Absa Bank is withdrawing its annual funding of R500-million from Verus Farm Group, a risk management company that provides input profits for South Africa’s grain farmers.
This decision comes amid a crisis in the agricultural sector as a three million ton oversupply of maize from last year, a bumper crop this year and cheap grain imports from South America have slashed South Africa’s maize price from R1 200 a ton last year to about R540 a ton this year. Production costs per ton of maize are about R562. Maize accounts for more than 50% of grain farmers’ income.
Johan Geldenhuys, the group executive for credit at Absa, confirmed that the bank had withdrawn their support for the “summer contract-growing scheme” and is currently in discussion with Verus to support the winter contract-growing scheme “for the last time”.
He said that owing to the volatility of the maize market, the bank lost “between 15% and 25% of the money [we] lent to Verus”. He said the bank has “fully provided for the loss”.
Seaweed Mcfarlane, the operations manager at Verus, confirmed that Verus stands to lose about R900-million. The Mail & Guardian understands that Barclays Bank also provides a proportion of the input profit funding to Verus.
Mcfarlane said he could not comment on the effect that the withdrawal of the money will have on the company or farmers because “Absa will only formalise their decision on Tuesday”.
Absa provides capital to Verus, which, in turn, lends money to grain farmers in the form of input capital to cushion the risk of an over-supplied market and low yields as a result of bad weather. Verus supports about 700 grain farmers, which constitutes 8% of the country’s industry.
The company operates on a contract basis with the farmers, which includes financing, risk sharing, and price fixing, through hedging on the South African Futures Exchange.
“The construction of the contract entails that Verus becomes the owner of the harvest and therefore also the risk taker. On the other hand, the farmer is insured of a minimum rand per hectare for his production despite his yield,” says the Verus website.
The programme is strengthened by linking a value per ton before planting season for the production and setting a break-even point for the farmer to aim at. The contract includes an incentive whereby the farmer receives a bonus if he produces more than the break-even.
South Africa’s ailing grain industry could push struggling farmers to bankruptcy if they cannot service their debts, which are about R30,9-billion.
The grain industry suffered another blow this week as agricultural supplier Afgri warned that it expected a 45% drop in profits for the year to February. The company is the largest JSE Securities Exchange SA-listed agricultural company.
Meanwhile, writes Lloyd Gedye, the proposed Barclays purchase of a majority share in Absa will go ahead at the current valuation even as minority shareholders may be holding out for a higher price, a banking analyst told the M&G.
“I think this deal is cast in stone, it is not going to change. Big share-holders like Sanlam will have already agreed to sell at R79 a share,” said Wayne McCurrie at Momentum Multimanagers.
Sanlam finance director Flip Rademeyer has been reported as saying that the company would only support the bid once it was recommended by Absa’s board as a fair offer.
“It is the minority shareholders right and obligation to get a higher price … I can assure you Barclays did not come up with this price without negotiating with the big shareholders. Barclays will have the majority of the 60% signed, sealed and delivered,” said McCurrie.
The offer by Barclays consists of a total price of R31,4-billion, or R79 a share, for a 60% share of Absa and a dividend of R1,80 a share.
McCurrie believes the deal is a fair offer albeit a relatively cheap one because of the current performance of the market. He said the deal’s financing was an interesting aspect. He believes the majority of the deal will have to be financed in the local market otherwise the inflow of money into the country will create a stronger rand.