Farm financing stable – for now
The agricultural sector, at the drought’s frontline, is beginning to feel the weather’s financial toll.
For now, there has been a limited effect on some of the largest banks’ ability to extend finance to farmers for planting crops.
This comes with a big caveat: #RainMustFall. If it doesn’t rain by March next year, 2016 will test food producers’ financial resilience, experts say.
“The drought has not affected our ability to grant new production loans; however, we do expect that the utilisation [or] uptake of the loans may not be to full capacity if the drought persists,” said Nico Groenewald, Standard Bank’s head of agribusiness in South Africa.
Ernst Janovsky, head of Absa agribusiness, said most farmers have secured financing to plant this season.
Only in the North West has there been a need to help farmers restructure their debt to help them through the drought, he noted, adding that the drought’s effects might only be felt financially next year, when farmers start applying for new production loans to plant the next season.
More farmers may run into trouble if the rains don’t come by March, he said. “We’ll have to think about restructuring and we will have to do a lot of work in the background to help them through the process.”
But the current debt profile of farmers was still positive, Janovsky added.
Jannie de Villiers, chief executive of grain growers’ association GrainSA, has confirmed that most of South Africa’s grain farmers have managed to get financing, although some have had to use equipment such as tractors and combine harvesters as collateral.
But he said it was becoming increasingly difficult, particularly in the North West, to get crop insurance, without which farmers cannot get production loans.
Farmers who didn’t get financing have, in some cases, taken steps such as leasing their land to others with more capital, De Villiers added.
He warned that if rain did not fall, particularly at key times in the growing cycle such as the pollination phase when plants flower, there may be no crops. This would have major implications by 2017.
“If we don’t get a crop this year, even if there is going to be good rain in 2017, we might not be able to plant because [farmers’] indebtedness will be too high,” he said.
Information from the department of agriculture suggests that farmers planned to plant about 3.8% less hectares of maize for 2016, because of the drought.
There is a small silver lining. Janovsky said declines in volumes have led to increases in grain prices. Simultaneously, the currency’s weakness has made imports expensive, and this offers local farmers some protection from imports.
In the beef industry, many farmers were being forced to slaughter more cattle, which was bringing in cash. The additional cash was providing a “little bit of a windfall”, which was helping to mitigate against the effects of the drought, said Janovsky.
Groenewald said prices for white and yellow maize increased by more than 65% and 50% respectively, from the previous year.
“Producers that manage to plant or have [carried] over stock will definitely benefit from the high prices,” he said.
About 10% of the area planted for maize is irrigated and, provided these regions still receive their water quotas, they should also be able to benefit from higher prices.
But Nedbank’s divisional manager for agriculture, John Hudson, was less optimistic.
The drought was having a devastating effect on agricultural production and would put increasing financial pressure on farmers. It was affecting different areas and enterprises in different ways and the same is true for recovery, which will take years.
“In some areas [farmers] have had successive years of drought and they are already experiencing financial pressure while, for others, the availability of water for irrigation has allowed them to continue producing through this period,” he said.
But given the drought’s severity, even irrigation farmers are now faced with a dwindling water supply.
“This is not only an agricultural problem and it does require all stakeholders and role players, both private and government, to participate in steering the country through this difficult period,” he said.
Other sectors of the economy are increasingly giving water much higher priority in their planning.
The Manufacturing Circle revealed this week that several manufacturers are worried about the drought and the negative effect it is having on their production. In its quarterly survey of the industry, there were concerns that, although water provision was relatively reliable, it was costly.
Christine Colvin, senior manager of the World Wide Fund for Nature South Africa’s freshwater programmes, said the majority of South Africans, including industrial users, are not paying the full cost of the delivery of their water services.
In addition, the government subsidies sunk into water infrastructure, such as dams and inter-basin transfers, are not fully recovered in the cost of water.
Furthermore, South Africa was not accommodating the cost of protecting ecological infrastructure – for example, water catchments – from threats such as alien invasive vegetation, fire or poor farming and plantation production practices.
She said water institutions, including catchment management agencies, water boards and local government, needed improved capacity to perform better.
“We can’t afford to stagger into this drought with partially functional water institutions, any more than we can afford to enter it with partially functional infrastructure,” she said.
Iraj Abedian, chief executive of Pan-African Investment and Research Services, said increases in water prices could not be used as a “sledge hammer” to address the problem.
This would adversely affect the poor and price increases would do little to solve water losses at municipalities and metros such as Johannesburg.
He said the state had to do a better job of investing in water infrastructure, including properly overhauling and replacing aging pipelines.
For the long term, South Africa had to begin thinking regionally for its water supplies, argued Abedian.
“The African subcontinent has more water than it needs,” he said, adding that it made sense to integrate the region’s water and energy infrastructure.