By Tobie Jordaan, Partner, Bowmans South Africa
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 various hardships faced by the sector over the last year, such as a drought caused by the impact of El Niño, heightened geopolitical tensions, inadequate road infrastructure, lingering animal disease and inefficiencies of ports and rail networks, have caused a stark downturn in confidence amongst agribusinesses and resulted in widespread pessimism in the sector.
Indices
Five of the 10 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 volume of export sentiment (down 14 points).
Five sub-indices showed mild improvements, including market share of agribusiness (up 6 points), general economic conditions (up 9 points) and general agricultural conditions (up 28 points in Q2 2024)
Notably, the sub-indices of the debtor provision for bad debt increased by 3 points from Q1 2024. Although this is an increase, it is different from other indices as it reflects an unfavourable development and reveals rising bad debt in the sector. A decrease in financing cost indices, however, can be seen as a good thing. Finance indices decreased by 4 points in Q2 2024 due, in part, to a general expectation that interest rates will start to decline as we head towards 2025.
Options for alleviating financial distress
With the ACI noting more than ZAR 205 billion in farm debt in South Africa, early intervention in circumstances of financial distress is essential. Struggling agribusinesses will require the assistance of various sector role players who must work together to improve outcomes for businesses and ensure the sustainability of the sector. Such role players include lenders, large creditors, development institutions, advisors and suppliers.
Business rescue
Options for alleviating financial distress and implementing viable restructuring procedures include the implementation of business rescue procedures.
The key benefits of this process include preserving jobs (Agbiz noted that 941 000 people were employed in primary agriculture in Q1 2024) and implementing restructuring initiatives, with – in the case of business rescue – assistance from an independent third party, to return the entity to a place of solvency. There is also the advantage of a moratorium and ‘breathing room’ from creditors.
It is important that the business rescue process be done timeously, as leaving it too late can result in the business having no other option than to consider liquidation. If business rescue starts on time, it can return a company to solvency. While business rescue proceedings are complex, and each case must be individually assessed, there are many cases of successful rescues.
According to the Companies and Intellectual Property Commission, in February 2024, 13.2% of businesses that commenced business rescue proceedings were in the agriculture, forestry and fishing industry, second only to the manufacturing sector.
Informal restructuring
Informal restructuring and/ or consensual turnaround procedures are also an option often initiated by a lender and/ or major creditor alongside an entity in distress to achieve debt restructure. This procedure is the most informal way to restructure a company and can therefore be efficient and cost-effective. The process is also usually confidential, which allows the business to preserve its reputation, market value and internal and external relationships.
Sector-specific considerations
Business rescue proceedings and informal restructuring in the agricultural sector must consider issues specific to agri-businesses, such as the liquidity of valuable assets like land and livestock, the seasonality of cash flow, the impact of the proceedings on the business’s supply chain, compliance with environmental regulations and consideration of the types of business structures and the different laws that apply.
Imperative
The financial distress of businesses in the agri-sector has serious knock-on effects across the economy, impacting the country’s export figures, GDP, rates of employment and the sustainability of many of its rural communities. Ensuring financially distressed agribusinesses have access to timely business rescue and informal restructuring assistance will assist this sector, long considered an important engine for the country’s growth, to play a role in accelerating the country’s economic recovery.
