Finance, not prices, key to farmer viability

13 Jan, 2023 - 00:01 0 Views
Finance, not prices, key to farmer viability

eBusiness Weekly

Farmers complain frequently about the cost of inputs, especially fertilisers, which to be fair are the largest single input by value they have to fund.

Yet the problem is not so much the cost of fertilisers, but the whole business operation. In theory it does not really matter what the costs of production are, so long as the final price paid by markets for what is produced is greater. This is the same in all businesses. If you sell something for more than it cost to produce you make a profit; if you sell for less you make a loss.

However in farming there are some particular difficulties. The first is the time lag. Generally a farmer needs inputs at least six months before there is a harvest in the required condition that can be sold. This is a far longer time gap than most industrialists, for example, would face. It should also be noted that the bulk of the inputs are needed at the beginning, with only some of the labour costs, if any, spread out over the whole production process.

The second problem is that while some inputs are available when a harvest is sold, and so can be bought immediately, quite a few are still being made, imported or gathered. So the new inputs make not be available, even if the farmer has the money, for several months, not perhaps a major problem unless inflation is more than a few percent, and in Zimbabwe it is frequently more than a few percent.

The third problem is the one that all businesses face, the access to finance. Interest rates are at present high, and there is that period of up to six months that a farmer required a financing loan, without much room for this loan to come in tranches.

The fourth problem is security. The main practical security is the crop being grown. In theory those with title deeds or leases can also use those for security, although banks and other financiers are usually reluctant to foreclose on a title deed or lease because of the backlash that can result, let alone the fairly complex process needed for foreclosure on real-estate, especially in the complex arrangements in Zimbabwe when it comes to rural land. There are serious limits over who would, for example, be allowed to bid for such property, even if it could be auctioned.

The fifth problem is the risk, that the farmer could lose the crop, or a good chunk of the crop, if there is drought, a prolonged dry spell, fire or flood.

Various ideas have been floated to reduce the cost of fertiliser, but all introduce so many distortions that they probably introduce more difficulties that they solve. Subsidies have been tried, and see everything from shortages, truckloads of smuggled fertiliser going out of the country, black markets when someone manages to create a corner in subsidised fertiliser and the difficulty of pricing the final product. In effect they tend to be subsidising the final cost of food, rather than the farmers.

Subsidies and price control in Zimbabwe saw phosphate mining decline, so eventually pushing up imports and thus prices. There was also the problem of finding the electricity, let along the money, for manufacturing ammonia from air and water through liquefaction and electrolysis, only possible when there was surplus Kariba power available at low cost in off peak periods. However a lot more local production can at least stabilise prices, and ensure greater availability.

So a lot of the problem and solutions leave the realm of the actual prices of inputs and the producer prices, which must be higher than the cost of production for the average farmer, not the super-efficient farmer at the apex of the business section but the bulk of farmers in the middle levels.

This has been a factor in Zimbabwe for decades. In pre-colonial times and in the first quarter century of colonialism there was little high-input farming. The population densities were sufficiently low that extensive agriculture was possible, that is clearing what amounted to virgin land, using the field for a couple of years and then letting it lie fallow for at least a decade. This worked sustainably if only 10 percent of arable land was actively farmed for crops.

It would last longer, unsustainably, as the percentage devoted to crops rose, but in this case the virgin land was not kept constant, but was constantly being cut back, and when there was no more then there was no more. So fertiliser, and that includes manuring on small plots, became more necessary, and input costs in labour or money rose. We need to remember at this stage that there were perhaps less than 1000 active white commercial farmers, with most while landlords renting out plots on their “farms” to the people who were living there and had been for a long time.

But those farmers, as higher levels of inputs were required, had the political power to cause new systems to be created, for a start controlled markets, the Maize Control Board, which became the GMB, being the first in the early 1930s, largely to ensure there was no Financompetition from black farmers as well as a guaranteed price for the whites, plus more bank lending. With the guaranteed prices the two banks, Standard and Barclays as they were then known, were willing to lend to farmers who they knew were serious, with managers visiting the less than 2000 farms, and a Land Bank was set up where the title deeds could be kept for longer term finance, as well as seasonal finance.

After the Second World War, with an influx of white immigrants including some would be farmers, the amount of land in commercial production rocketed, with the major population removals now coming into play. These white farmers worked out how to dominate the colonial political set-up, first in collaboration with the white professionals and then by dominating the new RF and cutting in the skilled white workers by promising no black competition for their jobs.

In both set-ups a great deal of financing was created, first through the additional marketing boards and then by combining all of these under the Agricultural Finance Corporation. The controlled marketing of just about everything, including beef and pork, and longer term finance was backed by the banking sector, dealing with a maximum of 8 000 farmers with large average holdings, a minimum of 1 200ha. That allowed personal knowledge of each farmer by a bank manager. Title deeds were still kept in bank safes, but foreclosure was rare.

The same system continued after independence, despite the problems of most small-scale farmers not having title deeds for security. But the guaranteed producer prices, more self-financing, some free or subsidised inputs and, with the Cotton Marketing Board a highly innovative group guarantee scheme, whereby a group of say 50 farmers would guarantee each other, kept the wheels on. They came off with inflation, when self-financing was no longer an option.

The present Government has been trying to move back to what worked, with success but still dealing with a work in progress. Small-scale farmers get free inputs, up to a very modest maximum but enough to restart commercial production in that sector, although expansion will be requiring extra finance in time, probably from contract farming.

The middle and large producers get Government guaranteed loans. The danger here is that some decline to pay these back, and already this is causing strains in the system. Enforcement is difficult if there is side-marketing. This should not be happening. This was how farming was done for many years between the Second World War and land reform. The AFC was the bedrock lender and had its capital topped up each year so it could expand. Hyperinflation of course wiped that 50-year accumulation of capital out very quickly.

There is a fair amount of nonsense written and said that land reform killed quite a bit of commercial agriculture in Zimbabwe. That is not true. Rather it was the destruction of available finance through hyperinflation, and a desperate attempt to use subsidies that hit all their problems. We see this with tobacco, where finance and discipline were available, and fairly quickly a small-holder farming community became dominant in the sector, driving production to new records. The financing was via by contract farming, rather than self-financing with bank loans, but that was just the method.

What tobacco showed was that land reform would increase production, so long as finance was available and side-marketing was stomped on hard. The partial collapse after land reform was a function of the hyperinflation, more than anything else.

The Second Republic has reorganised the AFC, and has started a capitalisation programme. The old boards are being reenergised, with Cottco on its way to being taken over by the State again. So the lessons of the past quarter century have been learned.

The way forward does require the inflation battle to be won decisively so that six month and even 12-month financing becomes sustainable and practical. The merchant banking sector needs to be enlarged again, and this will include AFC and the new commodity exchanges, so that the flow of finance can be managed better over 12 months. Farmers borrow to buy inputs, they pay this back when they sell the crop, the crop-buyer then has to have the money, and with merchant banking the loan just changes. Then that loan can be eliminated as the crop is sold gradually over the next 12 months.

Under low inflation this rotation of money over the 18 months from the time the seed and fertiliser is bought to the time when the last spoonful of the resulting harvest is eaten becomes viable again. So farm financing is reliant, like so much, on the defeat of inflation. The rest just needs smart banking practices and a growing capital base.


Share This:

Sponsored Links