Evaluating grain producers' production financing alternatives: evidence from South Africa

Abstract

Purpose -The purpose of this paper is to identify, present and compare agricultural production financing alternatives available to grain producers in South Africa. From the South African perspective, agricultural land cannot always be utilised as collateral and therefore alternative financing has developed. Design/methodology/approach -The study makes use of an exploratory study by applying qualitative techniques. The research population was agricultural finance providers in South Africa and semi-structured interviews were conducted with representatives of the sample. Findings -The production financing alternatives identified and presented include: grain contract financing; grain contract financing with additional collateral; and corporate farming. A comparison of these alternatives indicates that although the traditional balance sheet financing is a cheaper form of financing, using agricultural land as collateral has a number of limitations, especially within the South African context. Practical implications -Using agricultural land as collateral to obtain production financing is not always viable considering the present South African agricultural environment. Commercial grain producers should therefore consider the identified alternative production financing. Originality/value -Limited research on agricultural production finance from the South African perspective has been performed. Furthermore, no previous research on identifying production financing alternatives without utilising agricultural land as collateral has been performed. This paper therefore provides new knowledge by combining South African practice with theory.

Agricultural land valuation methods used by financiers: The case of South Africa

“…As collateral is a regular ingredient of risky lending, it serves to limit potential losses for financiers (Menkhoff et al, 2012). Within the South African context, traditionally the balance sheet lending approach is followed, where the financier generally takes out a lien on the producer's land, which serves as collateral for the value of the producer's loan (Middelberg, 2013). In addition, or alternatively, the financier might require the following, or a combination thereof, to serve as collateral for a production loan including: i) crop insurance, either limited peril insurance or multiple peril crop insurance; ii) a cession on non-current assets excluding land; and/or iii) the expected harvest.…”

“…Although alternative financing models have been developed, using both the expected harvest and crop insurance as collateral, the use of agricultural land as collateral in providing financing to producers is still the primary and cheaper form of financing (Middelberg, 2013;Anseeuw & Ducastel, 2012). However, to place a value on the collateral, the agricultural financier has to value the agricultural land and this valuation process is intricate and complex (Wessels & Willemse, 2013;Garcia & Grande, 2003;Cabrido, 1990).…”

Increasing the usefulness of farm financial information and management

“…Usefulness of financial information is problematic when being discussed in the farming context because Australian farms must record and report financial transactions for taxation purposes, and decision making is not a function of compliance reporting (Marriott and Marriott, 2000). This perhaps explains why a number of studies across a number of countries have consistently found that farmers find financial information not very useful and very difficult to understand (Argilés and Slof, 2003;Halabi et al, 2010;Wolf et al, 2011;Middelberg, 2013).…”