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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

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Table of ContentsExecutive 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)

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Executive SummaryAgriculture 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


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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.

IntroductionThe 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 AimThe 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.


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Project ApproachThe 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.


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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.


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Initial Analysis – SA agriculture in contextDuring 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 o High levels of rural poverty are mainly addressed through social grants.

o Educated populationo Diverse population

o Dual economy (limited middle class)o A large part of the rural population


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environment 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.

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


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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 availableo 50% of the country is below sea levelo 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.


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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 logisticsAn 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 EnergyLimited water resources and high energy costs are major constraints.

Institutional Infrastructure: Research and DevelopmentCrucial in increasing agricultural productivity and competitiveness.

Institutional Infrastructure: Agricultural Support ServicesShortage in the supply and training of extension officers

Hard Infrastructure: Roads, Railways, Telecommunications, and ElectricityInfrastructure (roads, bridges, dams, etc.) has significant impact on the

efficiencies of the agricultural sector.


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Labour in the agricultural sectorSouth Africa's labour market has undergone transformation since 1994, with an

emphasis on strategies that eliminate the labour inequalities and improved general

working conditions. The introduction of the Basic Conditions of Employment Act in the

agricultural sector (the minimum wage for farm labourers is currently R1, 300.00) has

led to a higher demand for part time rather than permanent employees. Anecdotal

evidence has shown that South African farming skills are in high demand both locally

and internationally.

Findings:

Crop production risk (weather, diseases, R&D, technology)Crop risk caused by the factors such above can harm the profitability of farmers.

Knowledge of risk mitigating measures would greatly assist farmers, especially the

emerging farmer with little or no support services or skills. Government support to

agricultural research is channelled directly through the Agricultural Research Council

(ARC). Before 1994, South Africa had 14 separate, autonomous Departments of

Agriculture, and it is said that state funding to agriculture has declined (Vink, 2003).

Farming Infrastructure and logisticsThe availability of appropriate infrastructure such as pack houses and grading facilities

play a major role in ensuring the success of the farming supply chain.

Labour in the agricultural sectorWhile there is an abundance of unskilled labour the farming industry interviews with the

major commercial banks in South Africa have suggested that one of the key shortfalls in

farming is the apparent lack of access to technical expertise amongst emerging farmers.

Vhembe co-op

The Vhembe region is conveniently situated in a sub-tropical region of South

Africa which reduces the risk of weather related crop failure.

The completion of the pack house is only one of the ways in which the co-op is

addressing infrastructure needs. The deterioration of roads as well as the lack of


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rail transport to key destinations is an impediment to the successful

transportation of produce by the co-op.

The co-op is allowed to contribute towards the development of Integrated

Development Plans for the municipality which deal with among other things

infrastructure priorities in the area.

The current labour force in the farms comprises of a combination of family

members, employed labour from local communities and immigrant workers from

the neighbouring countries (Zimbabwe and Mozambique).

Land ReformLiterature review

The success of emerging farmers is linked to the nature and speed of support given to

the beneficiary of the land reform process. Greenberg (2010), is extremely critical of the

lack of wider consultation and participation of those who are supposed to be

beneficiaries of the land reform process. The government’s intentions on land reform

are best summed in the quote from Anseeuw, W. and Mathebula, N. (2008):

“The South African government aims to put about 30 percent of the country's

agricultural land into black hands within 15 years. But the program has been painfully

slow. Moreover, where successful sales have taken place, critics complain that the

government has failed to help black farmers”.

Findings

Most Black emerging farmers in rural areas operate on communal land and this is

perceived as a risk by commercial banks. Farming is increasingly becoming an

economies of scale business. Banks believe that marginal farmers and subsistence

farmers are not easily bankable.

Vhembe co-op

In our case study the co-op consists of four land tenure systems:


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communal land offered to family groups by traditional leaders,

private land,

agricultural land that has been recently transferred to Black communities

land that the government leases to farmers or is offered by traditional leaders to

farmers on a permission to occupy (PTO) basis.

