Table of Contents s13

AGRICULTURAL FINANCE/AGRARIAN REFORM
Coach
Desray Clark
Sponsors
Andrew Makenete : Land and Agricultural Bank
Wilfred Verwey : RSM
Tashmia Ismael: GIBS
Syndicate 3
Magdeline Kekana; Mohamed Basson; Nerina Naik; Nwabisa Piki; Seth Maanda

Table of Contents

Executive Summary 3

Introduction 4

Project Aim 4

Project Approach 5

Background 5

Vhembe Agricultural Co-operative: 5

Initial Analysis – SA agriculture in context 7

1. Farming environmental factors and infrastructure 10

Crop production risk (weather, diseases, R&D, technology) 10

Farming Infrastructure and logistics 10

Labour in the agricultural sector 10

Crop production risk (weather, diseases, R&D, technology) 11

Farming Infrastructure and logistics 11

Labour in the agricultural sector 11

Land Reform 12

2. The Farmer 13

2.1 Emerging Farmers Financial Skills 13

2.2 Borrowing 14

2.3 Benefit of co-operative structures 16

3. Profitability of the farming enterprise= 17

3.1 Pricing of commodities 17

3.2 Input Costs 18

4. The role of the government 19

5. Recommendations 20

6. Conclusion 27

REFERENCES 28

List of Interviewees: 28

Bibliography 28

APPENDIX 1: ABOUT THE VHEMBE REGION 32

APPENDIX 2: GLOSSARY OF TERMS 34

Agri-finance - Agrarian reform: Syndicate 3 ALP project (100% draft submission)

Executive Summary

Agriculture plays an important role in the economy of South Africa as it is a key contributor to ensuring the foundation of food security, poverty alleviation and job creation which are Government priorities. Government has implemented initiatives to transform this sector of the economy however; transformation is still lagging behind other sectors.

The purpose of this research is to identify a framework for supporting emerging farmers in obtaining finance to migrate into successful commercial farmers. The framework when implemented will make a considerable impact towards agrarian reform. The study will analyse the effectiveness of the current support framework within South African financial institutions and make a comparison to the models used in both Kenya and the Netherlands.

A case study of the Vhembe co-op was undertaken to highlight some of the challenges faced by emerging farmers in South Africa. Site visits were conducted to the Limpopo Vhembe district, as well as the Joburg Market to establish the extent of the challenges.

The analysis included the use of various mechanisms to assist in understanding the current landscape. These include:

1. A PESTLE analysis of the South African, Netherlands and Kenyan agricultural sectors. This allowed us to make an informed comparison of South Africa with other countries agricultural sectors.

2. Detailed literature review, interviews with financial institutions and relevant stakeholders were done on the following :

a. Environmental factors and infrastructure requirements

b. The farmer’s business skills and borrowing capabilities

c. Profitability of the farming enterprise

d. The role of the Government

Finally, recommendations were proposed based on our findings, literature reviews and gaps identified when assessing the Vhembe co-op. The recommendations were primarily based on the four highlighted themes that impacted the value chain and profitability of the primary co-op.

Introduction

The birth of South Africa’s new democracy in 1994 was followed by several transformation initiatives aimed at redressing past imbalances across a number of sectors. There are mixed reactions about the success of these initiatives, but there is consensus that the agricultural industry has failed to bring about meaningful transformation. While commercial banks have a role to play in providing funding required to push transformation, one would be naïve to ignore the role played by factors such as government policies, the impact of implementation of reform programs, lack of farming skills and various factors that we will explore in this document.

The positive spins-offs of addressing the agri-reform issues are among other things:

· alleviation of poverty;

· creation of food security;

· rural development (that leads to a reduction of massive urban migration)creation of employment; and

· sustainable agri-businesses.

Gareth Ackerman (Chairman of Pick n Pay) says, “In most developing countries, agriculture is the largest source of employment, and international agricultural agreements are crucial to a country’s food security”, Finweek (2010, 29 July).

Project Aim

The aim of the project is to research and develop a set of operational recommendations which will support emerging farmers in accessing finance from financial institutions.

