Drought pushes farmer debt levels to a massive
As the drought, caused by the lowest rainfall on record, is withering mealie fields and discouraging the planting of crops across the country, farmers are sitting with their highest debt in history with South African banks – more than R125 billion.
FirstRand, Africa’s biggest bank by value, had the largest proportion of total loans (at 3.6%) extended to agriculture among the four main lenders, Harry Botha of Avior Capital Markets said on Thursday.
Barclays Africa had 3.4%, Standard Bank Group had 2% and Nedbank Group 1%, said Botha.
“Dry conditions would have an impact on profitability because of lower yields, and for some producers it would be a total crop failure,” said Nico Groenewald, head of agribusiness at Standard Bank. “We expect to see some producers under pressure.” The SA Weather Service said rainfall last year was the poorest since records began in 1904. El Niño, a movement of warm water in the Pacific Ocean that typically leads to a rise in temperatures and a drop in rainfall for South Africa, has left farmers with what’s expected to be the smallest mealie crop since 1995. They will also probably sow the smallest area with the grain since 2011, according to the government.
The strain on farmers’ finances comes as banks, which have total lending exceeding R3.29 trillion, contend with increasingly indebted consumers. The strain on households has worsened because of accelerating inflation and rising interest rates, caused partly by the more than 40% slump in the rand against the dollar since the start of last year.
FirstRand’s consumer unit, First National Bank, won’t necessarily decrease lending and tighten credit criteria for farmers this year, according to Dawie Maree, head of information and marketing at FNB Business’ agricultural division.
“FNB has a well-diversified portfolio of clients and is not overexposed to the agricultural sector,” he said.
Nedbank, which said in October it had lent R8.96 billion to the industry, out of total loans and advances of almost R649 billion, “is concerned about the drought impact on the economy, agriculture industry and society at large”, said John Hudson, Nedbank’s divisional manager for agriculture.
The “devastating impact” of the drought “will place many agricultural producers under financial and cash flow pressure”, he said.
While the drought could lead to “additional distressed debt” for Standard Bank, its lending is diversified across a number of agricultural industries – from timber to wine – that could cushion the effect of any increase in bad debt among livestock and grain farmers, Groenewald said. The spread of Standard Bank’s lending book across industries and countries would also enable it to absorb any drought effect, he said.
Adrian Cloete, a banks analyst at PSG Wealth, said: “The drought will have an impact on bad debt levels. Some farmers will probably find it difficult to fund their interest service costs as their income levels will be lower as less maize is planted.”