FINANCES
PART II
Farming debt
Steps to improve the financial position of a farming enterprise
According to statistics issued by the National Department of Agriculture, Forestry and
Fisheries, farming debt increased by approximately R34 689 million, or 30%, during the
period 2014 to 2017. It is further expected that debt levels will reach the R160 000 million
mark during 2018, which would imply a debt burden of approximately 35%.
By Johan du Toit
Manager: Senwes
Agri-Economic Services
M
easured against generally
accepted norms, it gravitates
towards the high side. It
should be seen against the
background of a slowing down (even a
decrease) in land prices, stricter monetary
policy and political uncertainty.
Every farming enterprise has a unique
set of circumstances and it is therefore
important to determine the impact thereof
on the financial position as accurately as
possible rather than to
generalise.
70
SENWES SCENARIO | SUMMER 2018
ADDRESSING PROBLEMS OF A
LONG-TERM NATURE
A farming enterprise does not run into
trouble overnight and, as a result, long-
term problems require more drastic
steps, which normally relate to structural
adjustments, such as:
i.
Phasing out of non-profitable compo-
nents and expansion of more profi-
table components - analyse margin
of profit/margins and carefully consi-
der long-term market prospects/
potential of other business compo-
nents being considered.
a. equity partner
b. selling of non-farming or luxury
assets
c. scaling down of existing farming
units, with the objective of remai-
ning units being sustainable units
d. investigate selling and lease-back
of a portion of the land and/or
herds.
Other options which relate to structural
changes are:
i. Investigate methods of inceasing
income;
a. evaluate efficiency and profata-
bility of current business compo-
nents on an individual basis;
ii. Obtain capital injection by means
of, inter alia:
b. additional income streams -
utilisation of surplus capacity, e.g.
doing contractor work, leasing of
underutilised or unutilised land;
c. re-evaluate production efficiency
- produce more with the same
inputs or the same with less
inputs.
ii.
Investigate addition of value in value
chain (vertical integration forward
and/or backwards) in order to
strengthen profit margins. Principle
- additional income must exceed
cost of value addition. The drafting
of a well-considered business plan
is important.
iii.
Investigate total operating cost
structure (focus on the 20% cost
items which represent 80% of opera-
ting costs:
a. can variable production-expenses