CIARAN RYAN: The contribution of agriculture to the South African economy was highlighted yet again by Finance Minister Enoch Godongwana in his medium-term budget. Last year agriculture grew at a rate of 8.3%, second only to mining which grew at 11.8% on the back of a commodity boom.
The resilience of the agricultural sector – particularly animal products and horticulture – is fundamental to the country’s goal of food independence. Although the rains were kind to us, there’s more to the story than meets the eye.
Technology and innovation are playing a crucial role in South Africa’s agricultural success.
Joining us to discuss this is John Hudson, national head of agriculture at Nedbank Commercial Banking. Welcome, John. Tell us a little bit about what farmers have had to contend with over the past year or so, and what you feel lies ahead.
JOHN HUDSON: Thank you, and it’s great to be with you. The past few years have been volatile; I think that’s the starting point. While the broader economy didn’t do that well, agriculture had two sterling years – 2020 and 2021 were really good years. In many ways that was the shining star.
But 2022 has become tricky, and it has become trickier almost by the day, so much so that on the back of the pandemic, [with] the disrupted supply chains, I think the Russia/Ukraine crisis just took it to a new level. That’s where we saw so much more complexity come through, challenges come through.
So whether it was rising input costs, whether it was the cost of freight, whether it was continuation of the disrupted supply chains, this impact converged on farmers all at once.
So 2022 has been a … really tough period in terms of agriculture, and of course all of that has led to squeezing margins for farmers. So, while they had two good years, 2022 became extremely tough; margins were impacted.
Of course this was not for all farmers, but certain sectors, I suppose, took even more strain than some others. For example, field crops did okay because prices actually stayed high and we think they will continue to stay high. But some of the others that you mentioned – animal production and horticulture – have had a rough time, and that could be because of foot and mouth disease and so on.
For the citrus guys the cost of freight has just gone through the roof and, together with all those other factors that I mentioned, margins have been squeezed to the bone.
And then, of course, if I bring it up [to] where we are now, interest rates are starting to rise or have been increasing, and we expect that to continue.
Farmers do take on debt and we’ve seen debt increase in the sector over the last few years, and that’s because of the expansion in certain sectors like citrus. But that debt now comes with a cost as these rates tend to go up. We’re seeing that interest – that sort of increasing cost of debt – playing out. So it’s a tough period.
Some good news, however, is that the forecast for the upcoming summer production season is positive again. Another wet year, maybe not quite as wet as last year, but certainly it all points – from a field-crop point of view and from a crop-production point of view – [to the fact] that we can look forward to a pretty good year. That’s good from a food security point of view, albeit at higher production costs.
CIARAN RYAN: Let’s talk about innovation and some of the initiatives that farmers are implementing to address these challenges that you’ve been talking about. How do they remain competitive and ensure food security at the same time?
JOHN HUDSON: That’s a good question, and I think this is not the first time we’ve had this margin squeeze. The margin squeeze has played out for many years. If I look back over time, yes – there are times [when] margins open up, and then they squeeze again. But if you look at the long-term trend, there’s been a continuation of this margin squeeze.
Really, what farmers have done is they’ve looked to technology in many cases. The likes of precision farming I think has just taken off because quite honestly, farmers need to do more with less.
And the efficiency that that comes with that – whether you’re talking about water efficiency, energy efficiency, improved soil health, etc – we see that playing out where farmers are being much more precise around efficiency in their farming businesses. [It’s about] getting those costs under control, but at the same time doing more: so pushing in terms of yields and pushing in terms of how we get more out of the same natural resources that we have which, quite frankly, are really limited.
Maybe soil health is a good example. While you might argue this is not necessarily high tech, it really talks to improving soil health, improving carbon levels in soil, looking after the soil – which in turn gives you far better yields and also the ability to withstand droughts.
I’ve mentioned that we are in a positive weather phase, if you want to call it that, but no doubt climate change is still going to play out and droughts will come down the line. I think what I’m really saying is that, yes, [there’s] innovation, [and] I think farmers by nature are really good at this because of the challenges they face. But the adoption of technology has really helped them combat their cost-price squeeze, and that keeps them in the game.
Our farmers don’t benefit from a high level of state support. In many ways I think that has made [them] really competitive, because many of these challenges that they’ve faced over time they’ve had to deal with without state support.
That safety net is not there, which I think makes our sector extremely agile and also responsive in terms of how they deal with these challenges.
That’s resulted in, I think from a commercial farming point of view, a strong, strong base for commercial farmers to deal with this type of uncertainty, and it stands them in good stead for the longer term.
CIARAN RYAN: One of the things we are reading about, for example, is renewable energy with the Eskom crisis that we are experiencing at the moment. Are a lot of [them] implementing renewable energy solutions as a power source for farming?
JOHN HUDSON: Yes, certainly renewable energy is a big talking point. I think what I need to point out when we are looking at energy, or water for that matter, is that this becomes a business-risk type of discussion.
If you’re talking to a farmer and their energy supply is compromised or their water supply is compromised and they need to be more efficient with water, it starts to impact their business risk.
Where I see the take-up of these smart farming practices is that, with farmers the take-up obviously just gets elevated [since] there’s a direct impact on their business. Load shedding is a perfect example of that, and there are multiple points around this.
Security of supply is a big issue.
You have to have water to put on your citrus crops, for example. You do that through energy and through electricity, and that is critical in many of our farming operations. Timing is everything, and if you miss out in terms of water application at a critical time in the plant cycle, that can impact yield, for example.