In addition, state owned land under tribal jurisdiction is de jure state land and therefore

available for allocation, but de facto it is tribal land where certain rights have already

vested by users of such land through either PTO or CTO (certificate to occupy). A

common solution offered to production efficiency and access to funding is one of

“privatization” of state and tribal land. This over-simplification of the complex issue

ignores the social security value of land which consistently causes “community

disagreements” on commercial projects on such land.

2. The Farmer

2.1 Emerging Farmers Financial Skills

Findings

The understanding of a farming business’s financial position is essential for sound

business practices, maintaining effective control, managing cash flows and building

history for future references.

Farm records should be vigilantly kept as they provide the basic information required to

compile the financial statements. Some of the emerging farmers are illiterate and

therefore find difficulty in understanding business finance and the management of

finances.

There is evidence that assumptions are made by funders when preparing Income

Statement and Balance Sheet projections and that these assumptions are then forced

into retail or corporate credit models.


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Vhembe co-op

The Vhembe co-op faces financial management literacy challenges. The co-op avails its

members to Madzivhandila Agricultural College to assist in closing the farming and

financial management skills gap. The Department of Agriculture also assists emerging

farmers’ financial literacy through Ralman Consulting. This method of classroom training

provided proved to be ineffective.

2.2 BorrowingLiterature review

Inexperience in the risk assessment, lack of collateral, low profitability and macro

economic uncertainty makes banks view the emerging farmers as high risk consumers.

According to Rabobank, the farmers can be segmented into the following features:

Source: Rabobank Development: The Financial landscape and the Cocoa sector. Obstacles and solutions in farm financing: May 20

2010, Hans Bogaard


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Findings

The below table indicates a comparison of most of the initiatives that financial

institutions that have made in supporting emerging farmers in accessing finance.

Name of institution Initiatives Objectives

Khula Enterprise

Mortgage loan

This is a financing facility which enables the emerging farmers to buy land for agricultural production purposes. Repayment term is 20 years. R 800 000 per emerging farmer

Equity Share scheme

A business arrangement in which both land reform beneficiaries and private sector partners buy equity in the form of shares in a land-based agricultural enterprise. R 600 000 per emerging farmer

ABSA

ABSA have about 22% of market share on lending to emerging farmers. Absa has recently been engaging and working with the Department of Agriculture, Department of Land Affairs and Khula Enterprise Finance to expedite the transformation process.

Standard Bank

Standard Bank in collaboration with Khula Enterprise plans to finance more land deals involving South African farmers seeking expansion opportunities across the continent to grow export crops. Standard Bank will be providing up to $100m in new lending over three years to small farmers and medium-sized agriculture enterprises in Africa. Furthermore, Standard has committed R500m for emerging farmer support.

FNB

First National Bank (FNB) and the US Agency for International Development (USAID) signed a R300m deal to boost emerging agriculture in the country.

Land Bank

As per Land Bank corporate plan, R450m has been committed for 2010/2011 to finance developing emerging farmers.

Vhembe co-op

The co-op has only reported receiving donor funds from the European Union (EU) and

the Department of Local Government and Housing (DLGH) to renovate their pack

house. No other funding from Commercial Banks was reported.


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2.3 Benefit of co-operative structures

Chances of successfully applying for funding from commercial banks and the viability of

agri-businesses improve when farmers are organised as a co-op.

Literature Review

Agricultural co-operatives, according to Kate Philip (2003), became a powerful lobby for

agriculture, holding a virtual monopoly in key agricultural sectors, backed by access to

finance through the Land Bank. These co-ops had firm control of the marketing boards

until the agricultural boards system was dismantled after 1994.

Co-ops have significant bargaining power and the ability to provide technical support to

their members. Philip’s paper puts the challenge faced by new co-ops very well when

he says: “Management is tough, democratic management is tougher”.

Findings

Rabobank (a AAA rated bank in Netherlands) was formed purely by a group of co-ops

and has to date a market share of 85% in banking farmers in the Netherlands.

Vhembe co-op

Each member of the Vhembe secondary co-op contributes R500 as a membership fee

to join the co-op. The members have limited management ability however they all have

a great commitment and resolve to work towards the transforming themselves from

subsistence or emerging farmers to fully fledged commercial farmers.

