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Credit and South African Agriculture

Let us start with agriculture’s direct contribution to South Africa’s GDP: it was a little over 2% at the last count. This figure is sometimes used for political reasons to downgrade the importance of agriculture in the South African economy.

Tragically, this is very simplistic thinking and does not show the full picture: agriculture does

not operate in a vacuum. It buys from and provides raw materials for manufacturing and purchases a host of services. But that is not all: related sectors are agribusiness, farming

operations, input manufacturers, suppliers and co-ops; food processors, distributors and

traders, to name a few. Research shows that agriculture and its related sectors actually contribute more than 15% of South Africa’s GDP when all related and second-stage industries are taken into account.

Agriculture plays an important role in the process of economic development and can contribute significantly to household food security. The National Development Plan sets out a broad vision of eliminating poverty and reducing inequality by 2030.

If we have to define agricultural credit, we would possibly define it as a type of financing used

to provide funding for agricultural producers. This may be in the form of letters of credit, loans

or banker's acceptance documents. This is generally used to provide investment from outside resources to the farming sector.

The answer to the question of why a farmer requires credit is simple: credit is needed in every type of business and agriculture is no exception. There are numerous reasons for needing credit: the capacity of farmers to save and invest is very low. Agricultural productivity is low due to the low use of inputs. Production suffers from weather risks. Farmers therefore need credit to increase productivity and efficiency in agriculture. This need increases over the years with the rise in the use of fertilisers, mechanisation and increasing prices.

Agricultural labour is often under-employed.

The need for agricultural credit also becomes more important when a farmer moves from traditional agriculture to modern agriculture. The role players in credit and financial assistance are not always clearly defined, but the six major sources of credit for farmers are banks (56%), agricultural cooperatives and agribusinesses (9%), the Land and Agricultural Development Bank of South Africa (the Land Bank) (30%), private creditors (3%), and other creditors and financial institutions (2%).

Access to credit for smallholder farmers remains a challenge in most developing countries. This is evidenced by the trend and pattern of bank credit granted to smallholder farmers in South Africa, both before and after the attainment of a democratic government. Analyses show that bank credit granted to smallholder farmers is, and continues to be, a small fraction of the total credit to the private sector and constitutes a very small proportion of GDP. The smallholder farmer sector is observed to face the same constraints with respect to credit as SMEs, a category of enterprises to which smallholder farmers also belong. In view of the importance of agriculture in general smallholder farmers in particular to South Africa's poverty alleviation and food security drive, important policy implications are involved.

The Department of Agriculture, Forestry and Fisheries was disestablished in June of 2019. The agriculture function was incorporated into the new Department of Agriculture, Land Reform and Rural Development, while the forestry and fisheries functions were incorporated into the new Department of Environment, Forestry and Fisheries.

This vision for this new department is supported by ideas such as decent employment through inclusive economic growth, comprehensive rural development and land reform, and protecting and enhancing our environmental assets and natural resources.

According to Statistics South Africa’s General Household Survey of 2018, only 14,8% of South African households were involved in some sort of agricultural production activities during the reference period. While 37,1% of the households in Limpopo and 29,3% of the households in the Eastern Cape engaged in some agricultural activity, participation was much lower in the Western Cape (2,5%) and Gauteng (4,0%). Of the households that were involved in agriculture, 10,1% cultivated farmland, while 90,3% created backyard gardens.

Nationally, more than three quarters (75,6%) of the households that were involved in agriculture were attempting to secure an additional source of food. Provincially, 88,7% of the households in Limpopo, and 78,8% of the households in Mpumalanga were engaged in agricultural activities as a way to augment their existing sources of food.

By comparison, 41,4% of the households in the Western Cape practised agriculture as a leisure activity. Since agriculture is not so common in Gauteng, this finding might point to the fact that many households engage in agriculture as a last option.

Of the households that were engaged in agricultural production, 50,6% cultivated grains, and 53,3% grew fruit and vegetables. Livestock were produced by 48,7% of the country’s households, while 36,6% produced poultry. Only 10,0% of the households involved in agriculture reported getting agriculture-related support from the government during the

year preceding the survey.

The only provinces where significant support was provided for farming households were the Eastern Cape (25,1%) and Northern Cape (17,3%). Nationally, slightly less than two per cent (1,3%) of the households reported receiving training, and 6,3% received dipping/livestock

vaccination services. According to Stats SA, the percentage of persons who experienced

hunger decreased from 29,3% in 2002 to 11,3% in 2018. The percentage of households who were vulnerable to hunger reflects the same pattern, as it declined from 24,2% in 2002 to 9,7% in 2018, including a spell during which the percentage increased to 13,2% in 2008 before continuing its decline.

Let us explore some of the reasons why farmers need agricultural credit in more depth:

Purchase of new inputs Farmers need finance to purchase new inputs, which include seeds,

fertilisers, pesticides, irrigation water, etc. If the seed of high-yielding crop varieties and other modern inputs are made available to the farmers they can increase the productivity not only of land, but also of labour.

Purchase of implements

Farmers require credit to purchase tractors, threshers, harvesters, water pumping sets, etc. The use of the appropriate machinery in fields will increase production, as more than one crop can be grown on the same piece of land at the same time.

Better management of risk

Credit enables farmers to better manage the risks of uncertainties of price, weather, etc. They can borrow money on rainy days and pay back the loans during peak crop years.

Permanent improvement of land Credit also helps the farmers to make permanent improvements to their land like sink wells, reclaim land, practise horticulture, rotate crops, etc.

Better marketing of crops

If timely credit is available to farmers, they need not sell the produce immediately after the harvest is over. At that time the prices of agricultural goods are low in the market. Credit enables the farmers to withhold the agricultural surplus and sell when prices in the market are high.

Facing crises

Farmers require credit to face crises. The crisis can be caused by the failure of their crop, drought or floods. In conclusion, should we carefully venture into improving credit to the

agricultural sector of our economy, we could enhance employment opportunities through inclusive economic growth. Furthermore, it should lead to a more comprehensive rural development and land reform strategy to protect and enhance our environmental assets and natural resources, resulting in more food security.

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