John Deere Africa | Tech Terrain | Episode 15

Deep roots in the agricultural sector. The focus for Le Mang is the black farmer, taking the term that you use. A new era farmer.

Hi, I'm Tony Ndoro and welcome to Tech Terrain. This time around we'll be focusing on finance in the agricultural sector. We'll also look at the economy of agriculture during the pandemic. And luckily in South Africa, agriculture was deemed an essential service. What are the effects of that? We'll discuss all of that in this show. To put things into perspective, economist Doc Rulof Botha from the Optimum Investment Group will join us in studio to look at the local and world economy. Then we chat with Praveen Dwarika from Limang Agricultural Services about some of the challenges farmers face in getting the right finance. The the team from John Deere Financial is in studio to illustrate some of the benefits of financing and tell us more about the SMART campaign. Remember to visit the techterrain website regularly for bonus material uploaded every single week. Let's start the show. Well, as I said at the top of the show, we're going to be focusing on financing and also looking at the economy. Are we heading in the right direction? We all be positive at the present moment, especially when it comes to the effects of the pandemic that we're experiencing at the present moment. And we've got just the right guest to do that with us. Dr. Roelof Botha joins us now. Economic Advisor, Optimum Investment Group. Doc, are you well?

Yes, thanks. And yourself?

I'm fantastic, thank you. Good to have you with us in studio. Okay, just in general, paint a picture for us in general, because we've all been sitting at home under lockdown. You know, many people at the present moment are saying, okay, I might lose my job. What's going to happen? Should I be positive? Going the next five years from a South African and African perspective, what's your take?

Right now our economy and the Sub Saharan African regional economy.

Yes.

Is poised for really unbelievable growth. There can be little doubt about this. We've been so fortunate with the rainfall and with the second largest mice crop in our essay, which we'll be sharing with one of our neighbors at least. Yeah, as long as they pay us.

Yeah, we know what that neighbor is.

And you know, fortunately, economics, we turn Newton's law on its head. You know, what goes down must go up again. And from the base where we are right now, where we took a knock, 17%, not 50%, 17% year on year comparison, which is the correct method, which was to be expected. And under the circumstances, not so bad. We are looking, especially after the opening up to level two and to level one of the lockdown, we are looking to spectacular growth in the third and fourth quarters of this year and paving the way for very solid growth next year. And this is not just me speaking. The consensus view of the 38 economists that participate in the media 24 economists of the Year award, which I was fortunate or lucky enough to win, their view is that we will have growth of between 3 and 4% in real terms next year. And that should be the springboard for sustained growth. The type of growth that we had between 2003 and 2008 before the previous recession hit us. I'm pretty sure we're going to be heading in that direction.

2008-2009-2018-2019, that was what, 3.3? A growth of 3.9, 3.8% for the whole of the African continent. We didn't have a pandemic. What effect does that have? Does that slow down that growth at all? Has it slowed down output in any way whatsoever?

The assistance that the IMF has provided in these countries has gone a long way to counter the negative effects of the pandemic. And it has also made them realize how important food security is without a shadow of doubt. And I'm convinced that the next step will be that they will spend heavily on the infrastructure required to expand agriculture and especially to improve the logistics for trade. Because it's one thing to have a crop, it's a totally different matter to get that crop into the food processors factories and to market.

So, Doc, in your answer there, you mentioned processing, which is one of the key things from an African perspective. And you know, the last 30, 40 years, everyone's saying, listen, we need to process, we need to beneficiate, and so forth. Do you see that happening? Are we picking up within that sphere?

Yes, I see it happening. Unfortunately, I see it happening very slowly because there's a huge incentive, obviously, for Chinese manufacturers to dump their products onto this continent, which they're doing effectively because they get subsidization from government, which is not allowed according to the wto. Not that China worries about the WTO or anything else for that matter.

Well, the Americans, to a certain extent.

Well, to a much lesser extent, at least, the US is not guilty of large scale intellectual capital theft. Intellectual capital theft. But getting back to the potential for beneficiation not only of metals and minerals, but also of food, of agricultural products. I don't have to tell you that the potential is immense. The import replacement potential and that can be done with the simple instrument called a quota. And the beauty of a quota is that you know exactly by how much your domestic market is going to swell. And if we can do that on such a basis where you start with a very small quota, which won't make a dent in China's export figures, you can literally, literally create millions of jobs in saric. But then we need to strengthen the institutions and the logistics within sadc. Now remember, China is playing sort of a semi imperialistic game in its power march towards the number one position, probably only in another 30 years as far as I'm concerned. And whoever wins the US election has a unique opportunity to get cracking in Africa and help us and just assist us, especially with skills, especially with the know how, that you would require a bit of infrastructure development as well so that we can strengthen our own ability to produce and to process and to beneficiate further. Yeah, because the advantage to the US would be that they have then a potential ally, at least among some of the countries, which will send us in good stead. I'm not terribly involved in any power struggles. I, I'm just in concern about our continent which, which has so much potential.

