GTR brought together a mix of commodity experts on the sidelines of GTR Africa Trade Finance Week 2015 to discuss key concerns currently facing the agribusiness market. Talks turned to access to finance, infrastructure, insurance and the impact of climate change on their business.

Roundtable participants:

  • Zhann Meyer, Africa head, global commodity finance, Nedbank Capital (chair)
  • Rupert Cutler, CEO, financial & political risks division, CGNMB
  • Edward George, head of group research, Ecobank
  • Gregory Havermahl, head, structured trade & commodity finance, trade & working capital, Rand Merchant Bank
  • Lodewyk Meyer, director, Norton Rose Fulbright
  • Ebbe Rabie, senior account executive, Specialty, JLT SA


Meyer (Zhann): With regards to infrastructure, is the cost of moving goods becoming prohibitive and thus restricting intra-regional trade and getting goods to the ports?

George: I think the real problem, particularly in West Africa, is that even though there is a developed port infrastructure on the coast, from Dakar to Tema/Takoradi, Lagos and Abidjan, all of these ports are overloaded, and the connections between them are poor. There is a long-term plan to build a six-lane highway running from Dakar to Lagos, but it is still very much on the drawing board, so there are few interconnections between these ports.

At the same time, warehousing infrastructure is extremely poor, particularly up country when we look at the agricultural sector. Typical crop losses are 40-50%; they could be even higher for some crops. Nigeria produces 2 million tonnes of tomatoes a year, but a million tonnes rots before it gets to market, yet they are the largest importers of tomato paste in the world. It is a huge problem: so much output is lost before it makes it to the warehouse.

The final issue, and perhaps the most important, is the problem of power. The power sector is woefully inadequate. All of us have experience of how expensive it is. The bottom line is that, if you want a viable processing sector – it could be minerals or it could be soft commodities – you need to have cheap and reliable power. It is why manufacturers are relocating back to the ‘Beast in the East’ in the US, because they have cheap power there; yet, in Nigeria, they are still flaring gas.

Meyer (Zhann): It also boils down to the fact that rail – commonly regarded as one of the cheapest forms of transport inland – is not nearly close to its potential, purely because of the fact that electricity supply is erratic and unreliable. You could revert to diesel locomotives, but it remains an expensive option.

George: Yes, exactly. But it also a question of maintenance and the effective running of electricity networks. You need an effective central organisation and, unfortunately, many institutions in West Africa – particularly in Nigeria – are hugely underperforming. And so much of the rail infrastructure that exists is directly linked to commodity flows, whether it is getting out coal or ores, which is not much help if you want to run passenger services.

Havermahl: While there is a lot of talk and emphasis – which is important – on agricultural practice and yields, it is a very good point that you lose a lot of that agriculture production in the first place to poor infrastructure through rot and contamination. I think the starting point is getting the infrastructure right, so that you do not have the losses. Even with low yields, up to 50% is lost: that’s a very important note to pick up.

Meyer (Lodewyk): Yes, that is right, but I would question whether it is the yield on the production or the yield across the entire value chain that is as low as it is. If it is only the yield on the production cycle or in the cultivation phase, there is an even bigger problem.

Havermahl: What we are concluding is that it is throughout that chain. A lot of people think that we need to get the yield up, which we do, but we also need to fix the infrastructure.

George: Also, if you can reduce wastage, you can increase production without using a single additional bag of fertiliser or pesticide, or a single drop of water. All of these resources are wasting by the side of the fields or train tracks.

Meyer (Lodewyk): We must not discount the fact that the cost in moving the goods, because of the problems in infrastructure, further erodes the yields.
Meyer (Zhann): Is there appetite amongst regional banks to finance agribusiness?

Havermahl: I guess, from a risk perspective and a banking perspective, we fear what we do not know or understand. The closer you are to the risk, the better you understand it, so I think it is a proximity issue. You have to look to local and regional banks to be “first movers” in a sector which is clearly high-risk. It is not just the high risk of agriculture but of the geographies that you are in and socio-political factors. There is a whole range of factors which would make it important to have a diversified portfolio in agriculture. If you are a regional bank, you can do that and you can be much closer to understanding the risk.

Meyer (Lodewyk): I am not always convinced that the regional banks bring the most appropriate financing product to the market in the context of agri-financing. They may consider a balance-sheet product or a collateralised product, whereas, possibly, a value chain product could be a better solution.

