Agri SA questions the state of corporate governance at the Land Bank. Moody’s downgrade of the Land Bank is evidence of an unhealthy state of affairs at governance and management level within the bank. It is also a setback for growth and transformation in the agricultural sector.
Moody’s downgrade holds direct implications for the agricultural sector with broader spill-over economic impacts. The Land Bank’s long-term sustainability and ability to execute its core mandate are now viewed as ‘riskier’. It therefore makes access to finance more challenging and expensive for the bank.
Farmers are under financial pressure
Agriculture is cyclical in nature, and as a result many farmers do not have a fixed or regular income. They earn the bulk of their income in a short period of time (varies based on commodity) when their produce is sold. Access to credit, from among others the Land Bank, is essential to meet cash flow needs (for example, paying for inputs and labour) throughout the year. Farmers will typically settle their debt when their produce is harvested. However, climate change and drought conditions have placed many farmers under pressure.
The Land Bank’s increased costs are passed on to farmers borrowing from the bank, increasing their cost of credit. Many agri-businesses have also sold their loan books to the Land Bank, increasing the Land Bank’s role in the agricultural credit system. This could mean higher input costs for farmers accessing production credit through these agribusinesses. This places further pressure on farmers’ finances and sustainability, with associated risks to the rest of the value chain and the end consumer. Consumers could end up paying higher prices in a constrained environment.
Risks leading to Land Bank review
Along with the downgrade, Moody’s changed the bank’s outlook from rating under review to negative. The Land Bank was placed on review for a downgrade in November 2019. Moody’s highlighted three risks leading to the review:
- An increase in non-performing loans (agriculture under pressure/challenging operating conditions).
- Environmental risks.
- Expropriation without compensation (policy uncertainty).
Challenges facing the Land Bank
The broad concerns highlighted the bank’s high exposure to environmental risks such as climate change, drought, unusual patterns of hail, and heightened biosecurity/disease risks.
Following on this, Moody’s report exposes government’s continued fiscal challenges and its inability to support state-owned enterprises, specifically in case of need. This is also illustrated by the negative outlook assigned to South Africa’s sovereign rating.
Other challenges include the inability of the Land Bank to appoint a permanent CEO and other operating factors which impact negatively on its financial performance and on investor confidence.
Agri SA therefore calls on the board and management team at the Land Bank to act decisively and to implement a turn-around strategy to reverse the implosion of this institution. – Press release, Agri SA