What does the economy hold for commercial agriculture?
SA has experienced high growth rates for the past five years. Many purchased goods are now imported and the value of imports has, for some time, exceeded the value of exports, resulting in an increasing deficit on the balance of payments. Relatively higher domestic interest rates compared to the rest of the world have, however, benefited SA through the inflow of investment capital.
But this is not considered a healthy situation, as the consumption debt of the country is being financed by capital inflows rather than by matched exports. Should capital inflows decline, the rand exchange rate will be under pressure, exacerbating the balance of payments.But this will benefit export-orientated agricultural enterprises. Excessive consumption expenditure, as well as higher prices of imported goods has led to higher inflation. As a result, food expenditure shrinks and this, in turn, decreases the demand for food and impacts on domestic agriculture.
It’s claimed that profit margins in commercial agriculture are decreasing rapidly. What are the main factors?
This year, farmers will have to contend with considerably higher input costs. The primary driver is arguably the higher oil price, which has hiked up the price of fuel, fertilisers, chemicals etc. This is considered a serious threat to sustainable food production in South Africa.
And food prices have increased substantially, due to agricultural commodity prices increasing worldwide. The strong growing economies of China and India have increased the demand for maize, wheat, oilseeds and factors necessary to produce them – fertilisers, fuel, chemicals, seeds, etc. Many countries are also following a policy of renewable green fuel sources, which means that maize, wheat and oilseed prices have increased. Farmers have withdrawn acreage from other enterprises to produce these more lucrative commodities, resulting in other commodity prices increasing. In SA, the Reserve Bank has increased interest rates in an effort to curb inflation. This, together with the increased fuel price has increased the food price.
What’s your point of view regarding the impact of possible farm expropriations?
Unfortunately, the legacy of land reform projects since 1994 has not been satisfactory, with reports indicating that only 50% of projects have been successful. As a result, many previously productive farms have ceased production.
The failure of such ventures is usually associated with the lack of operating capital, insufficient practical and financial skills, mentorship and support. The question that needs to be asked is whether the critical ingredients will be available to the recipients of land reform, so that the possible withdrawal of 30% of farmland from production is prevented? If not, the consequences for food security could be devastating.
How will the proposed Bill impact on commercial banks?
Commercial banks can be negatively affected in the event of land values falling due to expropriation. If land values decline, the banks’ exposure to bad debt will increase. Even worse is where the finance extended to buy property later exceeds the market value. The positive side for the banks is the inclusion of a more diverse population into the ranks of property owners.
BEE in agriculture is a contentious issue. What’s FNB’s take on it?
The unique challenges facing BEE in agriculture has resulted in much trial and error. Sustainable systems have taken a while to become established. Significant progress has, however, been made with schemes involving USAID, Khula and other business partners. Recently, the Charter for the Agricultural Sector was published. FNB welcomes it as it removes uncertainty surrounding the charter debate and allows us to position ourselves as an effective partner with our customers who would like to participate in the AgriBEE process.
The charter serves to link the bank and its customer through frameworks created within the AgriBEE Charter and the Financial Sector Charter. It also gives the bank a clear mandate to adapt policy towards efficient and effective customer relations. The turnover target of above R5 million for compliance is achievable within the delivery structures of the bank and its strategic partners.
What’s your opinion about the land reform process so far?
The process must be viewed against the aims and ethos of agriculture. This includes providing not only a place of residence, but also a means of producing in excess of subsistence for those outside agriculture or for export. Viable farms also provide job opportunities and support businesses upstream (input suppliers, cooperatives etc) and downstream (processors, logistics, etc) in the economy. Security of land tenure is supported by extensive legislation. Agriculture is a dynamic sector and the natural trends in mechanisation and labour must be seen in the right context. |fw