Each primary co-op nominates a representative who sits on the secondary co-op. The

board of directors is democratically elected and good governance is promoted. Voting


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rights are based on a ‘one member one vote’ system. There is a plan to form business

units responsible for running key activities of the co-op e.g. logistics and marketing.

3. Profitability of the farming enterprise=

3.1 Pricing of commoditiesLiterature review

“SA embarked on what is now regarded to be the most extensive reforms of any nation

in the shortest time possible in the 1990’s. These included deregulation of agricultural

products, abolishing certain (most) tax concessions favouring the sector, reducing

significantly budgetary expenditure on the sector and implemented huge changes in

Land reform and trade policy for example, the replacement of direct controls over

imports by tariffs which were significantly set below the rates as per the WTO.”

(Makenete, L., 2010, p.11).

Findings

During an interview with Andrew Makenete from the Land Bank, it was highlighted that

the sweeping changes made to the agricultural policy agenda in South Africa from being

a subsidised and regulated industry to that of a totally liberalised free market sector had

consequences for all, more specifically for new entrants into this market. Further, the

speed of reform in the agricultural space was not complemented with policy reform in

other spheres of government.

Pricing can be broken down into two components namely input costs and selling price

(revenue). The selling price is key in determining the viability of what crops to plant for

the forthcoming planting season.

Selling price considerations:

Prices are determined by market forces both locally and internationally


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Major players can use dumping tactics to reduce prices at certain intervals to

retard the growth of potential new entrants

Agents are used in this sector, the consequences of agents are that they offer

low prices to the farmer and resell to the market at more inflated prices

Clearing agents at the Joburg produce market is used to assist farmers in

getting the best prices possible as prices are driven by demand and supply.

Vhembe co-op

The Vhembe co-op farmers are also at the mercy of external market forces that

determine the price at which commodities are sold based on supply and demand.

3.2 Input CostsLiterature review

In his presentation to the Agricultural Industry Conference, Dr Kobus Laubscher CEO of

Grain SA (2009), illustrated the link between technology, input costs and infrastructure

to agricultural competitiveness.

He uses the example of a grain farmer and analyses the nature of input items that have

to be factored by a grain farmer. The list will be similar to a horticulture agri-business. It

has elements and can be classified into fixed, variable and marketing costs

Dr Laubscher concludes that most farmers are not even getting to a point where they

can recover their production costs based on the low global prices. This further

perpetuates consolidation of large farmers to drive better economies of scale.

Based on the 2005 Agricultural Census, 77% of farms have an income turnover of

below R1 million the implications of which is that they do not qualify for tax rebates. In a

presentation by Willemse, J. (Aug 2005) results of a study done among 700 farmers,

indicated that the most important aspect that required focus in the farming business is

input costs (a 25% weighting) followed by efficiency and management (with a 14%

weighting). As input costs rise, less farming happens resulting in a dependency on

imports, and therefore threatening food security. This leaves South Africa exposed to


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world food price hikes, unemployment and a worsening poverty situation, especially in

rural areas.

Findings

All commercial banks also view input costs as an impediment to the viability of small or

emerging farmers. Commercial banks stressed the importance of planning, land

preparation and timeous disbursement of funds required for agricultural inputs.

Vhembe co-op

The Vhembe Secondary Co-op realised the importance of managing input costs and

has subsequently formed strategic partnerships with key suppliers. Some of these

suppliers are providing advice and training to members of the co-op. What still remains

a challenge is affordability of inputs, funding and access to the best knowledge and

skills.

4. The role of the governmentDealing with government is a complex matter as various ministries are tasked with the

same priorities more specifically, poverty alleviation and rural development. Two main

ministries being the Department of Agriculture Forestry and Fisheries (DOAFF) and

Department of Rural Development and Land Affairs (DRDLA) plays a pivotal role in

providing grants to assist agrarian reform however, the prevalent modus operandi in

these departments are that they operate as silos in relation to the priorities, further

compounding the problem is that within one department they are not aligned as to the

three spheres of government namely; National vs. Provincial vs. Local.

