While commodity prices are increasing, farmers are facing shrinking profit margins as input costs are increasing at a faster rate. Now many are wondering what this will mean when it comes to obtaining credit.
First National Bank (FNB’s) Louis van der Merwe said they are moving away from security-based lending only to cashflow lending. “While this can be a challenge given market fluctuations, we’ve gotten around the problem to a large extent with the introduction of our Pre-Plant Contract (PPC) product, whereby FNB will finance 100% of input costs needed by a farmer. If inputs increase by 30%, FNB will increase the available finance by 30% too.” As per normal business practices, this will go hand-in-hand with calculations to determine the farmer’s ability to repay his loan.
The PPC product involves a 3-in-1 contract that includes supply of finance, physical delivery of the crop (and the use of price hedging), and multiperil and hail insurance. FNB said that where it can cover price and production risks, its clients won’t have a problem obtaining credit. A bsa’s Ernst Janovsky said they don’t believe farmers will be turned away from banks due to the increased demand for credit to finance input costs. Absa has made provisions for this, but said farmers should be using price hedging to ensure input costs are covered. “We will be slightly more cautious in looking at debt ratios, but we believe that farmers will remain profitable and each business case will be reviewed on its merits,” said Janovsky. MC L oock of Standard Bank says their normal business criteria will apply, but the bank is encouraging farmers to take advantage of the situation most will find themselves in this season.
“Farmers are in ‘We’ll do our best for farmers,’ say SA’s banks Finance P erspective A close shave with deatha windfall situation,” says Loock. “They’re using inputs bought before input prices increased but receiving high commodity prices. The average farmer should be in a very lucrative position this season.” Standard Bank recommends farmers carefully assess what they do with this once-off windfall and recommend using it to partly finance next season’s more expensive inputs. S tandard Bank‘s production loan is based on 65% of farmers’ long-term yield hedged at the best possible price.
The bank recommends that, given shrinking margins, farmers should carefully consider the production potential of the lands they’re planning to plant. They strongly believe that, to deal with rising input, costs farmers must consider changing their crop mix to ensure overall profitability. “While domestic production of sunflower declined in the last five years, crop estimates predict a 270% increase during the 2007/08 season,” says Loock. “Sunflower seed exports and the substitution of imported sunflower crude oil are expected to relieve pressure on the domestic market. Farmers should consider planting sunflower when diversifying.
Standard Bank recommends farmers do their own profitability analysis (based on yields and costs for their specific region and current Safex prices) for the 2008/09 production season. R ico Basson from Nedbank echoed the sentiments expressed by the other banks. “We’ll continue to offer 100% production loans, depending on the crop in question, repayment ability and the bank-taking session of the crop,” he said. Nedbank reviews customers’ needs on a case-to-case basis and accommodates existing customers by restructuring debt repayments as much as possible.
In terms of the National Credit Act, banks can’t lend money if the recipient can’t repay the debt. However, within these parameters, the four commercial banks are willing to do what they can to ensure farmers remain sustainable and still have access to the credit they need. – Sharon Götte