We do. There's massive potential. But for us, when we want to beneficiate, we want to produce more, we need markets. Do we have those markets? Our government's working towards creating those markets.

Fair game. Well, according to the eu, the ultimate driver of economic growth is demographics. And in SADC alone we have 340 million people. That's 20 million more than the United States. And if you look at the last 20 years, a significant increase in per capita GDP and per capita disposable income. So the market is right on our doorstep. But we need to exploit that. And obviously if we can invest heavily in skills and in infrastructure, that's the answer. That's the secret for the future and of course the logistics. We must make it easier for the countries in this region to trade with each other.

That means an investment in infrastructure. Yep, yep. Is it happening?

It is happening, but very slowly. But not so in South Africa. I mean the 51 SIP projects down here, sustainable infrastructure projects, which is a partnership between government and the private sector in South Africa. The beauty about of that is that you, you do not need a national treasury finance, you need some guarantees, of course, somewhere along the line. But this is kicking off. I've been told fairly confidentially that we'll.

Keep it to ourselves.

One of the projects that has already Been approved. I believe the tender is in an advanced stage is for the residential. Residential development east of Pretoria which will. Which will be the largest of its kind in the the Southern hemisphere. Construction is the most labor intensive sector of the economy. It's more labor intensive than agriculture. So focus on, on, you know, on those two sectors and expanding the supply chains.

Yeah.

And you can create a lot of jobs. And the minute you create a job, you broaden the tax base.

Yeah.

And the broader tax base fixes a lot of problems.

Yeah, exactly. Put it back into education, into the.

Infrastructure we're talking about.

But that circle just keeps going. A few tips. Let's start with risks. First from an economic perspective. A young guy getting into farming right now. Want to know is this something I should really get into? What do you say to him?

I don't think there's been a better time, quite frankly. I think the world has gotten one clear message from COVID 19 and that is that food security is paramount. I mean everybody should know this but now, and South Africa is food secure, but in this part of the world, unfortunately there are still people that are battling with poverty. So I'm convinced. And I think President Ramaphosa has also tagged, you know, he's picked up on this. I've read some of his recent statements and it seems as if he would very much like to develop a little project whereby with the cooperation of the farming, the farmers and food processors, obviously the general dealers and involving sort of retail, non conventional retailers, which could include a lot of churches because there are churches everywhere. And to expand the food kitchen concept into a situation where ultimately maybe within the next couple of years, no South African needs to go hungry. Hungry at night. That would be unbelievable. And this is within our reach without a shadow of doubt.

So Doc, you mentioned, you know, infrastructure is one of the growth drivers. What other growth drivers are they?

Well, there's one rather important one and that's the lowest interest rate in 50 years. Now, according to my calculations, that has the potential to unleash up to R120 billion of demand into the economy. It lowers the cost of capital, it lowers the cost of credit. And as long as the Reserve bank gives us some indication soon that interest rates will remain low, that would be absolutely terrific. You see, a very high lending rate acts as like a tax on venture capital. And this country needs venture capital. And we've got that situation now for the first time. So since Jill Marcus was governor, which is good.

2021 is going to be a good year.

Oh, it's Going to be a very good year. For the first time in a couple of years, I've got a chance to win the competition again.

Yeah, that's the way you spoke about the meeting, Doc. Lovely speaking with you. Dr. Roelof Bother economic Advisor, Optimum Investment Group. You're very optimistic and that's fantastic to see. Because of you, I'm going to walk out of the studio with a big smile on my face. Thanks for coming through.

Okay.

All right.

There it is. So we heard it from the man himself. He says it's going to be a bumper year. We're on the right track. So many positives for South Africa and the continent as a whole. We just got to keep going at it. Stay with us. So now we know it's not all doom and gloom going forward when it comes to the agricultural sector in South Africa and on the rest of the continent. I want to discuss now new era farmers or developing farmers with a man who's very passionate about that subject. And he is the managing director of Limang Agricultural Services, which sits within afgri. I want to welcome to the show Praveen Dwarika. Praveen, are you well?

Thank you very much. Yes, I am glad to be here.

Good to have you with us. Limang Agricultural Services, first of all, paint us a picture. What's that about?

