R1bn boost for South African farming

Land Bank is better placed than ever to assist South Africa's farming community across the value chain, says Dr Moraka N Makhura.

By Ian Armitage

Food production at all levels of agriculture needs to be increased to feed South Africa.

While some see that as a challenge, many see opportunity.

And it is a fantastic opportunity.

South Africa already has a fairly large and active agricultural sector and there are almost a thousand agricultural cooperatives and agribusinesses throughout the country.

Agricultural exports account for about eight percent of the country's total exports and the sector contributes around 2.6 percent of GDP for the nation.

However, the industry accounts for just 10 percent of formal employment - relatively low compared to other parts of Africa.

There is certainly growth potential.

And empowerment potential.

For 100 years, the Land and Agricultural Development Bank of South Africa (Land Bank) has been the bank of choice for the South African farming community – and is still the only bank specifically specialising in agricultural finance solutions.

Land Bank is a development finance institution whose mandate is to support, promote and facilitate the development and transformation of the agricultural sector through the objective of the Land Bank Act. The bank was established in 1912 to promote rural and agricultural development and is a key financial player in agriculture.

"We are wholly owned by the Government," says Dr Moraka N Makhura. "Of course we are a finance institution that's focused on agriculture and our mandate is to support, promote and facilitate the development and transformation of the sector. We operate in terms of the Land and Agricultural Development Bank Act (15 of 2002) and basically this mandate is to provide finance to farmers, promote participation of historically disadvantaged communities, support and promote commercial agriculture and assist government in its land reform initiatives. When we say developments we are referring to transformation of land development, and in terms of increased production and productivity of agriculture, and making sure that agriculture is profitable, reputable and environmentally sensitive, all the while making sure that the country's food security is maintained and enhanced. We also have to ensure transformation of agriculture to make it equitable in terms of gender balance, racial balance, etc. It's therefore a broader phase of development. In the main, however, the Land Bank provides finance to farmers through the funding that it raises from the capital market. The government, however, like all shareholders from time to time provides capital injection to meet certain objectives, like strengthening the capital base, building the balance sheet, supporting its developmental imperatives and so forth."

Land ownership is a thorny issue in South Africa with government's assertion that around 80 percent of South Africa's agricultural land is still in the hands of white farmers against the almost 80 percent of Black Africans.

Government's original plan to have 30 percent of disputed arable land diverted back to the black majority by 1999 has failed.

Section 25 of the Constitution states that land must be expropriated "within law" and for an "equitable price".

"So basically, the bank, after 1994, started broadening its scope by including black farmers who used to be excluded," Dr Makhura explains. "In the past, most South African institutions were only really looking at the white farmers. So after '94 the bank had to come up with strategies to support historically excluded farmers. That happened in a big way and that ended up, to some extent, stretching some of the financial reserves. It created a funding gap. In addition to policy changes as well, there were also some challenges in the financial sector, with drought in 2003-2004 making it difficult for borrowers to repay their loans. Furthermore, in 2005 the prices of agricultural produce were low such that the ability of farmers' ability to service their debts was adversely affected. All those issues started piling up into a financial strain on the organisation. There were also issues in relation to policy and strategy."

This affected the sustainability of many of Land Bank's operations – it had to act, fast.

"We've put ourselves and our operations now on a more sustainable level," Dr Makhura says. "Whilst we remain committed to increasing the outreach, empowering as many people as possible, the main focus for us is to improve processes and systems to ensure that our liquidity or funding is enhanced – that will in turn enables us to achieve even a greater outreach to new farmers.

"We're looking at both sides of funding to make sure we enhance the way we raise funds while continuing to reach out to more farmers and industries. We are also looking at interventions to assist farmers to be more sustainable thus mitigating risk in our financing activities. This include partnering with other stakeholders in the sector to give new farmers technical support in areas like production, management of finance, how to access markets and so forth.

"We are continuing to diversify our sources of funding through which we aim to address two main challenges. These include the liquidity of the Bank, and giving the new farmers cheaper finance through development funding. We have realised that you cannot extend finance acquired at market interest rates at a discounted and hope to sustainably support the emerging farmers for long. If you did, you would soon get out of business. Thus we are on a campaign to get funding from multiple sources that are developmentally oriented including government and multilateral development finance institutions such as the African Development Bank and others."

In July, The Land Bank and the African Development Bank have entered into a R1 billion funding agreement to enable both emerging and commercial farmers to access finance at affordable rates.

The Bank will repay the loan over 15 years.

"The loan includes a two year grace period on repayment which enables us to provide funding to emerging famers that is tailor-made to their specific cash flow requirements. Emerging farmers, they're not generating cash straight away, so typical financing mechanisms aren't always suitable. This offers a grace period in both capital and interest components of the loan until the project or farm starts generating cash flow to service the debt.

"This sort of funding is ideal and means the loan can go further."

Dr Makhura is positive that other investors will follow the African Development Bank's example and that the sector can attract even more developmental funding.

"Maybe in the past, agriculture was not viewed as a very critical sector. It was just left to farmers and experts and institutions already involved. That said, the sector was always significant in terms of its contribution to the economy through job creation, foreign currency earnings through exports, and the development of downstream economic activities.

"What we have seen now, since the turn of the millennium and the onset of the financial crisis, is the increase in food prices and shortages of food in certain places and that has resulted in enhanced significance of farming activities. The sector is a hugely important economic driver and that has created a number of opportunities for growth. For example, there's an increasing need for food production to ensure food security, and that creates demand for agriculture products such as fertiliser and equipment and so on. Because of this, there is always a need for more scope of production.

"Another very interesting driver is that over the last 10 years agriculture has been one of the best performing sectors in terms of return on investment. It creates a higher demand for investors, while presenting opportunities for both the new entrants and established farmers, the government, and financiers.

"The end result is that we can introduce new farmers into the sector and if we can find ways to support them then the chances of them succeeding becomes very high."

Land Bank is 100 this year and its work is seemingly more important than ever.

To learn more visit www.landbank.co.za.

Image: Getty

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