By Zhann Meyer; Head: Agricultural Commodities at Nedbank CIB


Over the past three decades, the South African agriculture financing landscape has undergone some significant shifts, the two most apparent of which have been the massive growth in the overall need for farm funding and a change in focus by some of the country’s most prominent finance providers.

In the mid-1980s, the total value of primary farm debt across South Africa was approximately R13bn. At that time, the Land Bank held roughly 22% of this total debt, while commercial bank funding made up 26% and cooperatives accounted for around 30%. By the end of 2016, this agri-finance picture had changed considerably with total farm debt in the country amounting to approximately R145bn. Interestingly, at 28%, Land Bank finance still accounts for a similar proportion of this total debt as it did over 30 years ago. However, the involvement of cooperatives and commercial banks in agriculture funding has changed dramatically. Today, banks are responsible for around 60% of the total farm finance in play, while involvement by cooperatives has shrunk to around just 7%.

The reason for the drop in finance provision by these cooperatives is simply that their ownership structures and approaches to lending have changed considerably over the years. Where, before, most were collectively owned by farmers themselves, the majority are now held by institutional investors, which has naturally resulted in a shift in focus from lending money to farmers as a natural extension of services to more complex and often off-balance sheet structures with a limited recourse Service Level Agreement or Safex Derivative as a tool for deleveraging the Balance Sheet.

For its part, the Land Bank has retained its vital role in the South African agriculture arena. The institution is still a massively important provider of much needed finance to farmers. However, where it previously mainly provided finance to established farmers, it now plays a very significant role in the transformation of the country’s agri-sector, with the majority of its focus being on partnering with new and emerging sector entrants to help them establish themselves as sustainable commercial farmers.

This changing focus of both the country’s cooperatives and the Land Bank left something of a funding gap where the needs of established commercial farmers were concerned. And, over the past few decades, steadily increasing numbers of commercial banks have stepped in to bridge the gap. Perhaps somewhat fortuitously, this increasing involvement by commercial institutions in agri-finance provision has been facilitated by the stellar growth in farm land values over the same period. In fact, the total value of South Africa’s agriculture assets is currently estimated to be over R420bn, and land and improvements comprise well over half of this value. The presence of these physical assets delivers the dual benefit of making involvement in the agriculture sector more viable for private sector funding institutions, while also enabling the structuring of affordable finance solutions for farmers thanks to the collateral they can offer banks to secure the loans they require.

Importantly, though, the participation by the private sector in agriculture goes far beyond the mere provision of credit. As commercial institutions, banks have a vested interest in ensuring the success of the farms they lend to. As a result, commercial agri-financiers typically take a strong partnership approach, backing up their financial inputs with the provision of extensive expertise, consulting and advice to farmers as well.

While the full value of this partnership approach isn’t always immediately apparent, the long-term benefits will prove vital. The aftermath of the devastating 2015/16 drought is a case in point. While banks are helping farmers to meet their immediate needs through funding for more sustainable water access infrastructure like boreholes and dams, the less obvious aspect of their involvement is the expertise and guidance they are offering to ensure those farmers prepare themselves to cope with the growing challenges they will almost certainly face given the country’s water-constrained future.

And given that the success of any commercial farming operation relies on much more than just growing crops or raising livestock, this partnership approach by the banks typically extends to the full agri supply chain. This is a vital aspect of commercial agri-finance because, while farming itself is estimated to account for around 2.5% of South Africa’s total GDP, the secondary activities and industries that exist around agriculture push the full economic value of this sector to over 25% of GDP.

When one looks at it this way, the significant increase in the levels of involvement in sustainable agriculture by commercial lenders is of massive importance. By investing – financially and intellectually – into the agri-sector and its secondary industries, banks are not just aiding farmers; they also have the opportunity to help create and sustain jobs, ensure greater food security, and contribute to the much-needed growth of the South African economy as a whole.