ANDILE NTINGI: Lenders must change approach to financing agriculture in rural areas

Many aspiring commercial farmers and would-be lenders fear exploring investment opportunities on communally-owned land due to insecure land tenure.

This major investment hurdle, often characterised by communities’ inability to leverage their landholdings due to lack of title deeds, is also interwoven with disputes over land ownership in many parts of rural SA. 

Without title deeds communal landowners are cut off from financial markets because they are unable to put up their land as collateral when raising capital.

This lack of capital injection by financial institutions is one of the leading reasons why vast tracks of communal land lie barren and unploughed, with little prospect of attracting professional farmers to commercially exploit it to create employment and promote food security in rural areas.

However, there are a few financial institutions that have managed to dip their toes into commercial farming practised on communal land. In 2015 Old Mutual and Nedbank started providing loan financing to a Wiphold-led commercial dryland maize and soya bean farming venture on communal land in Centane and Mbhashe in the Eastern Cape.

The venture is also financed through revenue from crop sales and working capital from Wiphold, which acquired equipment for tillage and harvesting operations. The Eastern Cape department of rural development & agrarian reform also chipped in with grant funding for mechanisation and fencing.

The venture, which has access to 4,000ha of communal land and benefits 3,000 landowners, is 40% owned by Wipagriculture, a subsidiary of Wiphold, and the remaining 60% of shares is held by the community.

The project is a brainchild of Wiphold executive director Gloria Serobe, who hails from Centane. Serobe, whose company Wiphold holds BEE stakes in Nedbank and Old Mutual, has proved that it is possible for commercial farmers to successfully partner with landowners to make communal land productive.

Wipagriculture is run along commercial lines, cleverly implementing bulk procurement of inputs to reduce costs, and selling its grain through offtake contracts. The maize is sold via Farmwise, which is then supplied to mills such as Epol, Monti Feeds, Rocklands, Paramount Mills and Afgri Patterson. The company also sells some of the maize to feedlots and poultry farmers.

Amadlelo Agri is another black-owned company that has demonstrated that collaboration between rural landowners and commercial farmers can lead to productive use of communal land. The diversified agribusiness practices pasture-based dairy farming on 2,205ha of irrigated communal land in the Eastern Cape, where it operates five dairy farms.

Amadlelo produces more than 28-million litres of milk a year, and recently became the first black-owned company to conclude a supply agreement with Danone, which will result in the company supplying about 10% of the French food multinational’s SA milk requirements annually. Danone has said it is looking to double milk volumes from Amadlelo, implying that Amadlelo is likely to go to the market to raise capital to fund this expansion.

Amadlelo also has an offtake contract with Sundale Dairy, based in the East London Industrial Development Zone, where its milk is processed into full cream milk, amasi, yoghurt and cheese.

The investment made by Amadlelo has had positive economic spin-offs to the extent that it has also led to the resuscitation of irrigation schemes such as Ncora in Transkei and Shiloh and Keiskama in the former Ciskei.

Given that companies like Wiphold and Amadlelo have dispelled the notion that large-scale commercial farming is not possible on communal land, SA financial institutions must rethink their traditional approach to financing agriculture, which requires borrowers to put up their land as collateral to access loans.

However, Agrarius, an investment firm that recently listed a R10bn sustainability Sharia-compliant note programme on the JSE, has adopted an alternative approach to the traditional financing model.

Agrarius does not require borrowers to put up land as primary collateral if they have offtake contracts in place with clearly defined pricing agreements. The company has stated that it will primarily invest in already established agribusinesses that are looking for funding to grow existing operations.  

Many financial institutions will watch closely how Agrarius fares in this underserved market by the financial services sector.

In turn, rural communities must organise themselves in a manner that makes it easier to integrate them into the value chains of the mainstream economy. This is possible if they aggregate their land into large farming blocks and then enter into partnerships with professional farmers that have expertise and knowledge in commercial farming. 

Many families have parcels of land averaging 1.5ha in size, allocated to them by their chiefs or headmen and passed from generation to generation.

In October 2020 Wiphold released an 11-page document about its Eastern Cape project titled “Igniting rural economies and restoring dignity”, where it stressed the importance of securing buy-in from community members when engaging in commercial arrangements with them.

In the document the company explains that years of deep poverty and unfulfilled promises from several private sector initiatives have reduced trust levels, resulting in a high prevalence of crop and livestock theft.

The company said it has had to set aside funds each year for cash distribution to landowners to mitigate the problem while working towards building profitability for its farming venture. The strategy has been successful in reducing crop theft.

There is plenty of barren and fallow land in the Eastern Cape, but commercial farmers that are interested in venturing into that space must take Wiphold’s advice to heart when engaging landowners.

• Ntingi is founder of GetBiz.