Interview: TP Nchocho
How have sluggish headline growth and a weakened rand affected operational costs?
TP NCHOCHO: The macroeconomic environment has put farmer profitability under some pressure. Over the past few years the agriculture sector has done relatively well and benefitted from better global commodities prices. Even with the current drought of 2015, certain commodities are benefitting from healthy international prices. However, the one cost that is affecting all farmers is energy. Load shedding is adversely impacting agro-processing and rising electricity tariffs are thinning margins.
Additionally, farmers are incurring further costs for infrastructure provisioning. If you require water and there is no existing irrigation scheme, then you need to spend the money to develop one yourself. Despite being in an interest rate hike cycle, current rates are still on the low side so financing is not really a major factor, just the input costs and, particularly, energy.
What scope is there for land restitution and redistribution to improve the use of fertile land?
NCHOCHO: Land reform needs to be addressed in a way that supports the viability of farming units. From a bank’s point of view, the scale of production matters when financing loans, as this is required to generate production levels that will make a farm financially viable. In some cases, an entire land parcel may not necessarily be productive, perhaps due to efforts to preserve a certain plant species. The economics of the farm unit are therefore integral to driving land reform. You can’t just provide 100 ha of land when half of it ends up being infertile. In development financing, the economics of production and farm viability are important guiding principles for the sizing of the land reform initiative and other considerations.
Going forward, cooperation and support between government institutions, programmes and the Land and Agricultural Development Bank of South Africa should be improved. Land Bank is certainly positioned to be the central implementing agency in the sector.
What sort of credit products do you see the greatest demand for from farmers?
NCHOCHO: Three main types of credit products dominate agriculture finance. One is mortgage finance for land, where farmers buy new tracts of land to bring into production or into consolidation. There has been a trend of consolidation over the past couple of years, with the number of farmers declining but without the loss of productive land. For new emerging smallholder farmers, farm establishment finance is in high demand. They require capital to install infrastructure on their land such as water, fences, houses and crop seeds. Lastly, farmers generally require working capital on a season-to-season basis to buy production inputs like seeds and fertilisers, hire contract workers, purchase equipment and so forth.
What are the challenges smallholders face in scaling up and commercialising their operations?
NCHOCHO: The basic building blocks of running a successful farm are the same for smallholders and large-scale commercial farmers. They are: access to land, access to infrastructure, access to the marketing distribution system, technical support and access to financing. In terms of land access, smallholders have to put up significant capital to purchase tracts of land. In terms of infrastructure, running a farm requires water, energy, roads and rail, depending on the type of commodity you farm. Getting your product to market is another central issue. Smallholders require further advisory services and technical support if they are to one day effectively commercialise. Access to finance is also imperative for smallholders seeking to scale up. Going forward, partnership structures are key in linking up commercial farmers with smallholders to enhance the latter’s development.
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