Cash crunch forces Land Bank to slash lending to farmers- South Africa

The Land Bank, which is in the throes of a liquidity crisis, slashed lending by about two-thirds in the five months to the end of September, starving farmers of capital ahead of the production season for the food staple maize.

The dramatic pull-back came during the height of the coronavirus lockdown and shortly after the state-owned company, whose debt was assigned junk status by Moody’s Investors Service in January, was thrown into financial turmoil after skipping multiple interest payments that triggered a cross-default.

Land Bank head of strategy and communications Sydney Soundy said the 60% drop in the value of loans advanced to farmers during the period was due to the cash crunch.

The bank did not give the value of loans advanced during the period, but in the 2019 financial year it distributed more than R20bn to the agricultural sector in which it holds 29% market share; it also plays an important role in food security.

The sector contributes about 3% to GDP and is responsible for close to 900,000 jobs.

The Land Bank’s liquidity crisis is already testing President Cyril Ramaphosa’s pledge to wean state-owned companies off government bailouts ahead of this week’s medium-term budget policy statement (MTBPS).

In the supplementary budget in June, finance minister Tito Mboweni said the government would allocate R3bn to recapitalise it, and the money has since flowed to the bank. However, it has since asked for an additional R10bn of government support over the next four years.

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Debt restructuring

Soundy said the bank had requested R7bn for 2021/2022, and R1bn per annum for the following three financial years to increase the share of loans advanced to riskier smallholder farmers, which makes up about a fifth of the loan book.

The R7bn is planned to go towards supporting a debt restructuring plan after a series of skipped interest repayments triggered a default on bonds worth R50bn.

The bank has been seeking an additional financial boost after lenders refused to roll over maturing loans. The government has R5.7bn of guaranteed debt in the Land Bank.

Kulani Siweya, an agricultural economist at key industry body Agri SA, told Business Day last week that the failure to capacitate the Land Bank in all aspects will have dire consequences for food security in SA, given the affordable capital the bank extends to farmers.

"Furthermore, the failure of the Land Bank will compromise transformation and development in the sector," he said.

Siweya said commercial banks were already poaching top-end clients from the Land Bank during the crisis.

"Now with those particular clients coming off the books of the Land Bank, this will further perpetuate the challenges of the [bank] sustaining itself," he said.

"Given this, we believe that the Land Bank should get a bailout from government, given its strategic positioning in the sector and [because] failure to do so threatens food security."

In a market update last week, Wandile Sihlobo, the head of agribusiness research at the Agricultural Business Chamber, said there were growing concerns among various farmers that access to credit in the 2020/2021 production season would prove to be a challenge.

"It appears that the liquidity constraints that are currently facing the Land Bank, coupled with general uncertainty brought by the pandemic, have made various financial institutions more risk averse," he said.

"There is anecdotal evidence from various farmer organisations and agribusinesses that previously worked closely with the Land Bank on providing finance to the sector, who are now worried about the 2020/2021 season."

The government’s crop estimates committee is due to release its forecast for the extent of the area farmers intend planting with maize for the 2020/ 2021 season. A survey by Reuters last week found that they intend planting more maize thanks to strong prices and above-average rainfall.

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