George: What I have seen with a lot of local banks in Africa is that they are not offering trade finance to agribusiness. Instead, they offer overdrafts and working capital: which is balance-sheet lending. This means local banks are engaged at the middle of the value chain. If you have a processor that you know very well, often they are providing inputs for the farmers and buying their output, but getting the financing right down to the beginning of the chain, which is where they really need it, is nigh on impossible for local banks, given the high level of risk. To get round this, at Ecobank we have been looking at collateralised lending, where the bottom line is: how good is the warehousing and how good is the collateral control? The problem is that too many banks focus on documentation, but with collateralised lending it is not about documentation but about looking after the goods. There are so many things that can go wrong.

Meyer (Lodewyk): It is all about risk allocation. You may be looking at it from an agriculture perspective but you should rather be looking at it from an offtaker perspective. For example, in coffee, let us say that Starbucks is the offtaker, but the cultivation is happening on a small scale in a market. You need to look at products that can work themselves back from the offtake, as opposed to starting at the input phase of agriculture.

Rabie: Can I give you an example of what we have done with a specific fruit consortium in South Africa? We insured the crop in the orchard and then we took it a step further. We looked at the pack house receiving the crop, because there is a handling cost for the pack house. We therefore insure the loss of product supplied because of weather events in the orchard. We then cover the marine and transit component and finally the credit default from the overseas buyers. We removed all elements of non-man-made risk out, which made the deal fundable and bankable to the fruit exporter, who was able to get credit finance from his bank.

Meyer (Lodewyk): What I am suggesting is that you go one step further to the Waitroses of this world. It is like reverse factoring. I have two other points: on the positive side for regional banks, access to local currency is a key differentiator for local banks to be playing a bigger part in this market. Access to hard currency, as well as currency volatility, is problematic. We have been doing a number of transactions where, in the agri and softs space, the master facility limit may be set at a hard currency level, but the utilisation in the various African countries is done at a local-currency level. With Ecobank, we have structured such a transaction.

Meyer (Zhann): It is exactly this requirement for local currency that makes access to domestic credit lines relevant for the farmer. He pays for seed, fertiliser and even his children’s school fees in local currency.

George: You also need to get the timing right, because it is always the same time of year that he pays. If you have prepared that one properly, you are not going to have a situation where unscrupulous traders squeeze farmers come late August/early September, because they know they need the cash.

Meyer (Lodewyk): To add to that point, traders are stepping into this funding gap. We are talking about medium and large-sized agribusinesses, so it is not even at a farmer level. We are seeing more and more prepayment financings directly from the traders. I am not always convinced that traders are using their own liquidity; I think they are using senior lines with banks.
Meyer (Zhann): What about alternative financing mechanisms? They are growing in prominence, but the question is whether they are a blessing in disguise or a potential recipe for disaster. What is your view?

Meyer (Lodewyk): I have a potentially controversial view on this because I do not believe in the concept of alternative financing to bank financing. I think there is and always will be room for bank financing. When people say that trade finance is dead or that we are facing the death of the LC, I just do not buy it. What I do buy is the fact that there are alternative providers of finance that have different products to bring to the value chain; for instance, if people are talking about the insurance industry as an alternative to bank financing, then I would say absolutely not. Is the insurance industry relevant in the context of the agri value chain? Absolutely. You bring an indemnity product to market.

It is the appropriateness of the product vis-à-vis the funding need, taking account of the risk and where you allocate it in the value chain. If there is a place for pension funds and hedge funds to be sources of funding in the value chain, absolutely, but will it be at the traditional bank level of participation? Highly unlikely. It is more of a small, medium and micro-sized (SMME) financing opportunity, and it will not take the banks out – absolutely not.

Rabie: On the crop insurance side we price the insured values on an agreed-value basis. In that respect, it complements the whole financing chain. If there is a loss, we are not interested in currency devaluations or market drops overseas.

Meyer (Lodewyk): Another thing that we are seeing more and more of is a much bigger focus on managing the price risk in the value chain: the price of the commodity on the farm, as it is cultivated; the price of the commodity in the warehouse; the price through processing; the price to the offtaker; and the price to the consumer. There is, then, a lot more price management required within the value chain, and there is a big role to be played by all of the participants in
the value chain, including the financial institutions, the insurers and the funds.

George: When we talk about alternative financing, the prime importance of the trader comes through. It makes sense that the big trading houses should, in some way, be shadow banks. They always have been. They offer financial services, so they are shadow banks. But as horizontal organisations the information flows very well within them, and they understand all the different working parts of the value chain better than banks. They also adapt their value chains accordingly: in some countries the trader will operate the entire value chain, from farm to fork, in others they will outsource certain parts of it. I see it as a positive development that we see the traders much more involved in the value chain. In a sense, it is as if all these different sources of financing are different pieces of the jigsaw; it is just how you put it together.

