Building a stronger, more inclusive agriculture sector in South Africa

by Dawie Head of Information and Marketing at FNB Agriculture and Gert Breet, Business Development Head, FNB Agriculture

09 March 2022: The importance of the agricultural sector to South Africa extends far beyond its direct contribution to GDP of around 2,5% and was emphasised when agriculture was declared a critical industry and exempted from the harshest COVID-19 lockdown regulations.

Agriculture is deeply interlinked with value chains that extend through the manufacturing, food, beverages and chemical sectors. Agriculture also contributes to food security and employment and has the potential to drive transformation imperatives and reduce inequality.

FNB Agribusiness supports the transformation of the industry and is committed to growing a larger base of black commercial farmers. It is the agriculture solutions that encourage and enable commercial farmers to proactively engage in transformation initiatives designed to empower black farmers, their employees, and the communities in which they operate.

Overcoming agriculture’s unique challenges

Agriculture poses unique challenges to smaller commercial and black-owned farmers looking to grow their operations – which is a crucial objective, given the economies of scale that emerge. The first challenge is the long timelines involved. Some crops only begin to generate income years after planting, and it can be up to a decade before profits begin to be realised.

The second challenge is access to capital. Without owning land to be used as collateral, it is difficult for farmers to access finance to buy land in the first place. It’s a Catch-22 that can be overcome through innovative approaches to partnerships and risk share agreements.

FNB’s agricultural support initiatives, which run into the hundreds of millions of Rands, are aimed to surmount these challenges, and to support skills creation, wealth, access to markets and land-ownership amongst small commercial black farmers.

FNB is also focused on supporting resilience in what is an exceptionally climate-vulnerable sector, by keeping climate risk in mind when creating financial solutions.

Win/win for established and emerging farmers

A typical funding structure will involve a partnership between an existing commercial farmer who offers expertise and skills, mentorship, offtake, transport and equipment, and a farmworkers’ trust or communal property association.

Together they establish a new operating borrowing entity that is a viable farming venture, that can own or lease land, and in which shareholding is confirmed by contributions and dividends create wealth. The commercial farmer receives access to resources and discounted capital, and the emergent farmers are able to purchase land, receive training and skills, and access offtake, transport and equipment.

It has been particularly encouraging to see the appetite from existing commercial farmers to be involved in these partnerships – not because of any intrinsic benefit to themselves, but because they understand and value the opportunity to grow and strengthen the sector, and the underlying need for sustainable transformation.

Enterprise Development grants lead to developmental returns

In one example, over two years FNB Business deployed R25.5 million of enterprise development grants to two agricultural projects in the Western Cape. The funding was structured as non-recoverable grants and allowed black farmworkers to acquire a 30% shareholding in a commercial agricultural project. 27 hectares of vineyards, 11 hectares of cherries (under netting), 20 hectares of almonds and 8 hectares of citrus have been planted to date, and additional funding was deployed to complete a 10 km water pipeline to secure 350 hectares of water rights for the farm.

The project has already created 50 permanent jobs and 30 seasonal jobs, and once in full production it is estimated the project will create 405 permanent employment opportunities and 285 additional off-farm employment opportunities, and R50 million in turnover by year ten.

Public/private partnerships to facilitate economic inclusion

Another innovative collaborative initiative involves leveraging public/private partnerships to facilitate economic inclusion. The cost of funding transformational agricultural projects remains an obstacle as many are start-up/greenfields ventures with no historic trading record. Interest rates for these initiatives will always be at a premium because of the risk profile, often making credit unaffordable.

Within this context, FNB Agribusiness entered in an agreement with development financiers, which offered a $50 million (approximately R725 million) facility at reduced interest rates. The lower funding cost benefit is passed on to qualifying transformation projects which creates a direct interest rate benefit.

Since the inception of this initiative, FNB Agribusiness has issued indicative term sheets to six projects totalling R219 million.

Emerging-farmer grant management programme

Historically, government made grant payments directly to emerging farmers who were expected to manage large sums of money without any formal financial support or mentorship. Most agricultural projects failed, resulting in government having to refinance projects multiple times.

In partnership with the Department of Agriculture Land Reform and Rural Development FNB Agribusiness developed a solution using FNB’s 3PIM platform. This allows government to transfer grant funding to each individual farmer, ensuring that ownership sits with them. Non-standard call accounts are used to ensure immediate availability of funding and to generate better interest rates. 3PIM provides a full audit trail with bank statements enabling financial control and enhanced reporting.

An automated accounting solution is provided that assists farmers to build a financial track record. FNB onboards each farmer and assists them with digital banking. As part of the programme, farmers are partnered with mentors who assist them with technical education and on-farm assistance. FNB is looking to enhance this by offering financial wellness and SME training.

Since the programme’s inception in March 2020, 140 emerging farmers have been on-boarded with access to FNB banking facilities. Validated grants balances under management have grown to R890 million as at 30 June 2021 The farmers have earned R21,6 million worth of interest on the grant funding under management for their own benefit, and, according to the department, these projects will create approximately 109 new jobs over the next 12 months.

ENDS