Johannesburg - South African corn producers desperate for rain and already in record debt will implore the government to provide guarantees for new bank loans as the worst drought in 23 years leaves farmers short of collateral before the new planting season.
While grain producers require debt security, livestock farmers may need cash to pay for feed after dry weather since the end of 2014 left grazing lands ravaged, Johannes Moller, president of the Agri SA farmers’ lobby, said by phone. The group is gathering information from members as it prepares to initiate talks with the National Treasury and the Department of Agriculture, Forestry and Fisheries, he said.
“We’ll need assistance one way or the other, because there’s no way we can do it ourselves,” said Moller, whose Pretoria-based group is the biggest representative of commercial farmers in the country. “The only party who can make up this shortage is the state.” He wouldn’t put a figure on the money farmers may request because his group is still consulting members.
Farmers in Africa’s biggest corn producer will reduce 2016 season plantings of the grain to the smallest since 2011 because of poor rains in the main growing regions, according to the Crop Estimates Committee. A drought in the previous season cut producers’ harvest to the smallest since 2007. A strengthening El Nino pattern bringing dry conditions to sub-Saharan Africa has prompted the national weather service to predict below- normal rainfall for the next four months.
A call from the industry for financial help could scarcely come at a worse time for the state’s coffers.
Moribund economy
Economic growth is at its slowest since a 2009 recession, unemployment has risen beyond 25 percent, while inflation is on course to breach the central bank’s 6 percent target early next year. Protests by university students that won a backdown on tuition-fee increases have forced the government to fund an unanticipated R2.6 billion shortfall.
Combined debt among farmers rose 14 percent last year to a record R117 billion, according to Department of Agriculture figures. By June, 2015 credit extension to the industry reached R93.3 billion, almost all of it provided by the five biggest banks, Kuben Naidoo, a deputy governor of the South African Reserve Bank, said on October 28.
Nedbank Group, South Africa’s fourth-biggest lender, has R8.96 billion of loans to farmers on its books, said Daneel Rossouw, a divisional manager for agriculture at the Johannesburg-based institution.
“Drought will have an impact on increased debt levels, as well as bad debts,” Rossouw said in an emailed response to questions. Farmers who need it could potentially have their loans restructured or rolled over, he said.
Worse news may be on the way for farmers. They may face water rationing if the poor rainfall continues, Trevor Balzer, a deputy director-general of strategic projects at the Department of Water and Sanitation, told reporters in Johannesburg on Sunday. Agriculture accounts for about 60 percent of the country’s water demand, he said.
“They’re the first that take the cut,” Balzer said. “When we do that, we’ve got to bear in mind that we’re impacting on the economy of the country, the GDP. We’re impacting on food security. The second cut will be industry and mining.”
The central bank doesn’t see farmers’ debt as posing a threat to the banking system, as it accounts for 1.75 percent of total credit extended, the central bank’s Naidoo said. “I don’t think it’s a financial stability risk, but it has a significant social risk.”
Social risks may include job losses and the impact of rising food prices, with inflation being driven by a lack of supply. South African yellow corn has already jumped to a record after an industry research group raised its forecast for the nation’s imports of the grain and cut its estimate of stockpiles.
Farmers’ rising bad-debt levels will continue to have a knock-on effect “in downstream activities where margins could come under pressure due to possible import replacements and ultimately food price pressures at consumer level,” said Nico Groenewald, head of agri-business at Standard Bank. “South African farmers have experienced these conditions before and are known for their ability to absorb setbacks.”
* With assistance from Kevin Crowley in Johannesburg
BLOOMBERG