Manage a loan wisely

January 2025

JANE MCPHERSON, PGP ADVISOR

BY LOANING A FARMER MONEY, THE FINANCIAL INSTITUTION ESSENTIALLY BECOMES AN ‘INVESTOR’ IN THE FARMER’S BUSINESS. IT IS THEIR JOB TO ENSURE THAT THE MONEY IS PLACED IN THE HANDS OF A POTENTIALLY SUCCESSFUL ENTERPRISE OPERATED BY GOOD FARM MANAGEMENT.

When farmers are planting only a few hectares (1 ha to 5 ha), they usually do it from their own pockets and without an outside loan. It is the farmer’s money and what he does with the crop and the income, is entirely his/her choice.

However, when a farmer starts to grow and plant more hectares, it is often necessary to apply for a production loan from a bank, agricultural business or other funders. These businesses are known as financial institutions. This is often when the farmer’s attitude changes. He then seems to regard the crops as someone else’s crops and he expects them to carry the loss. 

AN EXAMPLE
A farmer is able to plant:

• 25 ha of maize from his own pocket at a cost of R250 000 (for the sake of the example).
• 50 ha of maize with a loan from South African Cultivar and Technology Agency (SACTA) at a cost of R500 000.
• 50 ha of maize with a loan from Bank A at a cost of R500 000.

This farmer now owes R1 000 000 and has planted 125 ha of maize:

• 25 ha of maize yielded 50 tons with a total income R200 000.
• 50 ha of maize yielded 100 tons with a total income R400 000.
• 50 ha of maize yielded 100 tons with a total income R400 000.

So the farmer actually invested R1 250 000 in the crop and only realised an income of R1 000 000. In other words, the farm has made a loss of R250 000.

What to do
This puts the farmer in a dilemma: He needs money for himself to live on, but he owes the funders R1 000 000, which is all the income he generated.

• The wrong thing to do, is to only pay the funders R800 000.
• The correct thing to do, is to repay the funders in full with the total income of R1 000 000.
• Why? Farming is a long-term business and a way of life. Some years you make good profits and other years you make a loss.
• To be a grain farmer, you will probably need to take out production loans every year. When you don’t repay the funder, they will not fund you again – and in essence, that will be the end of your farming career.

Remember, you are not farming in a partnership with the bank. You are only borrowing from the bank, and you need to repay your loans before you use the money for anything else.  

TAKE NOTE
There are some risks to consider when applying for a loan:

• The interest rate may increase annually.
• You may lose your collateral (this is an asset or property that you offer as security for when you are unable to pay back the loan).
• You may have to pay late fees or penalties for late payment.

Source: https://www.farmersweekly.co.za/farming-basics/how-to-business/a-guide-to-the-loan-application-process/

Publication: January 2025

Section: Pula/Imvula