The levels of farm debt as a percentage of the agricultural sector’s gross value added have not yet reached higher levels such as those observed before 1994. Still, there is growing concern among various producers when it comes to obtaining production finance for the 2020/21 season.

South Africa’s favourable 2020 agricultural output, higher commodity prices that were precipitated by the weaker domestic currency, and growing global demand improved producers’ finances somewhat.

The benefits of this improvement were also observed through robust agricultural machinery sales. Tractor sales for the first nine months of this year were up slightly from the corresponding period in 2019.

Yet the challenge of growing farm debt in the sector persists as it will not be solved by one good harvest like the one recently recorded. This harvest was preceded by years of poor output in various provinces.

Agri debt is reaching unprecedented heights

In 2019, South Africa’s agricultural debt stood at a record R187 billion. This represents a nearly three-fold increase since 2010, according to data from the Department of Agriculture, Land Reform and Rural Development (DALRRD).

Approximately 29% of this farm debt was held by the Land Bank and 61% by commercial banks. The balance was spread among agricultural co-operatives, individuals and other institutions.

The escalation of debt, particularly in more recent years, was a result of both the expansion in area farmed, specifically in horticulture, and to some extent the financial pressure brought on by frequent droughts. These droughts have limited agricultural output on various farms.

The liquidity challenge

Exhibit 1 illustrates that the levels of farm debt as a percentage of the agricultural sector’s gross value added have not yet reached higher levels like those observed before 1994.

It appears the liquidity constraints that the Land Bank are currently facing, coupled with uncertainty brought on by the pandemic, have made various financial institutions more risk averse. Various producer organisations and agribusinesses that previously worked closely with the Land Bank to provide production finance to the sector are now worried about the 2020/21 season.

The Land Bank’s involvement in South Africa’s agricultural sector takes the form of various direct and indirect financial services dedicated to supporting both on- and off-farm agricultural activities and businesses. These activities and businesses include input provision, land purchases, production, distribution, wholesale, processing and marketing.

The spillover of the current liquidity challenge is particularly important as the planting season began this month and producers currently need to acquire production inputs and various agricultural implements.

Other risks threatening the 2020/21 production season

While the scale of the problem in the agricultural sector is unclear at this point in terms of the upcoming season, the growing concerns from various interactions have introduced additional risks to the 2020/21 production season.

Essentially, while we have previously outlined an optimistic view of the 2020/21 season (due to attractive higher commodity prices and a favourable weather outlook with La Niña forecasts on the horizon), access to production finance in the sector is now increasingly becoming a concern for producers.

The solution to this may entail addressing the liquidity challenges at the Land Bank. This responsibility largely falls on government, primarily the National Treasury and the DALRRD, as the Land and Agricultural Development Bank Act, 2002 (Act 15 of 2002) mandates.

With that said, we are not necessarily saying the sector is in financial crisis. Rather, we are signalling growing risks to the 2020/21 production season that need close monitoring. We will be listening closely when the minister of finance releases the medium-term budget policy statement on 28 October for any communication related to the Land Bank’s challenges.

Solving the impending financial challenges

Agriculture is one of the sectors the South African government has highlighted as having potential for growth and job creation. However, reaching this potential depends on also solving the current impending financial challenges.

Furthermore, a swift response to these challenges will demonstrate the importance of this sector for growth and job creation, specifically in the rural economy.

We won’t venture into sharing opinions on how the mechanics of the resolution should be as that is best suited for those with intimate information on the bank’s operation and interlinkages to agribusinesses. The purpose of this note is to flag production financing as an additional risk to the 2020/21 season. – Wandile Sihlobo, Agbiz

Wandile Sihlobo, chief economist at Agbiz, shares highlights in his update on agricultural commodity markets. Click here for the full report on the agricultural markets for the major commodities.

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