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Money matters and financial services
Special
Mei 2016
32
Producers advised to view
agriculture as an investment vehicle
A
lthough agriculture has always been the backbone of most
rural economies, it can become a social and financial in-
vestment vehicle capable of driving positive change at
national and regional levels.
Mr Nico Groenewald (head: Agribusiness SA, Standard Bank) en-
courages primary producers to take this long-term view rather
than being caught up in the immediate crisis of the country’s worst
drought in 80 years.
‘All of us in agriculture know that it is a cyclical sector and that weath-
er is a fundamental, but unpredictable factor, for which we must con-
tinuously evolve better strategies.
‘It is also the one sector that is critical to human survival. People
must eat. However, partly because of the weather and often in spite
of it, the ways of ensuring that people get good quality, nourishing
food are evolving. So, if you’re in agriculture, you’re going to be a
contributor to one of the most profound evolutions ever to influence
humanity’s future. Choosing the way you do that calls for wisdom
and vision.
‘This is not just a financial consideration; it also has immense so-
cial implications. It will shift agriculture into the domain of social in-
vestment, whereby people invest not only for a financial return, but
also to ensure that society functions more equitably as a result of
their input.
‘For all sorts of reasons, therefore, it’s time for producers to look at
the work they do as a type of investment vehicle.
‘That sounds theoretical. In fact, it’s extremely practical. New
agricultural strategies are giving rise to new up- and downstream
business opportunities in which conventional investors can be per-
suaded to take a stake. Producers can either create the investment
opportunities or participate in them. Either way, they gain a share
of the value chain upside that they don’t currently have. It also ena-
bles them to influence the direction in which agriculture evolves and,
thereby, how effectively it serves both producers and humanity.
‘For most producers, however, with or without drought conditions,
funding remains a challenge. Again, the solution lies in looking at
agriculture as an investment vehicle rather than purely as a tacti-
cal, operational exercise undertaken season by season,’ Groenewald
mentioned.
‘In an investment scenario, banks and their relationship managers
and agricultural economists can be a significant ally. In recent years,
and particularly since the economic crisis of 2008 that was triggered
by the bad behaviour of some banks, there has been a tendency to
view banks with suspicion.
‘However, tighter regulatory environments are keeping bankers with
an urge for experimentation, under strict control. Experience proves
that smaller banks are no less subject to flaws than the big ones and
that, actually, the big ones can bring more effective and longer-term
funding resources to bear as agriculture becomes more globalised.
‘In fact, agriculture has owed most of its operations to the loans
made available by large banks from the time of the establishment of
the world’s oldest bank in Italy, on the basis of a statute regulating
agricultural and pastoral activities in the region.
‘That said, modern funding trends driven largely by technology and
new phenomena such as crowd sourcing and crowd funding are
making other financing options available to players in the agricul-
tural value chain.
‘Producers wanting to take an investment approach should stick to
the basics of financing, as proven by banks,’ he said.
He cited by means of an example the potential of positive financial
leverage, in which assets acquired with funds provided by share-
holders or via a bank loan generate a rate of return higher than the
rate of interest or the dividend payable to the providers of funds.
The linkages between the use of debt as leverage, its impact on fi-
nancial risk, and the understanding of cash cycles and free cash are
some of the aspects which banks analyse in their risk assessments
and thus can provide valuable input to farming businesses with po-
tential expansion, capital replacement, and new venture decisions.
In addition to actual funding, banks with agricultural business units
provide ancillary services that can help producers achieve a com-
petitive advantage and mitigate their risks. These include access
to specialists focusing on financial viability, repayment ability and
appropriate debt restructuring, agricultural market trend and infor-
mation services, agricultural publications, value chain funding solu-
tions, and tangible support of organised agriculture.
‘Banks are in the business of creating wealth,’ Groenewald conclud-
ed. ‘But they can do that only through entrepreneurs who invest in
themselves and the future. We believe it’s time for producers to be
such entrepreneurs.’
Product information
STANDARD BANK
Nico Groenewald