Agribusiness Perspective: The significance of the banking sector in farmers’ decision to invest in production

Agriculture’s great performance in the face of the COVID-19 pandemic, compared with some other sectors that have been struggling, should convince banks to extend lending to previously ignored farming communities.

The agriculture sector in South Africa is once again in the spotlight. Despite the COVID-19 pandemic, which has caused unprecedented instability in some industries, a rise in input costs, and operating in an unstable, uncertain and sometimes contradictory policy environment, the sector continues to emerge stronger and more resilient.

If there is one thing the pandemic has done well, it is to highlight the importance of agriculture and its ability to help economic development, create and retain employment, and improve exports.

It is a well-known fact that the production of food and the availability thereof are of strategic significance to every nation, but the current COVID-19 crisis has highlighted the importance of being food secure, which means being able to produce the majority of staple food requirements domestically.

Furthermore, the pandemic has highlighted the importance of not only agriculture as a food-producing sector, but also the logistics and supply chain in making food accessible at affordable prices to the majority of the population.

ECONOMIC ENGINE

Indeed, during these difficult times, agriculture has proved to be a major economic engine for South Africa, accounting for a significant portion of export earnings and even GDP. Following one of the biggest maize crops and citrus exports on record in 2020, the sector’s outlook for this year remains positive, with current favourable conditions expected to continue.

Having said that, while we often look at production conditions as a good indicator of how the sector will perform in a given year, it is ultimately a combination of key enablers, including favourable production conditions, a sound policy environment, and access to both finance and markets, that drives good production output and market performance.

HIGHER PRODUCTION COSTS

When we look at 2021 so far, all indications point to an agriculture sector that will benefit significantly from the continuation of the favourable conditions and market indicators that we witnessed last year. But one of the ingredients that also played a major role in enabling high production expansion last year was low input costs.

This year, production costs seem to have risen by up to 20% compared with last year, and many farmers are now looking at their financial lenders for assistance in acquiring these production inputs and other farm operational requirements.

Given the above, the fundamental question that perhaps South African agricultural financial lenders (commercial banks) should address is what efforts they are making to ensure that they guide the required investment in the agriculture sector.

Addressing this question is critical, because farmers’ decisions to invest and produce are heavily influenced not only by favourable production conditions (such as weather), but also by access to financial instruments, and this is where banks become critical investment partners for agribusinesses.

Due to the risks associated with the industry, banks often lend to it disproportionately compared with other sectors. Needless to say, there is a portion of the agriculture sector that is not even considered for lending by commercial banks in South Africa most of the time. That said, it is also important to note that some banks are beginning to see the agricultural transformation agenda as critical to the sector’s long-term viability.

As a result, some are taking the lead in private-public partnership initiatives to ensure that financial instruments are extended to farming communities that would otherwise be denied credit by commercial banks. Based on last year’s results, banks are beginning to see the importance of the agriculture sector in the face of the COVID-19 pandemic, because other sectors did not perform well for banks in terms of income generation.

As a result, some banks are increasing their exposure to the sector, and efforts are being made by some market participants to continue providing farmers with the financial instruments that they need, allowing them to become more profitable, effective and sustainable.

Such financial instruments are critical enablers for the adoption of better technologies, the purchase of agricultural inputs, and making other decisions that can improve farmers’ business productivity and efficiency.

FINANCIAL INSTRUMENTS ARE CRITICAL ENABLERS FOR FARMERS’ ADOPTION OF BETTER TECHNOLOGIES