They are also moving away from being pure traders. There are few pure traders left – Czarnikow might be one of the exceptions, trading and supplying sugar to offtakers. But when it comes to the vast majority of trading houses, they are all becoming vertically-integrated supply chain managers. To have an effective supply chain you need fixed prices at the farm gate and transparency. The fact that trading houses are all moving in that direction could tie in with the kinds of changes we want to make to improve prices for farmers.

Meyer (Zhann): One of the most contentious issues is the role of secondary processing. We increasingly see some of the bigger traders actively investing massive capex to make sure that the value add happens on the African continent. It is not only job creation but physically increasing the GDP of the country in which the product is produced, before being exported.

Meyer (Lodewyk): A very good example is the soybean industry in South Africa, where most, if not all, big traders have set up crusher plants in the last three years. We are seeing some of the big traders setting up cotton gins in Zambia and cashew-roasting plants in East Africa. It is definitely a trend.

George: The real problem with these processers is that they are all about value add, but are they really adding value? There are too many processing sectors in Africa that do not add value. They are seen as strategic industries by the government, and suck up capital. But many are unprofitable and inefficient, and over time they result in a net loss of capital, and often a huge burden of debt. For some industries, notably flour making, it makes perfect sense to have mills in Africa, as there is strong local demand for the product. But in West Africa cocoa is hardly consumed at all, so why grind it there? If you have a region where you are producing something and you want to process it and add value, there has to be some kind of fiscal incentive for you to do it there; otherwise, why would you do it there? There is no local demand.

Meyer (Lodewyk): It is more about the balance of payments.

George: They have not got this balance right, which is why we have a crisis in Nigeria’s grinding sector. Grinders are crippled by an enormous amount of debt, even though the government wants to expand grinding. I also believe we have reached a plateau in grinding in Côte d’Ivoire and Ghana, even if the International Cocoa Organisation (ICCO) says the opposite. If you talk to the grinders in country, everyone has stalled their expansion plans, and they might even downsize in Côte d’Ivoire. Now that Olam has bought ADM’s grinding operations, are they really going to keep that plant going at full capacity if they have their new plant in San Pedro?
Meyer (Zhann): The challenge in terms of capex financing is that it is normally long-term tenor. Banks normally do not get involved because they see it as a massive risk. The input is an agricultural product exposed to the vagaries of nature. Ebbe, we talked about that just now; supply chain and business continuity insurance. Maybe this, on the innovation side, is something that the insurance industry could provide to, for instance, a sugar mill, ensuring that the raw feedstock will be available for processing. Are supply chain and business continuity insurance policies freely available in the market?

Cutler: There are policies but they are not long-term. If you are talking about five to seven years, you are pretty unlikely to get one. They will do 12 months and rolling. The US is an agri-powerhouse, and those traders buy those policies.
Rabie: On any agri or related business, the crop policies are all seasonal and non-cancellable, so they run off after harvest. We have had an uptake from our underwriters who are prepared to look at three years maximum. Again, it is renewable each year, but you can tie in for three years.
Cutler: A named supply chain peril is weather. It could be that you rely on a third-party supplier that is no longer available. You could include blockage of roads or ports – loss of ship, or ship not being able to get into harbour. It is, basically, a standalone business interruption called supply chain trade disruption insurance.

Meyer (Lodewyk): The principle is that it provides an indemnity against the loss.

Rabie: As long as there is a financial interest in the commodity, you can insure it. I have pack houses that are insured against, on a supply-extension basis, the commodity that they are receiving. If there is a loss on the farms, we can insure that loss within the pack house, even from the exporter side. We cover the whole supply chain.

Meyer (Zhann): What is the impact of climate change on your respective businesses? Where are we going and where do you see it in 10 years?

Rabie: What I am seeing is that regions that were normally not prone to certain weather events are now becoming more prone to them. We see unseasonal spikes taking place in various regions. Take the Western Cape and hail days: there is historically one hail day per year, whereas an area like the Free State has six per year. Last year, we had three to four in the Western Cape, so it has really just turned around. There is a higher probability of events taking place, and the frequency and severity of weather events are a lot greater. If we have a loss event, it is catastrophic.

Meyer (Zhann): Where, then, lies the future? Do you just merely increase the premiums to compensate for the risk, or are new products entering the market?

