Financial planning and financing in the agri sector

By Bennie Van Rooy, CEO of Grobank

While the agriculture sector contributes just 2.5% to South Africa’s total gross domestic product, it is a sector that provides both foreign exchange and employment. This grows its contribution to around 12% of the GDP, making it important not only from a food security and export point of view, but from a human resource perspective too.

Agricultural planning must therefore include all economic activities allied to the sector. Typically, this would be financing farmers to purchase ongoing inputs, such as seeds, fertilisers, pesticides, irrigation water and more. Agricultural finance can help to make these purchases easier for farmers.

Partnering for the long-haul

It is in understanding the farmer’s specific requirements that Grobank comes into its own. Where traditional banking looks at the financial impact first, Grobank looks at the client’s needs and how we can best support them.

It is a partnership that demands trust by all parties, as well as an understanding of current and future needs. For example, if we look at the picture painted by experts on global warming and climate change, and we review the impacts recorded over the past decade or so, we can ensure our clients have the resources available to them to deal effectively with anything from drought or floods, to fire or crop failure.

The negative impacts that farmers in sub-Saharan Africa have already seen requires not just financial input for mitigation, but a strong focus on education and the funds required for that. Every solution we determine in discussion with our clients brings an additional cost or infrastructural requirement, all of which must form part of our long-term financial strategy. Relationships between financial services and farmers need to be long-term, through the cycle and sustainable for both parties.

Presently, the risks brought on by the current drought in South Africa include a reduction in food security and increased unemployment. Food prices are on the increase, and environmental and social sustainability is fragile. There is also reduced access to credit by farmers, and an uptick in distressed bank loans. All of these issues are an integral part of our financial planning strategy.

Agritech: Emerging solutions for agriculture

The good news for many is a spike in the development of agritech, with technology breakthroughs promising a slew of solutions for the sector. The World Bank recently identified several trends that are transforming agriculture in Africa, including solar refrigerators that help dairy farmers reduce milk spoilage; and mobile phone apps that enable farmers to hire affordable tractors when they need them.

Reports indicate that just this simple technology is increasing farmers’ yields by up to 200%.

Agricultural innovations that assist with timing, monitoring and selling of crops for emerging and established farmers are proving valuable, and the sizeable profits that can be generated means investment in agritech should be planned for.

Types of financial products suited to SA farmers

These include term, mortgage and production credit loans. At the moment, Grobank offers business banking loans but not necessarily production/agricultural loans. However, we have plans for customised products specific to the agricultural sector in the pipeline and will start offering these solutions to customers during 2020.

Other important banking products from Grobank include transactional accounts, investment accounts, Forex solutions, structured trade and commodity finance. We also partner with insurers on behalf of our clients, should that be necessary.

Meeting today’s challenges head-on

Key challenges facing the agri-finance sector now are the credit risk that are beyond anyone’s control, such as weather and volatile commodity prices. This limits capital and funding allocated by banks to the agri-sector and – with inadequate data available on environmental and socially sustainable lending – caution is key.

However, agri-focussed banks are typically increasing their collateral requirements, enhancing their environmental reporting capabilities, and reducing production risk by getting a better line of sight of the value chain. Where Grobank is different is that we take a longer term view of the sector and accept that adverse weather conditions are cyclical. This ensures both Grobank and our clients have a more robust view of risks and take these into account during financial planning.