Transforming Agriculture Through Innovative Financing

Author: Roux Wildenboer, Sector Head Agriculture, Absa CIB 

Many readers are aware that Silicon Valley Bank was a popular lender in the US start-up market, and it recently collapsed after a run on its deposit base. However, fewer people will be aware of the fact that the tech lender was actually a key banker to wine growers in San Francisco and had lent out over $4bn since 1990 through its dedicated wine division. 

While the South African and US agriculture banking markets are materially different, it does give one pause for thought around the importance of innovative funding models to unlock economic transformation. 

By nature, the agricultural sector is capital intensive when it comes to its funding requirements, and this makes it hard for new entrants to break into the market. Buying land or equipment does not come cheap and neither does infrastructure development for both primary and agro-processing. This is further compounded by lumpy cash-flows that are associated with seasonal production.   

The Department of Trade, Industry and Competition (DTIC) has attempted to close this funding gap through a number of incentive schemes, including the Agro-Processing Support Scheme and Black Industrialist offering, which provides grant funding of between R20m and R50m.  

The challenge with many of these incentives is that they are typically “matched” funding, which means that the entrepreneur needs to have their own capital to support their application for funding.

This is where private sector funders and banking partners such as Absa step in, with innovative financing models to help bridge part of this gap. 

At a grass-roots level, there is a level of recognition that transformation is an imperative for the agri sector, and we have seen some interesting Enterprise and Supplier Development projects (ESD) bringing in and capacitating new entrants. More established businesses have also shown appetite for our B-BBEE specific facilities that allow for up to R15m in financing with a repayment period of up to 10 years. 

On the equipment side, strategic partnerships have become increasingly important. A new tractor can set a farmer back R325 000 for an entry-level model, while a second-hand self-propelled sprayer might set you back R3.2m. These are significant capital equipment investments for farmers to consider, and these requirements create barriers to entry into the sector. This is why it has been important for us to establish partnerships with the likes of John Deere, to improve access to finance for entrepreneurs, so that we can play our part in driving transformation in the sector. 

Should you not have the personal or business balance sheets to undertake transactions of this size, there are a number of solutions in the market where your banking partner will buy the moveable asset, and you will have the opportunity to lease it back for a fixed period of time, with the option to take ownership of the equipment at the end of the repayment period. This lease finance method allows you to have uninterrupted use of the asset rather than ownership. 

Equipment is only one operational part of the equation, and the other major consideration is being able to secure land or facilities. For many ordinary South Africans your house is the single biggest investment you will make in your life. This is multiplied many times over as a farmer or agro-processor, where you may be living, breathing and sleeping where you work. To this end, we have been able to structure some interesting Agri Business Mortgage Loan facilities where our clients are able to access repaid capital 24 hours a day, at the prevailing bond rate. 

At an industry level, we are also excited about some of the solutions in the green finance space.  These solutions include offering better credit conditions for clean energy projects, the creation of innovative financial products that reward agricultural producers with good environmental practices, as well as  market expansion through the dissemination of information about the benefits of clean energy.

We maintain that being a participant in the agriculture sector means constantly looking for innovative ways to grow the sector. While the collapse of the technology-focused bank in San Francisco might have upset wine-producers, we use our sector expertise to be a partner of choice to ensure that our agri-business clients continue to punch above their weight.