Efficient and competitive financing is the lifeblood of SA’s commercial agriculture sector.
The summer season (2020/2021) has been hit by a financing crisis that will in all probability permanently change the financing environment of primary agriculture in SA. Various developments and factors have contributed to this crisis over the past couple of years, with the Covid-19 pandemic, subsequent lockdown and its effect on the economy creating the tipping point.
Data from the department of agriculture, land reform & rural development shows that SA’s primary agricultural debt ballooned from R70bn in 2010 to R187.5bn in 2019, in nominal terms. The four major commercial banks, together with the Land & Agricultural Bank of SA (Land Bank), hold just on 90% of that debt, with the Land Bank’s share alone amounting to 29%. Over this decade, the debt to assets (land, fixed improvements and livestock) ratio deteriorated from 27.2% to 36.3%.
Various factors have played a role, including years of major drought, a decline in real prices of grains and oilseeds, increased production costs, and sometimes also injudicious credit extension. However, at the heart of the crisis are the liquidity challenges facing the Land Bank after various downgrades from ratings agencies when it defaulted on obligations to its creditors-investors early in 2020. While the Land Bank is negotiating the rescheduling of its debts, the Treasury did provide a R3bn injection in the supplementary budget of June 2020 to meet immediate obligations.
The Land Bank can now only provide about 50% of its commitments to its clients through its service-level agreements (SLAs) with several agribusinesses. In its submission to the portfolio committee in parliament recently, the Land Bank indicated it would need to renegotiate the terms of these SLAs, including the quantum made available and the pricing of loans (read interest rate increase). Thus, farmers dependent on this source of financing are, or will be, at a degree of risk, and many have had to resort to alternative sources of financing, with mixed success.
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Of greater concern is the ability of the Land Bank to raise further capital on the capital markets, as has been the practice over the past couple of decades. Investors are adamant that the government needs to provide a 100% guarantee on investments, while the Treasury is only offering a 60% guarantee. The Treasury’s October 2020 medium-term budget policy statement included a R5bn allocation to the Land Bank for the 2021/2022 financial year, and a further R2bn for the next financial year, “to restructure and develop a sustainable business model”. While support for the Land Bank is welcome given the strategic nature of agriculture in providing food security, much uncertainty still surrounds the long-awaited restructuring plan, which includes reviewing its mandate and business model.
Given that the estimated shortfall in financing was a potential R7bn-R10bn for the summer season, and that commercial banks are risk-averse given the uncertainty brought about by the pandemic, it is clear that access to credit or financing will be considerably tougher in future, and that increased risk will be priced into higher real interest rates. In addition, a revaluation of assets and securities will be done to reflect realistic market values, not inflated values. A greater emphasis will also be placed on the client maintaining a positive cash flow for all the enterprises involved.
The availability of finance, specifically for agricultural development, has now also come under huge pressure as the Land Bank cannot roll out new loans. One positive is that the blended finance mechanism developed by the department together with the private sector creates a new and novel way to leverage private sector financing for development through a tiered support mechanism. There are also new private sector-led initiatives, such as the Agricultural Development Agency, being established to assist in agriculture development finance. These hold much promise to support bankable projects effectively.
While we may thus be in some crisis, there is an opportunity for competitors, or new entrants, in the agricultural financing market. Already there have been indications of SA commercial banks entering a market they have traditionally not served, while international banks (also specialist agricultural banks) and private equity institutions have shown a distinct interest in entering the market. We need to let the market do its work; competition and opportunity will drive our sector to become even more efficient and globally competitive.
• Dr Purchase is CEO of the Agricultural Business Chamber of SA.
