Following a devastating drought, Sub-Saharan Africa’s agribusiness industry is crying out for innovative security products that will compensate small-scale farmers for crop failures and enable them to access the financing that they need. Shannon Manders reports.


Although access to finance in the agribusiness sector in Sub-Saharan Africa has always been a difficult issue, this has been exacerbated by an El Niño-induced drought, which was recently declared a regional disaster.

The drought has resulted in widespread crop failures and poor harvests, with a 9.3 million tonne regional shortfall in cereal harvest production according to the Southern African Development Community (SADC) as well as numerous livestock deaths (as many as 643,000 in Southern Africa alone).

The damaging effects have been felt right across the supply chain: from farmers – the primary producers – to banks and insurers.

“The industry needs to realise that there’s going to be a lot of carry-over debt in the system this year,” says Zhann Meyer, head of agricultural commodities in Nedbank’s global commodity finance team.

Because of these losses, there is going to be a lot more prudence in the system in terms of granting credit to primary producers going forward. “Financiers will be more diligent this coming season: we now know what the devastation of the drought can be in terms of financial risk,” says Meyer. “Climate change is here to stay. It’s something that we cannot wish away and that will impact on the weight that we apply to the crop as collateral for the loan.”

Although it is not the intent of banks to own farms, what this means is that the intrinsic value of the crop alone no longer provides enough collateral to secure banks’ interests: they need more security – leaving smallholder farmers stuck between a rock and a hard place.


Mitigation measures

Enter insurance: the age-old risk-mitigating tool – but one in need of a revolution in this part of the world.

“The industry is in dire need of a fresh outlook in terms of the availability of innovative insurance products,” says Meyer.

The multi-peril insurance product (that generally covers all weather-related risks, with insurers providing a guarantee for a long-term production average) that the market has come to know over the last 15 years has revealed its shortcomings. The product itself is not flawed: it just doesn’t work in this region. Because of the drought, the production average has declined and the claims that insurers have paid out over the last couple of years have been phenomenal.

“It’s blown the product out of the water. They’re talking loss ratios of 200 – 300% in some cases,” says Ebbe Rabie, senior specialist advisor at Price Forbes
in South Africa.

As a result, insurers – driven by their reinsurers – are becoming a lot more selective about who they’re offering the product to: many of them will curb their capacity in the coming season, or plan to apply their cover in areas where the drought has had less of an impact.

“Farmers and financiers are going to struggle this year to get multi-peril in certain areas,” agrees Meyer.

Weather derivative – or index – products are also available, but these too are not without faults. A derivative is used to insure against a nature-related event in a region, rather than the non-performance of a specific farmer. The problem is that the probability of a trigger is relatively remote (depending on the size of the area covered), but also that farmers generally don’t own their land, so they – and the financiers’ collateral – can move around.

For commercial banks, the policy is inherently flawed because they cannot establish a counterparty.

At best, such products provide an add-on for farmers looking to secure a loan – not the overriding mitigant for finance. And, at the end of the day, all of this supplementary security becomes very expensive to finance: it’s simply not worth it. Unless, of course, you’re an alternative financier or fund operating in the region: these players tend to factor in all the costs, take the risk themselves and offer a higher interest rate.

“That’s where the banks are coming unstuck: their credit approval is so cumbersome,” says Rabie. “They’re not getting through their credit committees to actually get the finance. Whereas the niche financiers are finding it a lot easier.”


Revolutionising the product mix

Rabie, who developed and sold the first weather derivative (based on temperature) in Africa many years ago, reckons that we’ll see more such products being launched. But innovation will be key.

“Perhaps if you move the index away from the primary producer that might be a smarter move,” he muses. “Banks could take out the index product – they could take the risk and hedge themselves against a weather derivative so that it becomes a back-to-back: lending out to a few hundred farmers.”

The advent of smart technology – drones to replace human intervention, satellite imagery, vegetation indexes, and the associated data that they provide –
is set to drive innovation in the market.

“It’s time for the modern world to come up with a repackaging of the concept that saves the laborious costs that go with assessing risks, and spending that on managing risk and buying insurance against weather events,” says Justin Vermaak, CEO of Bio-Energy Investments and an established entrepreneur in the agri supply chain.

Vermaak tells GTR that he is in the last phase of design for a new agri insurance product that will support the banking and supply chain industries to allow them to lend into the sector without the risks associated with multi-peril crop insurance.

The product, which is called Virtual Farmer, will be offered to a select market group later this year. He says that one South African bank is working with him to ensure that it meets all Basel III compliance needs so that it can become a scalable banking product.

Vermaak explains that the solution works as a debtor’s insurance policy within a stabilisation fund mechanism. Whereas previously, multi-peril policies have been in the individual policyholder’s name, here, the insurance policy is taken out by the buyer, namely the bank’s obligor. The obligor, through this policy, insures all its debtors, namely all the farmers that it has contracted and who receive advances.

The new product includes the set-up of various structures, such as stabilisation funds, that funders can draw from should they have larger-than-average defaults on their farming debtors’ book.

“The stabilisation funds, in turn, add specialised weather derivatives, such as CropLite, to augment fund flows into the fund for the credit of individual farmers,” he says. “This allows the farmers to build reserves in a tax-friendly manner and strengthens the balance sheet and repayment ability.” Over time, each farmer then ends up with his own “self-insurance” pool that he uses to augment seasonal fluctuation.

Vermaak is not alone in his search for innovation: he says there are “at least two other” companies in South Africa working on similar solutions that will
be a variation of what he is bringing to the market.

