In a no-nonsense analysis, renowned agricultural economist Professor Johann Kirsten hits back at those playing “cheap agricultural politics”, often blaming up-and-coming black farmers for the Land Bank’s financial woes. He says loans to white commercial farmers actually represent about 74% of the bank’s total book.
These days there are a lot of media reports and social media activity and comments about the Land Bank. Reporting in Rapport, Landbouweekblad and various public statements provides insufficient context, uses incorrect facts and has little understanding of the historical lead-up to the current situation in the Land Bank.
It is therefore necessary to put matters in perspective. In my 35-year career as an agricultural economist and professor of agricultural economics, agricultural financing and the role of the Land Bank have usually been an important focal point in my courses and research work – whether from a policy, institutional or financial point of view. So, I watched the Land Bank “movie” play out as an interested outsider over a little over 20 years.
Since its establishment in 1912, the Land Bank has played a critical role in the development and commercialisation of the agricultural sector. The Land Bank was therefore established from the outset with a development mandate (initially for “emerging” white farmers) to bridge the gap in the commercial financing of the agricultural sector.
The state has always been an important partner in this mandate and even the Reserve Bank was at one point obliged to invest in Land Bank long-term bonds. Up until the end of the 1990s, (only white) farmers were financed by the Land Bank on good terms to buy land and livestock and make permanent improvements to farms. These good terms included:
- Long-term mortgage loans from 25 to 45 years;
- Interest rates lower than the prime lending rate of commercial banks; and
- Application of simple interest.
There was little direct production credit provided to farmers by the Land Bank. The bank instead provided credit facilities to agricultural cooperatives which themselves entered into direct credit agreements with farmers.
Historic overview
It is quite informative to look up old annual reports of the bank. In 1980, all long-term loans to farmers were financed by government capital (30%), long-term bonds (55%) and reserves (13%). The production credit facilities to cooperatives and marketing boards were substantial (R52 billion in 2022 values) and the capital for this was obtained from overdraft facilities (53%), farmers’ deposits (22%), and Land Bank bonds (21%).
After the democratic elections of 1994, it was necessary that agricultural financing had to adjust. The Strauss committee’s recommendations and the new Land Bank Act (2002) ushered in a new period with a view to carrying out a “new” development mandate.
Unfortunately, the leadership of the bank also made a series of strategic mistakes and decisions in the first decade of the new century.
Among other things, it was decided to compete with the commercial banks, change the favorable lending terms of the previous 90 years and move outside the mandate by granting loans to football teams, golf courses and property development.
When the global recession hit in 2008-2009, many of these businesses went bankrupt and large sums of capital were written down. Most of this was government capital and reserves built up with great care since 1912. The bank was also then basically insolvent without following its real development mandate as foreseen and had to receive a bailout from the state. The National Treasury took control of the bank in 2010 and appointed new leadership.
The bank’s strategy was then to aggressively grow the loan book to a peak of R45 billion. It was a strange arrangement in which the bank involved intermediaries or partners such as Obara, Suidwes, GWK, AFGRI/Unigro, etc. used to recruit and manage clients on behalf of the Land Bank.
The customers (again, mainly white farmers) were therefore Land Bank customers from day one although the contracts, credit decisions, credit checks were carried out by the intermediaries. However, the risk of defaults was for the bank’s account.
Moreover, these agreements were essentially to the detriment of the bank with the interest margin being shared 50/50 with the Land Bank which also had to pay a substantive service fee to the partners. But in spite of this, it began to appear more and more that there were defaults and poor control of the loans. This forced the bank to suspend the agreements with the intermediaries.
What really caused the Land Bank liquidity crisis?
At the same time, the bank was plunged into a liquidity crisis when the largest capital providers did not roll over their credit facilities as usual. This was a direct result of the economic crisis caused by the Covid-19 pandemic. The bank was therefore technically insolvent because there was insufficient cash to repay these loans.
So, the liquidity crisis is the result of a combination of factors:
- Certain loan facilities to the bank which have been called upon;
- Poor repayment behaviour of commercial farmers;
- Poor management of Land Bank’s clients by some of the strategic partners, and in some cases indiscriminate granting of loans to farmers; and
- The classic error where the maturities of assets (loans) and the capital to finance them do not match. About R17 billion of the capital was acquired on the money market (short term) while around R18 billion of assets were captured in long term mortgage loans to farmers.
The liquidity crisis necessitates the bank to act responsibly and make sure that all debts are settled on time so that the bank can fulfill its obligations. It is therefore important that bad debts should be addressed to farmers, and therefore farmers who are in financial distress should get in touch with their banker early on to ask for restructuring of their loans and not wait until the sheriff is on their doorstep.
When I look at the stories in the media, it seems as if it was only hoped that the Land Bank would disappear and that people would get away with no payment. It’s a shame if it’s true.
The point is also often made that the Land Bank has decided to focus mainly on financing the emerging agriculture and is therefore on the verge of insolvency.
This statement is probably one of the biggest untruths and myths in South African agriculture and is also widely proclaimed by agricultural organisations without properly checking the facts. Loans to white commercial farmers represent about 74% of the total book of the Land Bank.
From the nature of the matter, the largest part of the overdue debt of R12 billion (June 2022) is therefore not with the emerging farmers. Some of the bad debts can be attributed to the years of drought in the west of the country and this is understandable. But the largest part of the Land Bank’s total book is based in the grain industries where particularly good harvests have been made in the last few years. It is therefore incomprehensible that farmers have not stayed up to date with their installments. Where are these profits going?
I agree with many commentators that many mistakes were made by the Land Bank in the period between 1999 and 2019 and these were brought to a head by the Covid-19 crisis in March 2020.
However, there are some facts and nuances and comments which in the recent past have brought forward the wrong image about the Land Bank. Certain individuals and organisations have also been guilty of spreading falsehoods for the purpose of cheap agricultural politics. It is therefore important that such persons sit down with the Land Bank management instead to familiarise themselves with the real facts.
The new board of the Land Bank is actively working to straighten out the bank, but first the solution to the liquidity crisis must be reached with the bank’s capital providers for the bank to once again be able to fulfill its rightful “developmental” role in the agricultural sector so that black farmers can also be part of the growing agricultural sector. Until then, it is important that role players in the agricultural sector enter the debate about the Land Bank maturely and responsibly and with full facts.
- Johann Kirsten is a professor of agricultural economics and director of the Bureau of Economic Research at Stellenbosch University. The article, which originally appeared in the Afrikaans-language Sunday newspaper Rapport, is published with Kirsten’s permission.
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