The local sphere of government is the entry point to access such funds. However their

mandate might not be aligned to provincial and/or national spheres resulting in funds

being redeployed.

5. Recommendations


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The syndicate acknowledges that a blue print does not exist and that an approach of

one size fits all is not feasible. The basis of our recommendation is that agri-financing of

emerging farmers to drive agrarian reform requires a synchronisation between the

farming entities, the government, and the commercial banks.

Recommendations for the farming entities

We recommend integrated community-based farming aligned to a value-chain funding

approach delivered through a co-operative. The approach will be based on the following

key farming principles which are elaborated on in this section:

Organising communal land into one large-scale farming entity preferably

within the same geographic area.

Mobilising the key stakeholders at government, community and farming

business level to create a credible forum to deal with land, infrastructure,

development and other key issues that could affect the large-scale farming

operation.

Structuring farmers into an agricultural co-op mandated to oversee the

farming needs and operations of the member farmers.

Appointing a good management team for the large farming entity tasked to

drive professional farming

Development of appropriate training to impart farming and financial skills to

improve yields and drive profitability.

Strategic crop and market risk management through insurance products.

The above form the basis of a sustainable farming enterprise that has the potential to

lay the foundation for banks to at a high level assessment of the farmers.

In the next section of the recommendations we expand on how the factors that we have

highlighted in our findings can be addressed.


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Environmental factors and infrastructure:

Crop production risk:

Introduce risk mitigating crop farming techniques such as dual cropping, multiple

product lines and crop rotation

Selection of appropriate crops, preferably longer shelf life, to reduce risk

Crop-rotation based on research Crop insurance and hedging

Farming infrastructure and logistics:

Engage with different stakeholders to expedite the improvement of roads and

introduction of cheaper modes of transport appropriate for the large scale area.

Engage with the municipality as a co-op which is a stronger lobbying structure in

order to influence decision making

Syndicated approach to input costs (fertilisers, seeds, packaging, transportation)

Labour:

Lobby government for farm worker grants as an incentive to meet government’s

minimum wage requirement

Create a partnership between the farmers and labour aimed at minimising labour

costs

Concurrently to the above, the agreement could also address the dependency on

migrant labour to stimulate job creation

Land reform:

Suggestion is to not apply a blanket approach – solutions are tailored with

government and community involvement

Sustainable integrated approach to land transfers, grant funding and commercial

lending, skills development and market creation

The farmerEmerging farmer’s financial and technical skills: Agri-finance - Agrarian reform: Syndicate 3 ALP project (100% draft submission)

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The co-op should appoint qualified book-keepers to assist in proper management

of their books

Continuous improvement of technical skills by regular workshops facilitated by

the Extension Officers in the area

Development of a tailored experiential learning programme for farmers

(communicated by the farmers as their preferred method of learning),

Partnerships with successful commercial farmers to share skills and lessons

learnt

Structuring of co-ops: Co-ops should be formed from an economic perspective (rather than to be used

as “stokvels”)

A proper management structure should be put in place

Encourage the co-op to pursue the idea of forming various business units aimed

at addressing key areas in the value chain for example: a marketing business

unit, a banking business unit etc.

The ‘one member one vote’ system should be discouraged. Those with larger

farms should have more say (they stand to loose more)

Individual farmers should be encouraged to cede ownership of their respective

PTOs to the co-op to ensure that all the necessary farming processes are

adhered to achieve profitability

Profitability of the farming enterprisePricing of commodities:In order to achieve the best selling price, it is suggested that farmers should:

Form alliances with other agribusinesses in the region to facilitate the best prices

for the produce from this area.

Use third parties to enter into hedging agreements to mitigate against volatility

The Vhembe Co-op should create capacity and contract directly or indirectly with

the market or with other third parties like big super market chains stores.


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Contracts should preferably have a minimum price as well as the benefit of

higher prices

In order to manage the risk of price fluctuations, farmers should enter into contr

acts (off-take agreements) that have a minimum price guaranteed for the crop at

harvesting time. Further, the contracts must also factor the allowance to benefit

on the upside if the prices are high on delivery.