Project Approach

The group’s approach to the project was to investigate the role played by the banking industry in providing funding to stimulate agrarian reform in South Africa, and to make its findings and recommendations based on sustainable measures that can be implemented in a South African environment. In conducting our research, it soon became clear that a number of factors influence and play a role in the development of the emerging farmers in South Africa, and that no one factor could be investigated in isolation. The economic, agro-ecological, legislative and social factors interact and overlap with each other and it became evident that focusing on only one factor is unlikely to give significant impact on the outcome of our findings.

Background

Vhembe Agricultural Co-operative:

The Vhembe co-operative (co-op) was chosen as our syndicate’s case study after consulting with the Joburg market (previously known as the Johannesburg Fresh Produce Market). They are a secondary co-op situated in a fertile part of Limpopo province that supplies 35%- 40% of the Joburg market’s subtropical fruits and other horticultural crops. They represent 18 primary co-ops who in turn represent approximately 2000 Black emerging and subsistence farmers. Our visit to Vhembe and interviews with the secondary co-op members confirmed that they were an ideal case study for our Action Learning Project for the following reasons:

· The members share a deep passion for farming and demonstrated a hunger to succeed.

· The co-op members volunteered to join, which is what the International Co-operative Alliance (ICA) formulated in Geneva suggests as the basis of forming a co-op.

· They had received financial support from the European Union (EU) and the Department of Local Government and Housing that was used to renovate a medium sized pack-house.

· The co-op farmers have access to an estimated 1500 to 2000 hectares of land in the area (an audit is in progress). The relatively frost-free climatic conditions of the area are favourable to growing various agricultural produce and there exists a good supply of water depending on which part of the district farming occurs.

SOUTH AFRICAN AGRICULTURE: FACTS AND FIGURES

- To date only 6 million hectares of land has been redistributed to Black landowners since the end of apartheid in 1994

- Of the redistributed land, 90% is no longer productive

- Only 12% to 14% of SA’s land is suitable for agricultural production

- Less than 1 in 20 beneficiaries have had access to any of Government’s facilities aimed at helping finance and support emerging farmers

- R254m of the 2010 land reform budget will be used to resuscitate commercial farmers that have fallen out of production since being redistributed

- There is an estimated 200 000 emerging farmers in South Africa

- The number of large commercial farms dropped from 60 000 to 40 000 in the past 14 years

- ANC policy requires 30% of land to have been redistributed into Black hands by 2014

- According to Rural Development and Agriculture Minister Gugile Nkwinti the year 2025 is more realistic to meeting the 30% land redistribution target.

Source: FinWeek 29 July 2010, Whitfield, B. and Lund, T.

Agri-finance - Agrarian reform: Syndicate 3 ALP project (100% draft submission)

Initial Analysis – SA agriculture in context

During our research, we have had the opportunity to visit the Netherlands and Kenya. Below we set out an analysis of the different issues affecting agriculture or agricultural reform.

