Advice on applying for an agricultural production loan

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"Banks often take the seasonal needs of primary producers into consideration when designing agricultural production loans. This usually makes them aware of how farmers seldom take advantage of the full range of production options available to them," says Nico Groenewald, Head of Agribusiness at Standard Bank.

"The reason for this appears to be a lack of financial planning, which, in most cases, is caused by a lack of financial knowledge. The irony is that help is readily available. For instance, at Standard Bank we have dedicated agricultural relationship managers and highly qualified agricultural economists in all provinces who can help with everything from budgeting to establishing the long-term viability of expansion projects.

Farmers ought to develop a personal understanding of what makes their operations tick

"However, it is important, for their long-term sustainability, that farmers develop a personal understanding of what makes their operations tick. This will give us the confidence to make funds available to them."

"For example, most farmers have more than one product, each with its own production cycle and unique requirements. One of the criteria for qualifying for a production loan, which covers the inputs for a production cycle, is to pinpoint when those inputs will be needed. This enables us to release the funds at the right time," says Groenewald.

"To ensure the release of funds at the right time across multiple products and their individual production cycles, a farmer really needs to think ahead - or risk not being able to plant a crop because he did not apply for a production loan in time."

Planning should start with a market-based decision

Groenewald says planning should start with a market-based decision rather than a production decision. "It is essential to know the state of your particular industry. Its current and projected stock and price levels will tell you very quickly how much you should produce or whether you should switch to other products suitable to your area and climate."

From an objective review of the market, the farmer must then examine the costs involved in producing for his selected market.

"While the prices may initially look attractive, you may find that your input and other costs will wipe out any potential profit," says Groenewald.

"Information about your costs is also crucial to your bank in deciding whether or not your margins are sufficient to support the repayment of a loan."

Insight into costs and prices enables a farmer to mitigate both production and price risks by means of insurance that includes adverse weather and hedging price shifts during a season.

Standard Bank always recommends hedging by way of selling one third of a crop on a pre-season minimum price contract and one third on a pre-season fixed price contract. The last third is kept for the end of season premiums. This approach eliminates the risk of losing good income from the main part of the crop.

Groenewald advises farmers not to limit themselves to planning only for the next season. "Whatever you plan for now has an impact on your longer term aspirations for the farm. Use your current plans as the foundation of your future growth."

"Specifically, ensure that your agricultural production loans work continuously in your favour, keeping you profitable over time and, thereby, making your operation progressively more sustainable," says Groenewald.