Rate reversal hits farmers’ move to mechanization

SOUTH African farmers who are looking to mechanise their operations are running into high capital costs, says Absa agribusiness head Ernst Janovsky.

Banks were lending to farmers at prime minus one or prime minus two a few months ago but that has now changed to at least prime plus one as international credit got tighter, Mr Janovsky said.

The announcement of a R105-per-day minimum wage for farm workers by Labour Minister Mildred Oliphant in February has prompted many farmers to move towards mechanisation as they attempt to contain labour costs.

Ms Oliphant’s announcement came in the wake of a strike by farm workers in the Western Cape.

At a breakfast briefing in Johannesburg, Mr Janovsky welcomed increasing mechanisation on farms as vital for necessary production increases as the population of the southern African region expands.

"Labour has provided the jolt that South Africa’s agriculture needed and farmers are now taking the steps towards modern farming methods that should have taken place years ago. It is the only way to increase food production," he said.

Leading agricultural exporters such as the US and Brazil employ few workers on their highly mechanised farms while South Africa’s agriculture has until recently relied mainly on cheap labour.

Farmers spent a record R7.5bn on farming machinery last year, according to the South African Agricultural Machinery Association.

But now South Africa’s farmers are being greeted by high interest rates as they seek to finance the purchase of expensive farming machinery that has been made even more costly by South Africa’s weak exchange rate.

"As a bank we have to raise funds on international markets and that is becoming increasingly expensive as South Africa’s risk profile falls," Mr Janovsky said. International ratings agencies such as Moody’s, Standard & Poor’s and Fitch have either downgraded South Africa’s rating or issued warnings about issues such as labour unrest, high rates of unsecured lending and the business and investment climate.

Mr Janovsky also said the Land Expropriation Bill had increased foreign uncertainty about South Africa.

"Investors are fleeing from South Africa and it is difficult to implement the necessary mechanisation of agriculture without investment."

The red tape in the country did not help. "When we lend money to farmers there are 58 acts to consider, including the Consumer Act, the Competition Act and the BEE (Black Economic Empowerment) Act. As lenders, we basically become the farmer’s partner and we have to check whether his operation is BEE-compliant before we can lend the money," Mr Janovsky said. "You need to employ a compliance officer in the business and it all affects the cost of production."

Agricultural Business Chamber CEO John Purchase confirmed that banks are being squeezed as credit gets "tighter". "They must take a margin too. They’re a business," he said.

Standard Bank agricultural insights manager Lumé Kleynhans said South Africa’s interest rate base has risen mainly due to changes in regulatory requirements generally affecting commercial banks’ cost of capital and, in turn, lending rates to customers.

"To a certain extent the lower repo rate mitigated this effect and until now the market probably has not experienced the full extent of these consequences.

"Our domestic currency has been adversely affected by a combination of poor sentiment related to mining unrest and poor economic growth, as well as international developments such as the possible end of the US Federal Reserve’s quantitative easing programme," she said.

"This will in turn affect the capital purchase cost of imported items. The effect will be similar on other industries, but especially on those that rely on imported equipment or inputs."

Mr Janovsky said agricultural commodity prices were projected to remain flat but that food price increases in South Africa would be driven higher by the exchange-rate risk, energy prices and labour costs.

Article source: www.bdlive.co.za

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