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Low interest rates create capital expansion opportunity for farmers
9 May 2011

Current low interest rates and the slight weakening of the South African rand are creating the ideal opportunity for farmers in South Africa to undertake capital expansion. 

So says Standard Bank Group's Director of Agricultural Banking Willie du Plessis. "In spite of the uncertainty in agriculture being created by proposed legislation such as the security of tenure green paper and the fact that globally increasing food prices will increase inflation in South Africa, we're very comfortable about supporting farmers wanting to expand or diversify their business. 

"Standard Bank's view is that interest rates will stay low and stable for the foreseeable future. Also, although the rand may weaken a little more, we're expecting it to remain relatively stable in the medium term, making the financial environment that much more predictable. And, of course, a weaker rand is favourable for importing equipment not only for primary agriculture but also for the downstream processing plants that this country needs in order for the agricultural sector to grow and provide South Africa with greater food security. 

"The hike in commodity prices that has pushed food prices up internationally has its downside, of course. But it also creates optimism for our local producers, who have been struggling to maintain margins and sustainability. 

"In other words, we're seeing a confluence of two significant trends. The time is right to push hard on production - and the time is right to do so by investing in capital expansion." 

A trend towards investment is already evident, with South Africa tractor sales up by 8% on previous years - and sales of other agricultural equipment also showing steady increases. 

Mr du Plessis advises, however, that an organic approach to capital expansion is likely to yield the best returns. 

"Agriculture stands at a cross-roads, where sustainability is as much about integration of farming methods and options as it is about the environment and finance. 

"That may seem counter-intuitive, when the trend is towards diversification of markets and products. But, integration is about making the most of what you've already got so that you can diversify to get more. A Standard Bank client who runs, for example, a number of piggeries uses the whey by-product from his dairy division as a naturally wholesome supplement to his pigs' feed. 

"In the same way, cattle farmers can expand their operations at very little additional cost by adding sheep. The two species graze differently, enabling in one step the land's output and the farmer's markets to be doubled. The addition of a maize crop gives cattle farmers a free, natural fertiliser and the maize remains food for the cattle. Costs and waste are reduced, markets are expanded, the farm becomes progressively more self-sustaining, the environment is served and preserved - and the bank sees an extremely good business case that it is happy to fund." 

Buying an adjacent property in order to extend capacity falls into the same integrative diversification philosophy, as does the use of alternative energy sources to power new farming ventures. 

As Mr du Plessis says: "If you're going to put in a new chicken house, why not use solar or wind to slash your electricity costs? 

"There will always be uncertainties in any commercial environment. The trick is to find and exploit the opportunities in the changes. Capital expansion at this extremely favourable time means your farming operation grows. It can, therefore, provide more jobs and more education and training. So, security of tenure, for instance, becomes less of an issue than it could otherwise be. 

"It's a question of not compartmentalising agriculture, but understanding it as an organic continuum in which whatever benefits one benefits all." For more on Standard Bank Group's agricultural services, visit www.standardbank.co.za/business.

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