Given the sharp rise in SA farm debt in recent years, interest rate cuts are expected to help turn the tide on agricultural business confidence, driving a recovery in sentiment by the end of the year.
The agricultural industry has faced challenging trading conditions in 2024 as high input costs and low commodity prices put a squeeze on margins, while elevated interest rates compounded farmers’ financial stress.
This is reflected in the agribusiness confidence index (ACI), which edged up in the third quarter, but remained below the crucial 50-point level — indicating that SA agribusinesses “remain somewhat concerned about business conditions”, according to the Agricultural Business Chamber (Agbiz).
However, confidence could turn a corner by the end of the year, with the ACI likely to rise above the 50-point level in the final quarter, according to FNB senior agriculture economist Paul Makube.
The improved outlook partly reflects recent interest rate cuts, which came at the end of the third quarter, and have significant potential to reduce farmers’ debt servicing costs, given that SA’s farm debt has increased sharply in recent years.
In 2023, SA’s total agricultural debt was estimated at more than R200bn, reflecting a 10% jump from the year before and a 76% increase over the past 10 years.
Agribusinesses are also increasingly reliant on commercial banks for financing. Farm debt by commercial banks was about R165bn in 2023 — up 14% year on year and 148% from 10 years ago. In contrast, the Land Bank’s agricultural lending in 2023 was down 10% from the year before and 50% from 10 years ago.
Deteriorating trading conditions for the Land Bank have resulted in its market share of agricultural debt falling by more than 20 percentage points in the past decade, while commercial banks grew their market share by 30%.
In September, the Land Bank concluded a long-awaited debt restructuring solution with its lenders, taking it out of the debt default position it had been in for four years.
The growing debt burden was a positive sign for SA agriculture’s growth prospects, said Makube, as most of this debt represented investment in expansion programmes — which aimed to build the additional capacity needed to lift agricultural output.
A corresponding rise in total asset value to nearly R690bn in 2023 suggests that this increased investment is yielding significant growth benefits, with the sector’s combined assets gaining a striking 89% in value over the past decade — while debt as a percentage of total asset value was 30% in 2023, reflecting a moderate improvement from 34% five years ago.
“The agriculture sector managed to raise its debt levels despite tough economic conditions and elevated interest rates, which indicates resilience,” Makube told Business Day.
On top of rate cuts, agribusiness confidence was also boosted by an improved electricity supply, said Makube, with many farming operations having invested in solar power at the height of load-shedding. Added to this has been declining input costs, which “will help alleviate pressure on farmers as debt servicing costs decline”.
Additionally, seasonal conditions have been improving in recent months, recovering from a drought that began in 2023. Makube said that while rains could be delayed, “the situation will still be much better than the previous season”.
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