Farmers and financing – friend or foe?

March 2020

Jenny Mathews, Pula Imvula contributor. Send an email to jennymathews@grainsa.co.za​​​​​​​

This article aims to address the issue of farmer financing and focuses on why finance is necessary in the agricultural sector and what a farmer’s responsibilities are in light of providing a transparent and truthful business plan and in terms of honouring debt repayments on loans acquired.

WHAT IS AGRICULTURAL FINANCE?
Agricultural financial services are offered for agricultural production, processing and marketing. The loans offered may be short, medium- or long-term loans and may include crop and livestock insurance plans. The institutions lending finance need to know exactly who they are lending money to and what they are loaning the finances for. When applying for financing, it is the farmer’s responsibility to present a solid business plan which truthfully represents the business status and prospects in the form of a business proposal. 

The financial institution, by loaning the farmer money, essentially becomes an ‘investor’ in the farmer’s business. It is their rightful intention to get a reasonable and reliable return on their investment (by collecting interest against the amount loaned). This means it is their job to ensure that their money is placed in the hands of a potentially successful enterprise operated by good managers. The investors will thus thoroughly investigate the business to understand potential opportunities and identify possible weaknesses.

WHY DO FARMERS NEED LOANS?
There are a number of different reasons for farmers needing access to finance. Among these are:

• Purchase of new inputs – production inputs including seed, fertilisers, pesticides, herbicides and fuel etc. are increasingly costly. If the farmer does not have the funds to plant a crop and ensure it has optimal growing conditions, then he may as well not even plant to begin with. The high cost of inputs sees many farmers relying on input finance.
• Purchase of implements – this may be to improve production potential or to work more efficiently and to enable a farmer to further diversify his farming enterprise.
• Manage risk efficiently – a farmers’ financial position enables him to insure his crop, livestock and storerooms in times of high risk. 
• Investment in the farmland – make improvements, build sheds, drill boreholes and install dams, improve the soils by investing in long term liming and fertilisation programmes etc. 
• Improved marketing opportunities – if a farmer is financially supported, he is better equipped to hold his crops and sell them at the best possible opportunity, rather than accept the market price as the crop comes off the land. This is the moment when prices are invariably lower due to increased availability of the product. It has become increasingly more important for maize producers to participate in the futures markets. A good financial standing is empowering and enables the timeous buying and selling of ‘puts’ and ‘calls’ which assist with the marketing of maize.

HOW FINANCIAL INSTITUTIONS MIGHT EXAMINE THE RISK INDICATORS TO A FARMING ENTERPRISE

It is widely accepted that farmers will access finance for different reasons and agricultural finance enterprises, banks and agribusinesses will readily look at applications to make loans to farmers. There are a few important aspects that farmers need to be aware of when planning to apply for funding. Potential investors need to know and understand your integrated risk structure as it is influenced by yourself, the climate, production potential, market risk, input prices and other investments.

• The farmer – what are the farmer’s work and health risks? Is the business carrying capital risk? What other business and tax risks are relevant? What does the farmer’s cash flow look like? What does the farmer have to offer as collateral?
• The climate – what are the potential risks to natural resources? What are the risks of natural disasters? How does the farmer mitigate against risk?
• The production process – does the farmer have the knowledge, technical and managerial skills required to run the operation? Is there a machinery/capacity risk for the hectares to be planted? Is there a production/crop loss risk? Is there risk of disease or pests? Is there any managerial capacity/human resource risk?
• Input risk – what risk is there regarding inputs i.e. availability, accessibility, price volatility? What has the historic return on production input been i.e. has crop yield justified the investment made into production inputs? Have the farmer’s agricultural practices been of a high standard? Has the farmer invested in the soil with good fertilisation? Does he prioritise purchasing certified seeds for higher yields?
• Investments – is there any risk to the enterprise arising out of poor investments made? How reliable has the farmer been at repaying other credit on other financial loans? What is the farmer’s business reputation like? How accountable has the farmer been to other financial institutions? This will be examined in detail. This process is known as ‘conducting due diligence’ and will enable the institution to determine if the investment in the nature of a loan is a wise one.
• Market risk – how well does the farmer understand the marketing process? Can he or she fix contracts? Has he or she got well established marketing channels? Does he deliver produce of a high standard?

HONOURING THE TERMS OF THE LOAN 
Farmers who have been fortunate enough to be supported financially generally consider it a high priority to honour the process by making the repayments due within the set time frames. This action will always prove beneficial to one’s reputation and future lending prospects. Should a farmer not honour this process, despite a successful season, this immediately brings the farmer and the business’s integrity into the question and sets a black mark against his or her name. 

BUT WHEN THINGS DON’T GO AS PLANNED
The high exposure of the agricultural sector to external risks which often lie way beyond the scope of the farmer’s responsibility calls for planning for differentiated treatment of loan repayments. The absolute key ingredients in this case are transparency and communication. Always bear in mind that it is in the best interests of the lending institution to help the farmer manage his or her way through a crisis period. In this way they can contribute to increased stability in the agricultural sector and at the same time find a way to ensure the defaulter is eventually better positioned to make the repayments due to the financing institution. 

As for the defaulter it is best to act sooner rather than later. It is not helpful to adopt a hostile attitude to the lending institution. They have not suddenly become enemy number one – they are merely a business which also must make money (and by taking out a loan with them – your business became interwoven with their business profitability!). If you stay silent and simply stop making repayments that are due, your credit scores will fall, and you’ll end up owing even more money as penalties, fees and interest charges build up. On the other hand, if you talk to the institution that has loaned the money it may be possible to find a way to mediate the process over a longer term in the hopes of repositioning and rebuilding credibility as a lender. Some options may be to:

1. Pay later but pay what was due.
2. Consolidate the debt or refinance.
3. Agree to sell off something which will enable repayment on the loan.
4. Talk to the lender and try to negotiate a settlement.
5. Prioritise payments – this may require some difficult decision making as to which loans to repay and which to delay.
6. Get help – seek debt counselling from experts who aim to help you get back on track. 

All of the above options require that you are open and honest about the situation you are in as far as loan repayments go. There is never a time when it is acceptable to simply not honour your business agreements and channel your funds into other spending … and remember Proverbs 22 v.1: ‘A good name is to be chosen rather than great riches; and favour is better than silver or gold.’  

Publication: March 2020

Section: Pula/Imvula