Project financing in agriculture

August 2016

UNATI SPEIRS, head of agroprocessing: Industrial Development Corporation (IDC)

The South African economy is considered ready for the opportunities that agri-finance may present. In all developing countries, the economic outlook towards growth is driven by the agri-food sector. In South Africa, the grain sub-sector is a dominant determinant within primary and secondary agriculture as this trend is seen in the rest of the Southern African Development Community.

Key factors that drive this dominance include staple food and traded commodity prices. This trend can be seen upstream within the value chain when the processed final goods are impacted by the shift in grain prices, climate change and other natural disasters such as drought.

Henceforth, the impact of the grain-based agricultural sector does influence investment and project financing to either a lesser or greater extent.

The key project financing aspects that an agri-banker should consider are:

• A maximum funding tenor of ten years.
• Opportunities, which enable the project to focus on financing immovable property, including agricultural machinery and equipment, construction and installation works, working capital requirements, as well as acquisition or lease of land.
• Financing viable opportunities that will allow the business to progress within the full agri-value chain (i.e. from primary production to agro processing).
• Financing of agro-industries (i.e. agro processing activities with backward linkages to primary production) in the rest of Africa.

Key funding criteria are applied when considering project viability. To this extent, various financial products may be utilised in mitigating financial risks, however the following pointers are still considered critical when funding projects:

• Loan repayment profile is based on the positive cash flow generated by the investment project.
• Assets (fixed/moveable) should be available for security.
• Insurance of secured asset.
• Annual audited financial statements and interim management accounts (in compliance with relevant accounting and reporting standards).
• Using only proven technologies to implement the project.
• A comprehensive business plan, inclusive of regulatory documentation, construction and installation documentation (i.e. building plans, cost estimates and project milestones), supply of equipment, and budgets (i.e. a five to ten year forecasted income statement, balance sheet and cash flow statement).
• Marketing assessment for the project to be funded.
• Supporting information, noting the developmental impact of the project.
• Mandatory shareholder contribution and security are a priority to reduce overall project risk.

The sector requires a customised loan package to suit requirements of each project and its expected return. This requirement has always been a challenge, and as part of the decision making process, financing each project requires a comprehensive on-site due diligence investigation in order to gain a complete understanding of the business. The financial package may include the funding of acquisitions, development/expansion of agri-businesses, financial restructuring, capital expenditure, working capital requirements, as well as non-farming investments (i.e. value-adding investments and farm-housing).

In order to overcome the challenges that faces South Africa, the following factors should be considered:

• The industry must be proactive in providing emerging farmers with critical information for technical specialists to respond to their needs.
• The establishment of a formalised small farmer agricultural grain market is considered beneficial in order to improve market access. To this extent, market research on the grain and oilseed sector should be made available to these small-scale farmers. The grain industry must request support from government with regards to legislation relating to climate change, pesticides and land must support the sector's performance.
• Financial modelling of large-sized deals (i.e. acquisition of a grain company and infrastructure) is only considered sound if reliable and accurate information (i.e. crop forecasts, S & D balance sheet of cereals and oilseeds, weather forecast and future crop conditions) can be provided.
• The value-added grain industry (i.e. wheat milling and cereal sector) is reliant on producers in order to fully optimise the available crops for processing.
• Despite the agro processing sector in South Africa being considered at an advanced stage, the grain sector in particular, is still somewhat sensitive to changes in the volume and price of grain.
• The export market can negatively impact the availability and pricing of raw materials for large processing companies.

In cases of drought, it is important that bankers and technical specialists remain in frequent contact with producers in ensuring that the growers are fully acquainted with utilising the remaining soil moisture following intermittent rains.

These practices would hopefully result in minimal changes to expected yields. It is furthermore noted that various factors (i.e. weather patterns) lies outside the funder's control, however these risks are considered inherent within the agricultural sector and due consideration should be given to the mitigation thereof by any agri-funder.

Publication: August 2016

Section: Relevant