commercial bank. In his state of the nation address (Sona) last week, president Cyril Ramaphosa said that over the medium-term budget period, R3.9 billion had been allocated to the Land Bank to support black commercial farmers. But is this enough to address the financing challenges in the agricultural industry?

Narrowed margins and lower outputs

Requier Wait, head of economics and trade at Agri SA, says farmers face two general challenges. “The first is that farmers absorb price impact and cannot pass on cost increases to consumers. In the global context, there is increased competition, which places downward pressure on output prices. However, South African agriculture receives relatively limited government support, as compared to many other global competitors. This can be seen from the OECD’s Producer Support Estimate (PSE) figures. Higher input costs, for example, electricity and diesel fuel, cannot be passed on to consumers,” he says.

Wait explains that these absorbing these increases impacts on farmers’ margins, leaving them with no option but to improve their efficiency by achieving economies of scale, leveraging technology and adopting precision farming methods.

The second big challenge relates to dry weather conditions and areas affected by longer-term drought, which impacts output levels. Lower output, depending on market prices, can result in lower revenues. However, Wait notes that the impact of drought can extend beyond the drought period itself, for example lower yields for horticultural products in the following season.

Wait notes that in terms of loans in the commercial agriculture sector, the ratio of total farm debt to total farming assets is still favourable. “We are still seeing investment taking place, with emphasis on investment in machinery and implements as farmers attempt to improve productivity in order to sustain current operations,” he says.

Innovative funding models required

Dawie Maree, First National Bank Agriculture’s head of information and marketing, points out that the average production loan for a grain farmer that plants roughly 1 000 hectares of maize per year is R10 million a year. He admitted that offering loans to farmers who do not hold the title deeds to the land they farm remains a major risk for banks. Nico Groenewald, head of agribusiness at Standard Bank agreed. “There is significant room for growth and banks across the board need to find more innovative ways to increase funding to emerging- and in specific black emerging farmers. Agriculture and land policy certainty coupled with an effective disbursement of government grants to deserving farmers would further support banks safely leveraging balance sheets of emerging farmers,” Groenewald says.

Maree says FNB typically runs an overdraft type of facility that is renewable every year but in the case of farmers who don’t own the land they farm, there is escalated risk for the banks with little or no security. “Personal loans are an option but this is not ideal,” he says. In terms of the Banks Act, and the National Credit Act, lenders have to look at affordability and the ability to repay (the loan).

Blended finance a possible solution

Maree goes on to say that in many countries the government subsidises insurance premiums to assist farmers who want to mitigate the risk of climate volatility. “For example, in the US half of the insurance premium is subsidised, resulting in 85% of the crops being insured,” he says.

FNB is in the process of establishing a fund with both its CSI funds and development funds from the international community to assist farmers without security. Maree said at this stage, the timeline was not definite but hopefully, the fund could be launched within the next year.  “As the financial sector, we need to ensure that everybody gets financing at a reasonable rate that allows them to be profitable. We need to refigure our financial models,” says Maree. He says this includes developing more complex credit structures with blended finance to help with access to markets, skills and funding.

Blended finance is broadly seen as the combination of official development assistance with private or public resources, with the aim of leveraging development finance from other players.

Groenewald says that until recently the bank had a credit line in place to assist emerging farmers on an individual basis to apply for production credit and loans. However, Standard Bank has since changed its focus and has moved to collaboration with organised industry bodies who can also support emerging farmers with production finance and technical support. “This type of collaboration appears to be more effective to service a broader base of similar farmers and provides a framework for technical support too, limiting production risk. We hope to announce the next collaboration framework before the next summer planting season,” he says.

Standard Bank also recently joined forces with the University of the Free State and the Free State Dept of Agriculture to put together a comprehensive programme  training and equipping emerging farmers. “The Department has already identified more than 22 farmers for participation in the programme with the aim to move this up to 50 farmers. Our role is to provide financial guidance and ultimately consider financial assistance in the form of finance. The aim is to build this out to a broader audience once the project proves successful,” Groenewald explains.

Standard Bank is also working with an insurer on a combined project where the first applicant or farmer will apply for production funding with the insurer providing an insurance solution as part of the risk mitigation. Groenewald was not able to name the insurance company that is partnering the programme at this point, but said the programme should commence in summer this year.

*This article was first published on Moneyweb.

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