Transforming agriculture
through innovative financing

The Financial Times recently ran a fascinating article entitled: “Wine growers fear funding will wither after fall of Silicon Valley Bank” – As one of the premium lenders to the South African agriculture market, this headline definitely caught the eye.

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 expansion.

By nature, the agricultural sector is capital and working capital intensive when it comes to its funding requirements, and this makes it hard for participants to fund growth. 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.

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.

Absa is very aware of the seasonality and cyclicality that are typical of agricultural value chains. Taking SA maize prices as an example, we have seen increases from R3600/t to R5400/t and back to R3600/t all in the span of 15 months. Just imagine what this volatility means for a company’s working capital requirements whose business it is to convert grain commodities in consumer staple foods. We have seen in 2022 that working capital requirements increased by almost 80% for some clients just to maintain volumes.

To help in alleviating this phenomenon Absa has designed customised solutions in our Working Capital and Commodity Finance businesses. As the largest funder of agricultural commodities, we see ourselves as an integral part of the food value chain and contributor to food security.

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

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 Agribusiness Mortgage Loan facilities where our clients are able to access repaid capital 24 hours a day, tax-free, at the prevailing bond rate.

At an industry level, we are also excited about some of the solutions in the green finance space to assist with the electricity supply crises in SA.  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.