Financing Farming During A Drought

Finding money for agriculture during a drought is difficult. The South African agriculture sector, farmers and financiers alike, is facing a perfect storm, according to Prof Sanlie Middelberg of the School of Accounting Sciences at North-West University. She spoke to Annelie Coleman.

WHY DO YOU DESCRIBE THE CURRENT SITUATION FACING THE AGRICULTURE SECTOR IN SOUTH AFRICA AS A ‘PERFECT STORM’?

A ‘perfect storm’ is defined as a bad situation, aggravated by a combination of adverse circumstances. Factors behind the perfect storm facing agriculture include the ongoing drought in certain areas of the country, policy uncertainty about the expropriation of land without compensation, and the decline in agricultural land prices because of this uncertainty.

This is exacerbated by minimum wage increases and labour law changes, as well as the decline in meat prices due to the foot-and-mouth disease outbreak. The situation is made worse by the volatility of the rand against major currencies. Excessive farming debt, lack of access to funding and crime also add to the crisis.

COMMERCIAL BANKS ARE A MAJOR AGRICULTURAL FINANCIER IN SOUTH AFRICA. WHAT IMPACT HAVE THESE CRISES HAD ON THESE INSTITUTIONS?

Commercial banks carry an enormous credit risk because of loan defaults and a decline in agricultural producers’ ability to present security for loans at the moment. This is underscored by the fact that 61% out of roughly R160 billion of farming debt in South Africa, as on 31 December 2017, is owed to commercial banks. Many farmers are unable to repay their loans because of failed harvests, ever-increasing input costs and low livestock prices.

Agricultural land is typically offered as security by a farmer when applying for credit, and a mortgage bond is registered over the property. The decreasing value of agricultural land and uncertainty around the loss of ownership negatively impact the value of collateral held by banks.