Overcoming agriculture’s unique challenges – a FNB story
Agriculture poses unique challenges to smaller commercial and black-owned farmers looking to grow their operations – which is a crucial objective in order to create increased participation in the agricultural value chain. These challenges are well-known to most of us. The first challenge is access to capital. Without owning land to be used as collateral, it is difficult for farmers to access finance to expand. This has a direct impact on the actual cost of funding as projects would be perceived as carrying a higher risk profile. The second challenge is the long timelines involved. Some commodities only begin to generate income years after planting, and it can be up to a decade before decent profits begin to be realised. If you then add other challenges like the lack of own equity contributions, financial and governance track record, access to markets and market information, it does look a daunting task to finance transformation projects.
It’s a Catch-22 that can only be overcome through innovative approaches to partnerships and risk share agreements. In reality, there is no silver bullet solution to these challenges. Solutions requires a lot of thought, innovative ideas and multiple like-minded partnerships based on trust.
It is particularly encouraging to see the appetite from existing commercial farmers to be involved in such partnerships – not because of any intrinsic benefit to themselves, but because they understand and value the opportunity to grow and strengthen the sector, and the underlying need for sustainable transformation. A typical funding structure will involve a partnership between an existing commercial farmer who offers expertise and skills, mentorship, off-take, transport and equipment, and a farmworkers’ trust or communal property association. Together they establish a new operating borrowing entity that is a viable farming venture, that can own or lease land, and in which shareholding is confirmed by contributions and dividends create wealth. The commercial farmer receives access to resources and discounted capital, and the emergent farmers are able to purchase land, receive training and skills, and access off-take, transport and equipment.
FNB’s agricultural support initiatives, which run into the hundreds of millions of Rands, are aimed to surmount these challenges, and to support skills creation, wealth, access to markets and land-ownership amongst small commercial black farmers. Some of these initiatives include leveraging public/private partnerships to facilitate economic inclusion. The cost of funding transformational agricultural projects remains an obstacle as many are start-up/greenfields ventures with no historic trading record. Interest rates for these initiatives will always be at a premium because of the risk profile, often making credit unaffordable. Within this context, FNB Agriculture entered in an agreement with development financiers, which offered a $50 million (approximately R725 million) facility at reduced interest rates. The lower funding cost benefit is passed on to qualifying transformation projects which creates a direct interest rate benefit. In addition to this, FNB Agriculture also implemented a Khula Credit Guarantee Facility which provides up to 80% collateral cover for qualifying projects. This facility solves the challenge of collateral which emerging farmers are in many instance unable to provide. FNB is also focused on supporting resilience in what is an exceptionally climate-vulnerable sector, by keeping climate risk in mind when creating financial solutions.
Our partnership with PALS dates back for many years and FNB is a proud sponsor and supporter of the PALS framework for land-reform models. Their approach is based on sound business and legal structures and principles with the aim to assist emerging black farmers to become successful commercial farmers. The framework is build on sustainability, equality and trust which aligns to the approach followed by FNB when considering transformation initiatives.
FNB Agribusiness will continue to support the transformation of the industry and is committed to growing a larger base of black commercial farmers and is proud to be associated with PALS.
