While South Africa’s national agriculture debt is now pegged at R200 billion – a 6% increase since 2019 – economists say it is too soon to panic as the number is well balanced against the value generated from the country’s agricultural assets.
At the same time, however, they urge farmers in financial stress to speak to their bankers sooner rather than later.
Nico Groenewald who is the head of Agri-Business for Business and Commercial Clients at Standard Bank said while he agreed that the national agricultural debt number in isolation might be high, the offsets were well within reason.
“The R200 billion needs to be seen in relation to the asset value of agriculture and the income streams generated by these assets. According to the Department of Agriculture, the debt as a percentage of assets reduced (improved) slightly from 2021 and is currently around 33%. Gross farm income of R368 billion has remained flat year-on-year, but the long-term trend is upward,” he said.
And with 30 sub industries in the agriculture sector all in their own unique production and market cycles, for example, the price squeeze in the macadamia sector and the production challenges in the poultry sector, Groenewald said it was for the broader stakeholders such as financiers to understand these and together with producers find ways to absorb the short-term impacts, particularly regarding debt structuring.
“Generally, farmers’ financial challenges result from a combination of aspects. The rate of expansion and the mix of own versus borrowed funds can contribute to financial stress, more so in times of where margin squeeze is experienced because of low commodity prices and/or increased production costs. The impact of the high fertiliser prices on the back of the Russian-Ukraine war is an example,” he said.
Additionally, in South Africa, electricity tariffs have increased more than 653% since 2007. Fuel and fertiliser costs have more than doubled since 2019.
As another example, for Mpumalanga sugarcane farmers who irrigate their crop, farm costs have increased by 56% in 2022 according to the Richard Nicholson who is the economic research manager at SA Canegrowers.
An added factor for exported crops is the European Union’s phytosanitary regulations as spelled out in its Green Deal. This has the potential to impact heavily on costs as South Africa is increasingly getting restricted byon which chemicals can or can’t be used to fight pests and diseases and the costs of meeting these requirements could eventually outweigh the benefits.
Price plunge
In the macadamia industry – where the development and growth of new orchards has been exponential from 2015/16 with soaring prices and the decline of the country’s sugar industry since 2009 – prices for an averaged blend of crop exported as dry nut-in-shell and kernel have plunged from R73.82 a kg in 2019 to just over R30 this year.
Farmers are expected to produce more than 90 000 tons in 2024, with a slight bounce back in the price at R48-a-kg dry nut-in-shell predicted.
In 2019, the cost of developing an orchard was pegged at around R95 000 to R110 000-a-hectare whereas today it could cost anything up to R130 000 per hectare, depending on the condition of the land under development.
At the recent International Macadamia Symposium in KwaZulu-Natal, SAMAC CEO, Lizel Pretorius revealed that of the 72 000 ha of macadamia orchards in the country, 32% of those hectares were yet to come into production. And while this might augur well for the future, farmers who invested heavily in the development of these orchards are undoubtedly under some pressure.
Group Agricultural Technical Manager at the Green Farms Nut Company, Barry Christie said his “gut feel” was that about 70% of those orchards were developed using commercial bank loans.
Dawie Maree who is the Head: Information and Marketing at First National Bank Business, Agriculture agreed that some macadamia farmers may have “expanded too much too fast”. “However, no-one could have predicted the Covid-19 pandemic and the result that it had on for example consumption in China. In the end it was market factors – supply and demand – as well as external factors which they had no control over such as failing logistics etc.”
Maree said First National Bank was doing everything it possibly could to keep farmers on the land. “We believe it is not in the best interest for the industry, the farm, the region or the bank to foreclose. The latter will be the last resort,” he said.
Hold on
Agriculture economist, Juan Winter from Source BI urged farmers to “hold on”.
Group Agricultural Technical Manager at the Green Farms Nut Company, Barry Christie
“Most growers currently sit at an average tree age of five to six years of age. Given the fundamentals of mature macadamia trees, at an on-farm price of $3.20/kg (R58.27) dry nut-in-shell with a yield of 2.7ton/ha or higher at direct production costs of R70 662/ha and overhead fixed costs at about R28 250/ha, macadamia production is still very profitable,” Winter said.
This, he added, should be clearly communicated to the banks at what he termed “realistic yield growth expectations” particularly as prices were expected to increase by 10%-20% in the 2024 season.
And while he was confident banks were taking a long-term view on the sector, he believed they were taking an “aggressive stance” on managing cash flow for those growers who had developed their orchards using debt instruments.
“But they are still giving prime rate loans to many growers as this is secured debt which carries less risk if the fundamentals of future macadamia farm profitability stay intact,” he said.
The long shadow of South Africa’s farm debt
Winter added that there were some practical examples farmers were using to cut away unnecessary expenditure such as:
Decreasing fertiliser spend significantly, not only on volumes of fertiliser used, but also going back to basic fertilisers;
Cut back on spending on security, and also replace labour security with electronic forms of security where possible, including intercoms, cameras etc;
Completely cut away any unproductive labour by placing labourers on early retirement;
Cut away any services that contribute to long term strategic decision-making. This includes consultants etc;
Reduce the number of transformers (fixed cost components) and connect existing transformers with enough capacity using cables which is a once-off capital expense, but then the saving is on future fixed costs for transformers
Variable Speed Drives (VSDs), which provide a slow start for irrigation pumps thereby decreasing the power-use spike;
And getting billed at lower rates than those billed by Eskom or the municipalities.
Silver linings
According to Christie, while many growers were not relying on an income from their orchards at this stage and it was “just the high input costs that are getting to them”, some notable trends were emerging.
“Many new growers are relying heavily on any form of income and unfortunately the spreadsheets don’t always match up with reality and the high yield on young trees at high prices are often not achieved.”
He said this meant growers were cutting back wherever they could. “I am aware of a few growers who have reduced their staff, which is unfortunate. Then, most growers have also cut back on foliar sprays which begs the question: how effective were they in the first place? There has been a move from conventional fertilisers to cheaper organic fertilisers or sources of nutrients. Many growers have also stopped applying herbicides which has challenges, but I also believe there are some advantages,” he said.
Before the low prices, Christie added, he had seen a trend to more sustainable and environmentally-friendly farming. “The low margins have helped to push growers in this direction even more, which is a good thing.”
He had four points of advice and encouragement:
Don’t compromise on quality and basics. Pruning, scouting, spraying effectively (only where and when necessary, based on scouting), and follow a good integrated pest management strategy.
Measure everything on a detailed level. Know what each orchard costs you, and also what it brings in yield and returns. Most farms have one or two orchards that are not justified. You can only make the necessary decisions if you have data.
The banks understand the industry’s situation and are trying to assist their clients as best they can. We know the industry will recover in the next couple of years, so don’t lose hope.
The industry will recover, and one day it will be in a similar situation again. Hopefully we learn from this and save for the tougher times.
Groenewald urged farmers facing difficulties to consult – sooner rather than later – with their financiers to try to find ways to weather the storm they were facing. “It is important to remain level-headed and re-assess the business to make sure the only productive assets remain the core of the balance sheet. In general, try to avoid short-term decisions if they have adverse long-term results,” he said.
Maree agreed saying if farmers saw a problem “coming down the road” they should be open about it and contact their relationship manager as a matter of urgency. He added that budgeting for 2024 should err on the side of conservatism with particular focus on input costs and then product price.
“The former will in all likelihood rise significantly and the latter might decline significantly. Be realistic and then be patient. The cycle will turn, we just don’t know when. In the meantime, if it is necessary, consolidate some things to make sure the farming operation remains sustainable in the long-term,” Maree said.