GTR understands from various sources that Swiss Re and BVG have also developed new products, with the first of them being launched very soon.


Government involvement

Vermaak believes that what the industry lacks, at a higher level, is a generic governmental insurance product – funded through appropriate tax structures – that would make a payment to all farmers in the event of an adverse weather event.

This is an approach that is popular in parts of Europe – and pockets of Africa. In Rwanda, for example, a Crop and Livestock Insurance Feasibility Study, commissioned by Access to Finance Rwanda (AFR), has recommended the removal of 18% of VAT from any insurance products supporting the rural sector. What’s more, the country’s ministry of agriculture and animal resources (Minagri) is revising its agriculture policy to include ways to help smallholder farmers who have no means of affording monthly premiums and access to the insurance that they need.

“The available products have not reached a satisfactory scale. We want the private sector to embrace more agriculture insurance, but we are also developing a policy that will show what we can do as the government to support the efforts of the private sector,” Rwanda’s minister of state for agriculture, Tony Nsanganira, told the local press recently.
The reviewed policy is due to be ready by the end of the year.

Nevertheless, awareness of insurance products in the country – and elsewhere in the region – remains low, with many farmers only looking to purchase insurance to secure bank loans, rather than as a necessary tool to protect their assets and own food security.


Changing conditions

Meanwhile, the predicted arrival of La Niña – the cold phase of El Niño – will reduce the weather system to a normal state, and the region is expecting higher-than-average rainfall towards the end of the year.

Revitalisation will, however, take time: crops will be harvested in March/April next year, and the prices of grain and cereal could begin to fall towards the middle of the year.

A recovery in livestock and meat prices will take longer. “This will continue for another two or three years,” says Meyer. “Purely because farmers have had to slaughter breeding cattle because of a lack of feed and pasture.”

Until then, the region will continue to import record amounts of maize and other products. Zambia, one of the few countries in the region to see production rise, suspended maize exports until the end of September to secure domestic supply. South Africa recently became a net importer of the grain: the country imported 1.96 million tonnes of maize in the last year, the most since 1993. With South Africa last year receiving the least rainfall since records began in 1904, it may need to import as many as 3.8 million tonnes of white and yellow maize this year to bolster domestic supplies, according to the South Africa Grain Information Service. Argentina is the country’s biggest source of yellow maize, while Mexico and the US are the largest suppliers of the white grain.

These transactions – in South Africa and the rest of the region – are severely impacting the availability of foreign currency as the more dollars that are needed for imports, the less they have locally, and that increases the cost of funding, too.

“It’s a vicious cycle: we’re forced to import – it costs more money in dollars, and because of liquidity issues, dollars are becoming more expensive in the process.
I don’t think this is going to change until March/April next year,” says Meyer at Nedbank.

Additional problems lie in infrastructure, as ports up and down the region’s coastline grapple with congestion.

South Africa is planning to invest around US$3.2bn in capacity expansion at its major commercial ports over the next seven years to support an anticipated 4% annual increase in cargo volumes. According to Meyer, the country’s port authority has been doing a “good job”. The congestion is not as bad as everybody had originally thought it would be, he says, although he admits that Durban, the deep sea port, has been very busy, with trucks queuing up outside the port, waiting to load the commodities.

“What we have found, though, is that the Mozambique ports are struggling in terms of capacity,” he explains. This is likely to cause further problems for neighbouring landlocked countries, such as Malawi, for example, which earlier this year announced that it wants to buy 1 million tonnes of maize. “Everyone says it’s physically impossible for that amount of maize to reach the country. The Mozambican ports provide the easiest access, and they are just not equipped.”


It’s not all about the money

Despite the forecast arrival of better weather conditions and the introduction of new risk-mitigating products to the market, a vital piece of the puzzle is still missing for small-scale farmers: that of a viable support system.

Banks are simply unlikely to get their money back from farmers that haven’t got the requisite skills and expertise.

“Finance has to come hand in hand with skills transfer and market linkages. Providing the finance on its own means absolutely nothing. Without the skills to be able to commercialise their operations, use good agricultural practices and have access to market, it’s meaningless,” says Bo Masole, founder and managing director of Victus Global, a food technology consultancy specialising in the development of Sub-Saharan agriculture and food manufacture industries.

Masole is also the managing director of agriculture for Mukaya Impact Partners, which focuses on supporting women-led and women-focused SMEs in Africa in the areas of finance, agriculture, tourism and hospitality, and is in the process of setting up a private equity fund to this end. Victus Global is one of Mukaya’s partner organisations.

According to Masole and her colleague Zee de Gersigny, CEO of Mukaya, although the importance of banks is undeniable, they need to work in partnership with enterprises such as their own. Only then will small-scale farmers – and the agribusiness industry at large – begin to thrive in the region.

Masole calls for a need to think “outside the box” in a holistic way that works for Africa. “We cannot copy and paste what happens in the west.
That’s the message that I would give to the banks. We have to find a model that is suitable for Africa if we ever expect to take this forward and grow the agri industry,” she enthuses.

The business partners emphasise that skills transfer must happen in the “right way”: it must be targeted to individual sectors and take place over a minimum of three to five years.

“If you’re going to train primary producers, then you’ve got to train them on the ground, on their own farms, to show them what to do to move from being a subsistence to a commercial farmer and get their product into much bigger markets,” explains Masole. “We need to leave skills in the country, long after consultancies – like ourselves – are gone.”



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