Yeah, so Limang Agricultural Services, like you correctly mentioned, is a subsidiary of the Afghan group, taking them to the next level to, for them to become fully fledged commercial farmers. And we do that through a variety of tools, not just financing, but other services that we offer. And I'm glad to share those details. In fact, it's something that I really feel we've got a, you know, we've, we've built a successful model around that.

Fantastic. So I'm, I'm that, let's say I'm that farmer. I, I see that I've grown my business and my enterprise up to the point where I can become commercial. When I approach you, what do you look for?

Passion, Number one, there has to be a deep seated passion for production. We really need that to be the number one driver because as the Lemang team, that's what we stand for and we want to partner and journey with farmers that express that same sort of passion. So we would look at the financing component naturally forms a key issue and it's a hotly debated topic when it comes to agriculture, especially the developing farmer sector. But add on things like training, agronomy, services, mentoring, which plays a critical role in farmers achieving success. So when you package that all together, we think we've got a win win for, for farmers.

I mean, this program we're looking at the financial aspect of everything. I mean, how important is that aspect when it comes to that farmer within that bracket? Because if I were to scale up, I start thinking, oh my gosh, I need to buy plant. And that is going to be incredibly expensive.

It's always a challenge. But I think therein lies the opportunity as well. And I think the role that we play from assisting to write up the business plan to take the operation to the next level, come up with different types of financing solutions. Traditionally, it's always been about relying on the farm. The land itself has security, but we know from a developing farmer perspective, land ownership is still a hotly debated topic. So not all of them own land. You know, there's communal land, there's restituted land. So which, for which farmers don't have title deeds as yet. So you know, they can't offer that to banks as security. So we come up with, with different types of bespoke solutions, you know, we would look at other alternatives to that. So that's always the starting point, is to ensure that the business plan supports what the farm is capable of doing.

Yeah.

And once that's in place, we've got a good foundation to start building on from there.

The mentorship issue, because I'm sure that is also incredibly important because you can have all that financing in the world and I'll end up, you know, I could easily buy the wrong thing. I don't know, you know, when do I plant all those things? If I'm upscaling, It's incredibly important. I have some sort of mentor. Are there larger farmers willing to be the mentor? The mentor.

Never underestimate the goodwill that's out there from your large established farmers. They're always willing to partner with the guys that are up and coming, the guys that are on the cusp of going full commercial. Once they see that passion and once they see that drive from these farmers, they're always willing to step in. It's never about competing with each other. That's, that's never been the case. Agriculture is, you know, us doing it together. And I think the goodwill that's there has to be capitalized on.

Okay, give, give us some good nice stories that you, I mean, you're on the ground, you've seen some of the, the farmers who talking about grow and you know, successfully.

Yeah, look, I mean, you know, without, without mentioning farmer specific names. We've Got farmers where we've taken maize yields, for example, we've taken it from 2.2 tons hectare that they've been doing right up to 4.5 tonnes. And that's on par with commercial farmers, you know, sunflowers from 0.9 tons per hectare up to 1.5, 2.2 tonnes. So we've done really well. We've taken farmers along the journey where they have become fully fledged commercial farmers. Proactive participants in the national economy is what the goal is for us. AFCRI as a brand stands for food security. And I think the farmers that we choose to partner with have got to have that shared ambition. They must be participants in food security on a national level.

Praveen, give us some examples of the, some of the challenges that you know, the new era farmers face.

One of the big challenges in raising financing, which is a key component, has been security of tenure. You know, that's been, that's been an issue that the banks have been trying to find so solutions for A lot of times in discussions and negotiations with government we don't yet have the perfect solution but I think we found workarounds in the meantime and, and those have been successful to a limited extent. But I think there needs to be a lot more discussion around that and, and solutions to be brought to the table where farmers that don't necessarily own the land have more security of tenure that banks can rely on and that, that can unlock huge opportunities from a financing perspective.

Is a long term lease any good at all?

It is, it is. We, we certainly do focus on that. Naturally that gives us some sort of security that the farmer is going to be on the land for the defined period, which is the lease with generally options to renew, etc. Yeah, but yes, it's an option.

I mean we're talking about developing farmers here. Is there you think sometimes if they work a little bit closer together that give them a little bit more scale to achieve a little bit more. Does that happen at all?

It does happen. It does happen. You know, it's generally how cooperatives started and I think, you know, one, the term's not used all that much anymore but it certainly happens and we find that amongst the developing farmers with projects that we've rolled out recently for corporates, we find that, that extremely successful. You know, it has, it has distinct advantages in the sense that there's a lot of knowledge sharing.

Yeah.