Input costs: Bulk buying leveraging on the economies of scale

The use of expert negotiators when buying and selling.

Role of the governmentWe recommend closer cooperation between the two relevant government departments

being: the Department of Rural Development and Land Affairs and the Department of

Agriculture, Forestry and Fisheries. This will address:

Access to special sectoral grants;

Influence agricultural infrastructure development;

Technical support through extension officers.

Role of Commercial BanksThe unique nature of the challenges faced by this sector requires greater co-operation

between government, business and commercial banks. There are two main types of

funding for farming enterprises: long term funding (e.g. mortgage, asset finance) and

short-term funding (funds for seasonal planting requirements such as seeds).

Banks should continue with unconventional methods of financing, i.e. “value-

chain financing” where crops are used as collateral

Get off-take agreements which can be used as a means of collateral (this also

speaks to the “value-chain financing”)


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Banks lend to the secondary co-ops, who in turn facilitate lending to individual

farmers and collect payment on their behalf as this will reduce the risk of

defaulting

Where co-ops are not in place but the farmers have off-take agreements, the

lending can be done through the food manufacturers e.g. Nestle as long as they

have the capacity to disburse the funds

Property owned by the co-op in partnership with the local authorities can be used

as collateral

Guarantee and relief funds from both government and other third parties

commercial banks, Developmental Finance Institutions (Khula, Land Bank, DBSA

and IDC), aid funding e.g. USAID to stand as security

Use a model similar to the Kenya’s Equity Bank “social pressure model” to

reduce incidence of non-payment of loans. This will require the use of community

leaders, chiefs and local priests to exert social pressure on the farmers to honour

their obligations.

Establish forums between the emerging farmer, commercial banks and

government in order to formulate and share “best practice” on funding methods

To summarise and align our recommendations to the problems identified through the

process of interviewing, literature reviews and the Vhembe case study, we have

developed a matrix, which in our opinion will aid the facilitation of the agrarian reform

agenda, more specifically the financing of agricultural projects.

The matrix gives an overview of the current impediments to possible tactical intervention

strategies as well as the key role players (indicative not exhaustive).

Issue Action Role playerEnvironmental factors and infrastructure

Crop production

risk

Group insurance

Technical support

Insurance & Reinsurance

companies


26

(extension officers) DOAFF

Farming

infrastructure and

logistics

Water supply

Roads

DBSA

Local Municipality

Labour in the

agricultural sector

Enhance skill set with

financial, technical and

business training

Local university and

agricultural technical

schools

DBSA

Land reform Lobby group Government

The farmer Emerging farmer’s

financial and

technical skills

Funding Collateral in the form asset

or income

Government guarantee

Land Bank, DBSA,

Commercial Banks, Khula

Enterprise

Structuring co-ops

Profitability Pricing Minimum price contracts

More agents

Input costs Bulk buying

Access to markets Branding, Contract

negotiations

GIBS, Rabobank

Recommendations for Vhembe

The syndicate decided from the onset that the project would be one that was applicable

and realistic. It is for this reason that it remains ongoing and the group has put in place


27

measures to address the needs of the co-op post the end of BankSeta’s IEDP

programme.

The learnings from the completion of this project will not only benefit the Vhembe

farming community, but put in place a practical model that can be duplicated in other

regions in South Africa.

The syndicate is in the process of finding workable and viable solutions for the Vhembe

co-op together with interested parties. They include:

The Gordon Institute of Business Science;

Rabobank Netherlands

The Development Bank of South Africa;

The Land and Agricultural Bank of South Africa; and

First National Bank.

Below is the draft action plan for implementation of the said solutions. At the moment,

no formal agreements are in place; however, the syndicate remains in contact and has

organised site visits with individuals from the above institutions.


28

6. Conclusion

The solutions to agrarian reform and the financing of agricultural projects must be

integrated as they are interdependent. Addressing one or only some of the components

will put stress on the other parts in the value chain.

Transformation of the Agricultural Sector has a government and donor grant label and

does not sufficiently focus on agricultural entrepreneurship development and efficiency

of production for profitability and sustainability. Emerging agriculture is therefore

reduced to a government social responsibility by commercial banks. Under this

paradigm, the potential commercial funding profitability of emerging agriculture is not

exploited by commercial banks.