Rabie: Because of climate change, we have had a bigger uptake in clientele buying more crop insurance. Previously, 10-20% of growers used to take out cover; now, we are seeing 60-70%, so we have a bigger risk premium pool that has grown from, say R1bn to R2bn. Insurers have turned around the loss from two years ago to now making 50-60% profits. This can change due to a severe drought we are currently experiencing in the North West and Free State.
Furthermore, I believe that the multi-peril insurance products are going to see the end of their days. In my opinion it is just not working. The frequency of events and the pay-outs have just been catastrophic.

Meyer (Zhann): Was it then almost a process of de-selection? I am of the opinion that multi-peril was used wrongly at the onset. Farmers who could not farm profitably on a sustainable basis or offer additional collateral, used multi-peril cover to obtain finance. What could we have done to save the multi-peril policy, and can it be fixed?

Cutler: Whether it can be fixed is partly in the lap of the weather. If you made it almost compulsory for anyone who was financed, or anyone selling, to buy into a pool, the costs for them would drop, the profits would mean that future premiums are lower, and you would then have some stability. It would mean that the contango of price and the weather should not hit you at the same time but, if you have everyone standing on their own, you have a problem.

Rabie: The biggest problem we have in the crop insurance market is the lack of reinsurance capacity, with one, two or three reinsurers supporting everybody. Unless we have new capital coming into the market to support multi-peril, we will see a growth in the index-related products – weather derivatives, weather index – where a large amount of capital is being thrown into that market. I foresee down the line that will see bigger growth than the normal conventional crop insurance. It works well in developing agri markets where you don’t have much yield statistics.

Meyer (Zhann): What effect is the oil price decline having on your business?

George: If you balance the different risks and impacts, the fall in petroleum prices is positive for the agri sector, and particularly for the food sector. A lot of fuel is used in the transportation of food, as well as in refrigeration and processing, etc, so this reduction in cost should feed through into lower prices. Fuel prices are also linked to ethanol, and even vegetable oils, which should have a further impact on lowering food prices.

Meyer (Zhann): There is also a drop in wholesale fertiliser prices, because there is a direct correlation.

George: Lower transport costs could have a huge impact on food prices. It could mean that you reduce crop losses, because farmers can transport more stuff to the market. The downside of lower oil prices, however, is that so many African countries rely on petroleum revenues running through the financial system. In Nigeria, one of the biggest impacts of the falling petroleum price has been a slump in bank lending. Banks have been relying on these petroleum flows coming through their bank accounts, which is what they have been lending out. Now the flows have been halved they no longer have the money to lend. And the first sector that will take it in the neck is agri, because agri gets the smallest amount of financing anyway.

Meyer (Zhann): What are your final thoughts on the topic of agriculture, the impact on the market and what we can do to address concerns?

Cutler: Agriculture is undervalued and under-loaned: however, it is one of the largest employers and has the biggest potential. It is down to logistics and the World Bank co-ordinating with governments that do not have the wherewithal. If you make a difference in those sectors, working with the traders and the banks, it
will change.

Havermahl: I have similar conclusions. I think it is a fact that agriculture attracts less financing, but that is because for example, in mining and energy, the projects are generally easier to back because there is an element of capital from sponsors. You have investors who are putting in an element of capital. Agriculture, for the most part, does not have that – it is not driven by large corporates. The solution is that we are seeing far more private equity and venture capital coming in to agribusinesses and agri-processing via the traders. To me, that is encouraging because that is almost replacing a lack of seed capital for a lot of these projects. You need to bring in the local or regional guys, and the regional and international banks and DFIs: put all of that together and a little bit of light starts appearing.

Meyer (Zhann): Private equity facilitates lending because it just gives that skin-in-the-game element to the financing make-up and debt portfolio.

Meyer (Lodewyk): For traders, the benefit is integrating all the component parts in the value chain and owning it.
George: The biggest issue, which ties into the whole value chain, is the fragmentation of the agricultural sector. Everything that traders and value chain managers are doing to tie the chain together, to make farmers sell before they produce, by guaranteeing their offtake – in other words, linking the chain together – reduces fragmentation. At the beginning of the value chain, it is always going to be fragmented between millions of farmers, and you cannot just sweep them off the land and put them all out of work, but this integration of the value chain will, I think, address the issue of why financing is not getting to where it is needed.

Meyer (Zhann): The role of the public sector in this in terms of giving a broad regulatory framework and policies that will enable the free flow of commodities across borders and into regions is crucial. It is also vital to keep small-scale farmers on the farm, although it is more crucial to migrate them from subsistence farmers into commercial farmers. That is the solution for Africa: to change the mind-set of eating what
you produce into selling what you produce.

George: It is about moving from agriculture to agribusiness.