Besides the risk sharing component, there's a lot of knowledge sharing, guys looking after each other and there's a lot of empowerment that takes place as a result of that. And we particularly enjoy that type of cooperation amongst the farmers.

All right, Praveen, you've, you've got a lot of experience working with these new era farmers, the developing farmers on the ground itself is, and you know, when you start a small business or business of any nature, you know, it's more your passion that you spoke about. But some guys just are terrible at the paperwork. How critical is that going forward?

It's very important, especially when you, when you're going next level and you want to start engaging with financiers and potential investors, let's not forget about that. It's critical that you're able to show that your record keeping is on par with the best. And to do that, to facilitate that, we, we offer business management, financial management, marketing and negotiation type of training courses. So guys are able to handle the paperwork and keep their records up to date. So, you know, it's that typical, you know, your appointments confirmed with the bank manager. Now you've got to go and look for your paperwork. In our instance, we make sure you empowered enough to be able to keep that, keep, keep that on, on track throughout the season. So at any one point in time you've, you've got information, information at your fingertips. We live in an information age and whether it's on paper, whether it's digital, it should tell the same story. And the key for us is to make sure that farmers are empowered and trained enough to have access to that.

Okay, fantastic. Praveen, lovely chatting with you. All right. Very passionate man about what he's doing. Praveen Dwareka Managing Director Lemang Agricultural Services and right at the beginning he said it all starts with passion and then everything else follows.

From sunrise to sunset, you work the field, living on hope and faith, trusting that the rain will fall. For weeks, months and seasons, you toil, believing that the harvest will come. For generations. You invest so that one day you can reap the reward and you build so your plans will come through. At John Deere Financial, we understand that this journey requires not just quality products, but also partners who can walk the long path with you. Tailored financial solutions based on your unique business needs to lessen pressure on your cash flow. We are committed to stand with you through thick and thin. We have John Deere financial representatives who will meet you on your farm to discuss the transaction and even contact your bookkeeper for all the necessary documentation, saving you a trip to the bank. As your partner. We know that the key to success is trust. That is why we have dedicated relationship bankers who will nurture and grow our shared businesses through flexible lending periods and detailed information regarding the best way to structure your installments. They will work to ensure you always receive highly competitive interest rates on your asset finance. Make John Deere Financial your partner in future growth and enjoy finance. Built for you.

Now, early on in the show, Doc Rulof Botha painted a pretty optimistic picture about the African economy and the South African economy. He thinks things are going to get better, nothing to worry about. So maybe you should be thinking about financing your operation. And if you do so, you might want to approach John Deere Financial to talk to us about what John Deere Financial actually is. I've got two gentlemen with me here in studio from the John Deere team, Antofan de Westasen and Herman Hunnafalz. Gentlemen, are you well?

We're very well. How are you?

Thank you.

I'm very, very well, thank you. Welcome to Tech Terrain. You've been here before though. Antoine, let me start with. With yourself. Anto here. Explain to us what is John Deere Financial?

Tony, the best way to describe what John Deere Financial is is we're a bank, We John Deere's bank. So quite a few years ago, 183 years ago, John Deere decided that we cannot just sell equipment. Some people don't have the money to buy it. So we need to find a mechanism to allow people that in general cannot buy cash to buy our equipment. So he sold the first plough on terms to a customer. And that theoretically was the start of John Deere Financial.

Wow, that's fantastic. And then when was it actually formalized?

So in the mid-1950s, we started a company in the US called John Deere Credit, which was the start of John Deere Financial. And we registered a bank. And since then we've grown across the world. We represented in all the continents as John Deere Financial. Some areas we are registered banks, some areas we are a leasing company. In Africa. We differ slightly in the sense that we are not registered as a financial services provider. So we make use of partner banks and partner financial institutions to provide the backbone for us in order for us to provide our services to our customers.

Okay, fantastic. Now, Herman, we've spoken from times on the show about the difficulties for farmers, you know, when it comes to wanting to upgrade and getting that bigger equipment and upscaling and so forth. Just talk to us a little bit.