So you start to see that the impact of load shedding goes far beyond just having blackouts. It really impacts the profitability and the long-term sustainability of these businesses, and therefore the uptake is certainly there.
The other point is, from a cost point of view, I’ve mentioned that the cost-price squeeze is a real problem for farmers. If you are looking to peg one of your major costs – in this case energy – then renewable energy certainly does that.
Yes, there’s the capex cost at the outset, but over time you are then able to peg one of the major costs in your farming business. And that could be the difference going forward in terms of being able to stay competitive.
So I think renewable energy has a massive application going forward. And from a Nedbank point of view, we recognise that these key focus areas – water, energy, soil health, etc – are crucial and therefore we are looking to support our farmers.
The latest partnership that we are looking at currently is with Hohm Energy. Hohm Energy really is a one-stop shop in terms of renewable energy from end to end. Because farmers are looking to banks to add value, to address these key risks in their farming businesses and therefore the finance we can provide drives this positive change. In this case, renewable energy is certainly top of the list.
CIARAN RYAN: Farming is clearly becoming very complex and there are a lot of risks. We’ve spoken about the weather, although the weather’s been pretty good over the last couple of years, and you’ve already said we should have a pretty good summer season.
But just talk about some of these partnerships that are coming to the fore and what Nedbank is doing in this regard.
JOHN HUDSON: Yes, I think partnerships are going to be key going forward, whether public/private – and I’ll speak to that briefly – but also just within the private sector.
Certainly from a Nedbank point of view, we’d like to think that we are really good at lending money and looking after people’s money – but we are not necessarily the expert when it comes to renewable energy or water efficiency, etc, and transformation.
I’ll give you one other example there from a transformation point of view where we are forming a partnership as well.
The partners I’m talking about are partners who we think can bring value to the table, and by partnering with them it brings solutions to the pain points of farmers.
So certainly if you look at the Hohm Energy [partnership], which I’ve just mentioned, that is targeted at bringing a renewable energy solution to the table and utilising the strengths of a partner like Hohm Energy to put a really exciting and innovative solution on the table, which guides farmers through the process of putting that in place. For us that’s key because there are certain things that we probably don’t do as well, as banks, and therefore why not look to the experts?
If you look at another one in the water space, Agrico is a company that makes centre-pivot irrigation. They’ve been in business for 116 years. We are partnering with them to bring a funding solution for irrigation and, in this case, centre-pivot irrigation. Again, this talks to water efficiency going forward and so on. The smart boxes they apply on their centre pivots really start to talk to that precision farming that I mentioned earlier, and the focus on water efficiency. So that’s another example.
If I turn to transformation – and I think this is a massive challenge for the sector – whether it’s private or public, and whether it’s just what the private sector can do to support transformation, there are a lot of like-minded partners wanting the same outcome. But sometimes we’ve been driving this in isolation and what better than to then come together?
The example that I’m going to give is SA Pals (Partners in Agri Land Solutions). SA Pals, which started out in the Western Cape but is spreading its wings around the country, supports structuring transformation deals. And so we’ve said to SA Pals well, we are going to support you, we are going to capacitate you in terms of funding, we’re going to provide funding to capacitate you in doing more of what you’re really good at. That’s structuring deals, identifying deals, putting them together, bringing them to the bank for finance.
So I think that’s a really positive development and these types of partnerships certainly stand the sector in good stead and are vital for the country.
As we started out – you mentioned the medium-term budget speech – well, there’s so much in that which is a positive in my view, but much of it requires partnerships to really implement it and bring it to life.
So I think, again, we are looking at the Blended Finance Scheme and all the commercial banks, not only Nedbank, are looking to partner with government in this case – where government will bring the grant funding to the table, but the banks will do the rest. There again, that’s a pivotal partnership going forward in terms of land reform and increasing the level of black participation.
So I think it’s very exciting and maybe a new area for banks – and certainly [for] Nedbank in terms of partnerships – but one that we are really looking forward to.
CIARAN RYAN: Okay. Finally John, just tell us about Nedbank Avo. It’s a helluva of a good name for an agricultural product. What is it, and explain what it offers and how it benefits your clients?
JOHN HUDSON: Yeah, Avo is, I guess, a super food, so it probably is a good choice from a farming point of view.
Nedbank Avo is an e-commerce platform, but it’s either B2C, which is business to customer, or B2B, which is business to business.
Business to business would be a double-sided platform. This allows for transactions to happen in that e-commerce world.
What we did notice during Covid, for example, is that many consumers were looking to buy direct from their suppliers, and the wine farms would be a really good example.
We have a lot of wine farmers that bank with Nedbank, but what they were finding is that … they needed to reach their customer base directly. And what better way than to do it through Avo or this platform, which then puts buyers and sellers in contact.
I think it has huge potential going forward. Although the pandemic, you could argue, is over,
I see that this trend of the shortening of that supply chain and consumers looking to buy direct from suppliers or farmers continuing, whether that’s locally or [as] an international concept.
Certainly Avo provides that platform for buyers and sellers to connect, not only to sell their goods. But I think going forward it’s really important for farmers to tell their story, their…unique story, what they are producing and the quality of their product, etc.
So I think these are exciting times and I certainly see Nedbank Avo playing a role in that regard.
CIARAN RYAN: Exciting times indeed. We’re going to leave it there. Thank you very much, John Hudson, for joining us.
Brought to you by Nedbank Agriculture.