South Africa’s farming sector is heavily in debt. As of 2018, the total farm debt was at a record of R168 billion. About 60% of the debt is with the commercial banks, 29% with the Land Bank, with the rest spread between agricultural co-operatives, private persons and other institutions.
The escalation of debt, particularly in more recent years, was because of both the expansion in area farmed, specifically in horticulture and, to some extent, the financial pressure brought on by frequent droughts, which have limited agricultural output on various farms over the recent past.
The 2019/20 production season follows two seasons which were hampered by drought in some areas, negatively affecting farmers’ finances. In ordinary times, the expected large output in both field crops and horticulture this season would be part of the recovery phase.
However, we doubt if that will be the case in the face of COVID-19, which has disrupted supply chains, thereby leading to lower global demand. South Africa’s agricultural sector is export-oriented. In value terms, roughly half of the products the country produces are destined for export markets.
Tourism and the wine industry
Locally, some agricultural industries’ performance is interlinked to some sectors, which are hard hit by COVID-19. A case in point is the wine industry, whose performance is somewhat influenced by tourism. The decline in tourism will hurt this sector. The COVID-19 pandemic comes at a time when wine grape production started to recover following seasons of drought.
This essentially means the South African wine industry could be hampered by both the potential decline in demand locally and the global market, specifically in Europe, which is now the epicentre of the COVID-19 pandemic.
Easing financial pressure
Through export earnings and domestic sales, farmers can generate the revenue necessary for servicing their debt, among other things.
Hence, as policymakers and private financial institutions try to find ways to ease the possible financial pressures from COVID-19, it might be helpful to also consider the farm debt issue.
Agricultural commodity prices
Global agricultural commodity prices have already taken a knock because of fears of slowing demand due to COVID-19. If we consider maize, soya bean and wheat prices, there has been a 10%, 8% and 6% decline respectively over the past month.
However, global price shifts have thus far not spilled over to the South African market, which is currently supported by growing demand for the above-mentioned commodities from Southern African countries and the relatively weaker domestic currency. Over time, however, the South African agricultural market could experience a similar trend, especially given that there are already expected large supplies.
Financial impact of COVID-19
The financial impact of COVID-19 will vary across agricultural subsectors, depending on the debt overhang from the previous seasons and also the stages of production. For example, the deciduous fruit and table grape exports might not be as badly hit, as most exports have already been processed by this time of the year.
Meanwhile, in the case of citrus, harvesting and exports have recently started. While so far there haven’t been glitches, a lot depends on the measures European countries put in place in terms of commerce amid COVID-19 intensification in that region. From a local market perspective, as long as food retailers are operative, there should be a flow of products to market.
The wool industry
The wool industry has just returned to the market following a ban placed by China, where 70% of wool is exported in a normal season, because of foot-and-mouth disease. This year was set to be a recovery phase from this event, as well as the drought that hit parts of the Northern Cape, Western Cape and Eastern Cape.
Any major disruptions on trade could negatively affect this industry and thereby farmers’ financial positions. Already, wool prices have declined notably over the past week, in part due to fears of potential slowing global demand.
The red meat industry
The red meat industry is somewhat in a similar situation, as the foot-and-mouth disease outbreak towards the end of 2019 led to a ban on exports which negatively affected the financial situation of farmers.
With limitations placed on restaurants, we could see a decline in demand for beef which some often consume away from home and which is more expensive than other protein foods. This too will negatively affect the beef producers’ finances.
Overall, while lower agricultural commodity prices, which we anticipate, are favourable for consumers, the opposite is true for farmers. Under such a scenario, the question is whether farmers will be able to have sufficient revenue to service their debts.
Admittedly, there are still a lot of unknowns as to how the COVID-19 pandemic will play out and the various levels of indebtedness among farmers. However, a proactive policy response could help prevent financial ruin for farmers, particularly those of a small to medium-sized scale.
So far, the recent 100 base-point cut in interest rate by the South African Reserve Bank has helped to reduce the cost of debt. We have observed in countries such as the United Kingdom, that financial institutions have set mortgage payment holidays of up to three months. However, the unpaid interest will still be recovered later.
*It is unclear whether such a policy response would be plausible for South Africa, but in these extraordinary times, it might be something worth considering and drawing lessons from. Perhaps the measures taken to support SMEs should be extended to the farming sector given its significance to food security. – Wandile Sihlobo, Agbiz
*Editor’s note: By 20 March Standard Bank had announced that it would grant a payment holiday from 1 April to 30 June 2020 on all up to date loans, adding that interest and fees would still be charged and capitalised.
Wandile Sihlobo, head of economic and agribusiness intelligence at Agbiz, shares highlights in his update on agricultural commodity markets. Click here for the full report on agricultural markets for the major commodities.