29

REFERENCES

List of Interviewees: Mr. Davhana, Mr Muvhulawa and other the directors of the Vhembe Secondary

Co-operative

Mr. P. Mphahlele – COO of Joburg Market

Mr. L van der Merwe – Head of Agriculture FNB Commercial

Kenny Ngcobo – Manager Agric Credit at FNB Commercial

Mr. A. Makenete – Head of Strategy Land and Agriculture Bank

Mr. Jacques Taylor - Director, Agricultural Banking at Standard Bank

Mr. Dean Scoble – Global Markets, Agri Desk at Standard Bank

Mr. William Malan – Agribusiness Manager, Absa

Mr. Simon Yegon – Senior Agricultural Manager, CfC Stanbic Bank

Mr. Nico Basson – Project Manager, Development Bank of South Africa

Mr. Hans Bogaard - Head AgriBusiness. Rabobank Netherlands

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APPENDIX 1: ABOUT THE VHEMBE REGION


http://www.nda.agric.za/docs/Batat/batat_series6.htm

33

Vhembe is situated in the Limpopo Province in the north-most part of the country that

borders Botswana and Zimbabwe.

VHEMBE AREA: SOME FACTS AND FIGURES

Population 1 240 035 (SA Stats, 2007)

Percentage of Blacks in the area 97%

Women as a % of the population 55%

People under the age of 15 37%

People living below the poverty line 65.2%

Unemployment 40% (versus national SA average of 30%)

Gini coefficient 0.64

Per capita income R11 100

Source: Global Insight: June 2006

Agriculture plays a significant role in the area and is rated as the second most important

source of employment. This contributed to our belief that success with the case study


34

could help alleviate poverty, create sustainable employment and benefit this poor

community.


35

APPENDIX 2: GLOSSARY OF TERMSAgrarian transformation: Agrarian transformation is the rapid fundamental change in

the relations of land, livestock, cropping and community. It will focus on, but is not

limited to, the establishment of rural business initiatives, agro-industries, co-operatives,

cultural initiatives and vibrant local markets in rural settings, the empowerment of rural

people and communities (especially women and youth), and the revitalisation of old,

and revamping of new economic, social, and information and communication

infrastructure, public amenities and facilities in villages and small rural towns.

Secondary agricultural co-operative: A secondary co-operative is a co-operative

where the members are primary co-operatives. The purpose of a secondary co-

operative is to provide services to its members relating to the sector where they are

active. It takes at least two primary co-operatives to form a secondary co-operative.

Primary co-operatives which are involved in similar activities often come together in

secondary co-operatives.

Gini coefficient: The Gini coefficient is a measure of the inequality of a distribution, a

value of 0 expressing total equality and a value of 1 maximal inequality. It is commonly

used as a measure of inequality of income or wealth.

Emerging farmer: The emerging farmer is a term used to describe historically

disadvantage individuals that were excluded from the agricultural sector.

Value chain: A value chain is a collection of activities or interrelated sequential and

parallel functions involved in the production, manufacturing and marketing of foods.

Co-operative: A co-operative is an autonomous association of persons united

voluntarily to meet their common economic, social and cultural needs and aspirations

through a jointly-owned and democratically-controlled enterprise.


36

Permission to occupy (PTO): A PTO means that a person occupies an erf as if he or

she is the holder of the land tenure right in respect of that erf, but who is not formally

recorded in the register of land rights as the holder of the right in question.

Certificate to occupy (CTO): CTOs prove that, according to the law, the house or

building is in habitable condition. Generally, such a certificate is necessary to be able to

occupy the structure for everyday use, as well as to be able to sign a contract to sell the

space and close on a mortgage for the space.

Collateral security is one of the elements used by financiers in assessing emerging

farmers to access credit. As a result it is almost impossible for emerging farmers to

access credit from the primary lenders, such as commercial banks because they are

regarded as high risk and lack collateral.

Extension Officers: are individuals that provide technical support, i.e. soil testing,

fertiliser usage, crops to be planted etc.


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