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Value Chain and Financing in the African Market

Agricultural Insight With Musa Group

Value Chain and Financing in the African Market

 

In the below sit-down interview, Andrew Makenete, Musa Group’s Agri-Business Executive discusses financing options for emerging farmers in South Africa.

 

 Q: How does farmer financing in South Africa compare with the process in other African countries? 

A: In the rest of the continent farmers do not own or have individual property rights. The state owns the land and leases it back to farmers, in most cases, with well-established traditional norms and status. Long term leases are available for investors and people seeking more secure rights. Typically, the land where actual farming takes place is of a much better quality (productive capacity) than land in South Africa. It is a commonly known fact that SA is actually not well endowed agriculturally, compared to the rest of the continent; particularly the countries in Sub Saharan Africa. This means that farmers can produce on much smaller pieces of land and with higher yielding crops. Contract farming is common in the rest of the continent whereby small holder farmers are provided inputs and production finance and then they deliver the crops (produce) to the person who financed them. This is often a sugar, cotton mill, processor, or packing facility, hence being the only market for the produce. The finance risks are fairly limited in such an arrangement.

Q: What kind of financing is available for emerging and smallholder farmers in South Africa? 

A: Grant funding in various forms is available in very limited forms to emerging and smallholder farmers. This is normally from the state (national and provincial governments) in various guises or schemes. It is so limited that it reaches only a few and has had little impact. It is either for production finance, or used to fund acquisitions, primarily of land, using the three key land reform strategies.

Limited recourse funding – typically provided by SOEs such as the Landbank, IDC and a variety of provincial funding institutions, whereby the funding is somewhat subsidized and the risk lies to some extent with the funder. Recourse is often some level of personal sureties, the crop, cessions on income etc. Some private sector companies also provide such type of funding and use various instruments such as input financing, crop sharing schemes, and subsidized 3rd party insurances (sometimes even from donor countries or agencies) to cover the risks.

Q: What is the biggest mistake made by primary producers when obtaining production financing? 

A: There are a number of key risks and it is difficult to isolate just one since they are somewhat interrelated. The modern commercial farmer produces best when they are sure of a market for their produce, which can provide a commercial return. Emerging farmers, often, cannot produce at a commercial scale with is typically dependent on

economies of scale, therefore not being able to cover their production costs. At the minimum, a producer must be able to recover their production (input) costs.

Q: How do you envision financing of primary producers changing within the next ten years? 

A: The so called “value chain financing” methodology is the way to go. Primary producers become part of product value chain where the financier intermediates the whole production chain – de-risking each and every step in the chain and determining the real costs and risks and ensuring sequencing in such a manner to have adequate financial cover across the chain.

PDF Version Here: Musa Group Agricultural Insight-A Makenete