How SA farmers can sow seeds for future financial growth
A 2022 Access to Finance for Smallholder Farmers report found that most Sub-Saharan Africa, Latin America, and Asian smallholder farmers face a $170 billion finance gap that prevents them from increasing their crop yields and income.This shortfall highlights how financial literacy and planning are vital for farmers’ growth and ability to cultivate long-term prosperity and resilience in the dynamic and often unpredictable agriculture landscape.
A strong foundation of financial knowledge and skills empowers farmers to navigate the complexities of managing their resources effectively, just as fertile soil and favourableweather conditions are essential for a bountiful harvest. From budgeting and cash flow management to grasping the nuances of investment and risk mitigation, financial literacy and planning are crucial for sustainable success in the agricultural sector.
Weathering challenges in a dynamic landscape
Farmers must contend with natural disasters posing existential threats, particularly those who cannot afford insurance to transfer this risk. Adding to this is the unpredictability of seasonal and variable income. There’s no regular income in the farming space; it’s seasonal.
Additionally, farmers are at the mercy of market forces, with prices for their products fluctuating daily based on supply and demand dynamics. That means they must strategically decide when to sell and hold back their produce to optimise returns.
Farmers must, therefore, manage the disconnect between their irregular income and regular expenses, such as salaries, electricity, and vehicle payments. Within that seasonal and variable income, they still need to match the provision for monthly production costs because their costs are not seasonal.Navigating this complex web of challenges requires astute financial planning and cash flow management skills to ensure long-term sustainability and resilience.
The role of financial planning
Financial planning is a crucial financial literacy component for farmers, particularly those with mature and established businesses. While financial literacy focuses on fundamental skills like cash flow management, budgeting, and risk transfer, financial planning involves more sophisticated considerations around business structuring, asset protection, succession planning, and exit strategies.
For example, a Sanlam adviser recently uncovered a significant financial oversight while consulting with a family of farmers running diverse agricultural operations from fish farming to maize and citrus production. The family had not accounted for the estate duties that would befall them should one of the brothers or the father pass away. This revelation highlighted the potential need to sell off assets to cover the estate costs, jeopardising their farming operations.
Through strategic financial planning and advisory services, Sanlam’s adviser helped the family take out substantial life insurance policies to mitigate this risk. The family also eventually secured considerable retirement annuities—a step they previously hadn’t considered essential. This comprehensive financial planning approach protected the family’s assets, paving the way for a more secure financial future. Most importantly, they can pass down their farming legacy without financial disruption.
Many farmers are already quite financially literate and adept at planning strategically. However, the more sophisticated farmers who have gone through a mature cycle in their business need financial planning that includes legal structures, how to protect assets, how to make provisions for exiting the industry, and what the succession plan should look like.
Seasoned farmers can optimise their business structures for tax efficiency, mitigate risks, and ensure a smooth transition when the time comes to pass the reins to the next generation by engaging in proactive financial planning with the support of advisers and legal consultants.
Crucial components of financial literacy and planning for farmers
While the specific financial literacy and planning needs of farmers may vary based on factors such as the scale of their operations and their level of experience, several aspects areuniversally important:
- Budgeting and cash flow management: Effective budgeting and cash flow management are essential for farmers to navigate the seasonal nature of agricultural income.
- Risk management and insurance: Agriculture is inherently risky, with farmers vulnerable to various threats, from adverse weather conditions to market volatility. Financial literacy empowers farmers to understand and manage these risks through insurance to transfer risk.
- Investment decisions and capital allocation: Farmers must make complex investment decisions, from acquiring new equipment and technology to expanding their operations. Financial literacy enables farmers to evaluate the potential returns and risks associated with different investment opportunities and to allocate their capital.
- Succession planning and business structuring: Financial literacy and planning also encompasses the intricacies of succession planning and business structuring for established farmers.
Barriers to financial empowerment in the sector
Despite the clear benefits of financial literacy and planning, many farmers face significant challenges and barriers in accessing the necessary education and resources. There’s a considerable gap in the market from the formal education platforms due to the lack of targeted short courses and programmes from tertiary institutions.
Financial services providers like Sanlam have focused on grassroots initiatives to bridge this gap, working directly with local farmer unions and agricultural organisations to provide on-the-ground financial literacy training and resources. The group decided to focus more on where it can see the end-user, and that’s the farmer through the local farmer union. The group’s advisers and legal consultants get involved to speak to these farmers about investment decisions, financial planning, and financial literacy.
Reaping the rewards of financial planning
In the agricultural landscape, financial literacy and planning are not just desirable skills– they are necessities for farmers to flourish in an increasingly complex and competitive environment. For example, improved financial literacy and strategic investment decisions transformed a rural cattle farmer’s business, empowering him to invest around R25 000 in better genetics for his herd.
The farmer could dramatically improve his calves’ weight gain and market value by selecting a superior bull and focusing on genetic quality rather than mere quantity. This strategic investment decision, guided by a deeper understanding of the factors driving profitability, boosted the farmer’s income and expanded his market opportunities. Whereas previously, buyers had bypassed his farm due to inconsistent quality, they now actively sought out his superior cattle.
By equipping farmers with the knowledge and tools to make informed financial decisions, they can foster a resilient and prosperous agricultural sector that continues to drive economic growth and social upliftment. Organisations like Sanlam are committed to walking alongside farmers on this journey, providing the education, resources, and support they need to cultivate enduring success.
Gert Bezuidenhout, Sanlam