PESTLE ANALYSIS

Indicator / Republic of South Africa / Netherlands / Kenya /
Political environment / o Land reform and rural development are key government priorities.
o Emerging farmers are under tremendous financial strain.
o Disjunction between access to land, markets and crucial water resources makes sustainable production difficult and cripples many emerging farmers. / o Government a key supporter for agriculture
o A support program is in place for new entrants into the farming industry / o Legacy of the past leadership still a stumbling block for government with regards to land redistribution
o Political violence in 2008 had an impact on the economy
o A referendum is scheduled for 4 August 2010 for a new constitution
Economic environment / o The economy is again growing (though at a moderate pace) and financial conditions have improved.
o Credit extension is likely to remain at low levels over the medium term.
o The financing of emerging farmers remains a challenge.
o Agricultural commodity price indices are steadily trending upwards.
o There is a growing demand for agricultural land in Africa by developed countries. / o The Dutch flower industry as well as the cheese industry is a major contributor to the Netherlands economy
o The Netherlands acts as hub for global trade.
o The country is stable financially, relying on diverse inputs to its GDP / o Economy has migrated from being overly dependent on agriculture. Agriculture moved from 75% in the 1970s to 25% 2009 in terms of GDP contribution
o Small scale farmers contribute 65-70% of the agricultural produce
o Major crops produced are mainly for the primary ingredient in the value chain of finished goods or export
o Commercial banks mostly finance larger agri-enterprises with collateral. Collateral could be other private property.
o
Social environment / o High levels of rural poverty are mainly addressed through social grants.
o A large part of the rural population depends on agriculture.
o Household nutrition levels and national food supply have been negatively affected by the recession. / o Educated population
o Diverse population / o Dual economy (limited middle class)
o A large part of the rural population depends on agriculture.
o Remittances from urban workforce to family structures in the rural areas
Technology environment / o Advances in agricultural technology are driven by the development of new production methods, including new plant cultivars, livestock breeds, input technologies and genetically modified products. / o Experts at logistics, both water and air (Hub and spoke)
o Research intensive environment / o Market research and data on agricultural not a government priority
o Large agri-businesses have their own research units
o Communication regarding agricultural risks information is not efficient and effective
Legal and institutional environment / o Regulatory institutions include the Departments of Agriculture, Forestry and Fisheries, and Trade and Industry, the National Treasury and the Auditor General.
o Complementary bodies include other Development Finance Institutions, agriculture research bodies, the Council for Scientific and Industrial Research and organized agriculture. / o Banking system support of the co-operative banking model. Rabobank is the major bank for agricultural financing, rated as AAA
o Strong regulatory compliance culture - Basel commission head also comes from the Netherlands / o Large sectors such as the coffee market said to be under strain due to poor governance and corruption by the state
Environmental issues / o Environmental issues remain at the top of the global agenda.
o The revised King Code and Report on Governance for South Africa (King III) re-emphasize the importance of sustainability locally and globally
o Need to increase food production takes place in the context of climate change and variables such as declining water resources, biodiversity. / o Limited arable land available
o 50% of the country is below sea level
o Specializing in agricultural productions and commodities. / o Rainfall dependent, limited irrigation for agricultural purposes
o Electricity is constrained as most power supply is from hydro-electricity
o Positive for agriculture in most regions in the country is the 2 rainfall seasons.

From the PESTLE analysis, it can be deduced that the common thread is that commercial agriculture makes a meaningful contribution towards economic growth. The challenge of graduating emerging agricultural entrepreneurs to become commercially sustainable is highly dependent upon a continuation of political leadership with dedicated government agricultural support mechanisms and instruments. The African experience suggests that there is a demand for subsistence and commercial agriculture in context of social upliftment and rural development. It is therefore important to understand the agricultural production objectives of the farmer. The syndicate concentrated on the South African context in their recommendations.

Agri-finance - Agrarian reform: Syndicate 3 ALP project (100% draft submission)

1. Farming environmental factors and infrastructure

Literature review

Crop production risk (weather, diseases, R&D, technology)

Variations in climate changes, as well as biological factors are major contributors of production risk in the agricultural business. The major sources of production risk are weather, pests, including insect and disease damage. Another source of risk to crops is the use of technology to genetically modify crop production. The advancement of technology has brought about improved mechanics aiding in the crop production lifecycle and emerging farmers don’t have access to new advanced technology.

Farming Infrastructure and logistics

An analysis of any country that has successfully developed its agriculture will always identify the provision of good infrastructure as a requirement for achieving higher levels of agricultural productivity and profitability. According to Stilwell et al. (1998), infrastructure can be classified as either economic or hard (e.g. roads, electrification, bridges and railways), social or soft (e.g. health and education) or institutional (e.g. farmers, co-operatives and agricultural institutions).

The following are the primary farming infrastructure dependencies and associated risks in South Africa:

· Resources: Water and Energy

Limited water resources and high energy costs are major constraints.

· Institutional Infrastructure: Research and Development

Crucial in increasing agricultural productivity and competitiveness.

· Institutional Infrastructure: Agricultural Support Services

Shortage in the supply and training of extension officers