Business confidence in the agricultural sector in South Africa in the second quarter of 2024 was at its lowest level since 2009, the year of the global financial crisis. As one of the largest contributors to South Africa’s GDP, the sector is vital to the sustainability of the economy, society, and environment, and a significant contributor to the upliftment of rural communities across the country. It is therefore of great concern that the current state of the sector is not as promising as one would hope. Agricultural sector stakeholders have an important role to play in ensuring agricultural engine failure does not ensue.

 

The latest Agribusiness Confidence Index (ACI), compiled by Agbiz and the Industrial Development Corporation in June this year, tracked the sentiments of 25 agribusiness decision-makers, questioning them on the economy, export volumes, capital investment, and general agricultural conditions.

The ACI revealed that the sector faced several challenges over the past year, including a drought caused by El Niño, heightened geopolitical tensions, inadequate road infrastructure, lingering animal disease, and inefficiencies in ports and rail networks. These factors have contributed to a significant downturn in confidence among agribusinesses.

Indices

The ACI data shows a stark picture. Five of the ten ACI sub-indices declined in Q2 2024, including turnover (down 22 points from Q1 2024), net operating income (down 13 points), employment (down 12 points), capital investments (down 4 points), and export sentiment (down 14 points). Meanwhile, five sub-indices showed mild improvements, such as market share of agribusiness (up 6 points), general economic conditions (up 9 points), and general agricultural conditions (up 28 points).

Notably, the debtor provision for bad debt increased by 3 points, reflecting rising bad debt in the sector. However, a decrease in financing cost indices, which fell by 4 points, suggests a possible decline in interest rates as we move towards 2025.

Options for alleviating financial distress

With over R205bn in farm debt in South Africa, early intervention is essential for alleviating financial distress. Struggling agribusinesses will require assistance from various role players, including lenders, large creditors, development institutions, advisors, and suppliers.

Business rescue procedures offer one option for addressing these challenges. They can help by preserving jobs—941,000 people were employed in primary agriculture in Q1 2024—and implementing restructuring with the support of an independent third party.

Business rescue

Business rescue also provides a moratorium and breathing room from creditors. Timely intervention is crucial, as delaying the process can lead to liquidation. Successful rescues have been documented, and according to the Companies and Intellectual Property Commission, in February 2024, 13.2% of businesses in business rescue were in the agriculture, forestry, and fishing sector, second only to manufacturing.

Informal restructuring

Informal restructuring and consensual turnaround procedures are also viable options. These processes are often initiated by a lender or major creditor and can be efficient, cost-effective, and confidential. They allow the business to preserve its reputation, market value, and relationships while restructuring its debts.

Sector-specific considerations

Business rescue and informal restructuring must consider sector-specific issues, such as the liquidity of assets like land and livestock, the seasonality of cash flow, the impact on the business’s supply chain, compliance with environmental regulations, and applicable business laws.

Imperative

The financial distress in the agricultural sector has significant repercussions across the economy, affecting export figures, GDP, employment rates, and the sustainability of rural communities. Ensuring that financially distressed agribusinesses have access to timely and effective interventions is imperative for the sector's stability and overall economic health.

All rights reserved. © 2022. Bizcommunity.com Provided by SyndiGate Media Inc. (Syndigate.info).