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August 2016
RELEVANT
Project financing in agriculture
T
he South African economy is considered ready for the op-
portunities 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 agricul-
ture as this trend is seen in the rest of the Southern African Develop-
ment 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 great-
er extent.
The key project financing aspects that an agri-banker should con-
sider 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 pro-
duction 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 mitigat-
ing financial risks, however the following pointers are still consid-
ered critical when funding projects:
Loan repayment profile is based on the positive cash flow gener-
ated 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 docu-
mentation, 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 in-
come 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 require-
ments of each project and its expected return. This requirement has
always been a challenge, and as part of the decision making pro-
cess, 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 ac-
cess. 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 avail-
able crops for processing.
Despite the agro processing sector in South Africa being consid-
ered 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 spe-
cialists 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.
UNATI SPEIRS,
head of agroprocessing: Industrial Development Corporation (IDC)