Agricultural debt has grown exponentially in South Africa over the past few years with no end it sight due to the country’s weak economy, Willem Lombard, acting executive manager for strategy and communications at the Land Bank, said in an interview last week.
The specialist agricultural development finance institution, which provides financial services and products to the commercial farming sector and agri-businesses, said while growth was envisaged in the agriculture sector, the Land Bank was currently not in a position to significantly grow its loan book until the debt restructure agreement with its lenders was concluded.
In October Deputy Finance Minister David Masondo said while the Land Bank remained in default to its creditors, it had at the time managed to repay 43% of the debt that was outstanding in 2020 and only R1.5 billion of guaranteed debt remained. A further reduction of debt was expected in the this financial year.
The Land Bank reported a net profit of R1.4bn in the last financial year against a net loss of R711m in the 2021 financial year.
But the situation is on the mend.
Lombard said after a relatively quiet period in the past two years during which the bank could only support existing clients, the organisation had resumed lending to new clients on the back of the launch of the blended finance programme in October.
The Land Bank said it was implementing the blended finance scheme together with the Department of Agriculture, Land Reform and Rural Development to ensure financing support to small and medium-scale farmers.
Growing new farmers to a commercial level would ensure the success of new entrants while creating jobs, transforming the sector, and contributing to food security, it said. This meant that some lending activities have resumed to ensure continued support and development of the sector.
The Land Bank said it was operating within the South African agricultural sector in line with the Land Bank Act.
It was directly impacted by opportunities and threats in the sector, due to the impact on Land Bank clients, whether in primary or secondary agriculture.
“The following opportunities exist in the sector: increase in grain exports due to the shortage in Europe, linked to the war in Ukraine, opportunities to increase participation of previously disadvantaged farmers in the sector and to grow the small-scale farmers to medium and large-scale commercial farmers. The bank is actively pursuing this with partners through the blended finance programme,” it said.
The domestic agriculture sector had performed well overall in the past season, with domestic production of grains being good in the recent cycle.
However, several challenges are facing the agriculture sector: the main one being the unreliable and inconsistent supply of energy. Load shedding has severely impacted business continuity, resulted in reduced productivity and increased waste.
“The knock-on effect has been rising food prices in South Africa, which is evident in the most recent inflation release,” Lombard said.
Another challenge the sector faces is increased input costs due to developments external to South Africa, like the changes in energy and input prices due to the Russia/Ukraine conflict.
Meanwhile, transport and logistics are becoming a problem as the country’s crumbling road infrastructure impacts farmers ability to deliver their produce to the market timeously.
At the same time rising interest rates are putting pressure on Land Bank clients with higher debt service costs, as marginal clients are most at risk.
The Land Bank said it continued to engage with its clients to ensure their businesses remained sustainable and viable.
Lombard said the performance of the bank’s loan book was monitored closely to ensure that early warnings of client challenges were identified proactively.
Distressed clients were identified in advance in order to provide support by restructuring their facilities when appropriate.
Meanwhile, Dr Roelof Botha, an economic adviser to the Optimum Group, said the weakness of the Land Bank had forced some farmers to resort to more expensive commercial bank lending amid high interest rates.
The financial viability of the agriculture sector had also been jeopardised by rising input costs, especially electricity, diesel, petrol and fertilisers, he said.
Lombard said the message to the government was clear: “Unless some form of subsidisation of higher input costs and a recapitalisation of the Land Bank is put in place, the country’s food security will be threatened together with an increase in unemployment.”
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