About some of those difficulties, Tony. Yes, it's difficult to go into specific detail on exactly what the challenges Are but looking at Africa as a broad view, it stems from the five Cs of credit, how banks look at credit granting. The first C is your character. There they look at your reputation, your financial reputation. So there the clients need to make sure that they don't have a small account that's not paid due to a dispute and it placed them at risk of not getting that bigger finance. So your character, you need to protect it. The second one is your capability. And the challenge there is the bank is looking for information to see are you capable in servicing that loan. So their financial record keeping is extremely important as well of holding a bank account to show your income and expenses through that account. Basically third party verification, then also capital. That's also quite a big one. Initially if you want to start off, you need to have a deposit so you'll have to save up a bit because the bank look at it and say you have to have some skin in the game. You need to make a contribution that you have to lose if you do not make the repayment of the loan. The fourth one is the conditions. On the conditions. There's always conditions to align, be it the term, be it the interest rate, be it, be it the security. And there the advice is if you as a farmer do not agree to those conditions or do not see that you can meet those conditions, you need at the onset need to renegotiate it because once the loan is paid out, renegotiating will be very difficult because it's contractually based. And the last one would be your collateral, which in the instance of our equipment, it makes it a bit easier because they take the equipment as the collateral and so that's, that's fairly easy one on the five Cs.

So those are the five Cs makes a lot of sense. Anto, back to you though. When do I make a decision that I need to finance?

Tony, that's probably one of the most difficult decisions. Most of us were brought up that you shouldn't have debt. Debt is an evil thing, but debt is actually a really good enabler. The decision to either buy cash or to use debt all depends on what you want to finance. There's a principle that we call self liquidating loans, which basically means that whatever you finance must generate the income to repay that loan. So I'm going to use a simple example. A farmer wants to buy a tractor and he has all the cash that's available. He's got all the cash that's needed to go and buy that equipment. So the decision now is well, do I use that cash to go and buy a tractor or do I do something different with that cash? Again, you can now go and buy the tractor. All your cash is locked into that tractor and you wait for quite a bit of time to generate your income, come out of that. Alternatively, what you can do is use a small portion, as Herman alluded to, to put down some capital, put down a small deposit, you can buy the machine, finance it, and then you can use your cash to go and buy something that's a quick income generated asset, like for instance, cattle or sheep or some sort of livestock. So that way what you do is you create an income through the machine, through your planting, through a contract to work, whatever you're going to use the tractor for. But you also have a backup. So you generate income from your livestock. So that livestock now becomes your backup. In case you have, for instance, not a great yield on your, on your crop, you can still now afford to buy that tractor and repay it.

Yeah.

At the end of the time when you, when you repay it, you actually sit with two assets. You sit with your cattle on the one side and you sit with your tractor on the other side. So your wealth as a farmer has actually grown by double what it would have if you only used your cash. So the decision is not that easy. One it is, how does it fit into my whole production system and is it the best thing for me to do to lock up cash in hard equipment?

Alright, great advice. Now Herman, what is the SMART campaign?

The SMART Campaign is an acronym. It stands for Solutions for Farmers Mechanization for yield. The A is access to finance, R is liability with low cost and T is technology with training. So and the whole purpose of the campaign is we as a collective in the agricultural industry want to assist our farmers in growing their business. We work with government organizations, private companies and public private as well. And on the access to finance piece, we work with governments. We can even do direct financing to those governments through our global trade finance entity where they do dollar loans or euro loans to those governments. We work with export import or also known as EXIM entities to do those type of businesses. And then obviously our alliance banks where we do some risk sharing and interest rate buy downs.

Okay, fantastic.

If I can add to that, Tony, just on access to finance, I think in Africa that's one of the biggest challenges that we're facing. If you go and you Google, what's the five most important things to unlock mechanization in agriculture in Africa, you're most likely going to Find access to finance as one of those of those five. So if we cannot really provide finance for farmers, the unlocking of the potential that they have by using mechanization, by using technology, will actually be really restricted. So Herman and his team spend a lot of time to work on solutions and possible solutions for our farmers so that we can create different ways of funding a bit away from the traditional ways of funding, so that we can have access for financing for farmers in the most rural areas, so that we can get our technology there and help them to increase their production.

You talk about different ways of financing as John Deere Financial. You're flexible, you work towards or you tailor make the package according to the needs of that particular farmer. Am I correct?

That's 100% correct. I think our motto is we are linked and committed to the people that's linked to the land. So what that means for us as a financial institution is to say we need to go and develop solutions that can help the people that's linked to the land to really use our equipment and to up their production and up their livelihoods. So flexibility is one of the most important part of our customer value proposition. Without flexibility, if we bring a monogamous kind of financing solution, we will miss the most important part of our, of our, of our customer base in Africa. So we have to be flexible.

Okay, Herman, we spoke a little bit earlier about the five Cs of credit, but it's just a practical terms. You know, I'm a farmer in Kenya somewhere and I knock on your door and I say, listen, I need assistance. What's the first thing you say to me?

Okay, obviously information. The bank requires information, unfortunately, to review your application. And all banks would require it because they regulated by certain laws. And it differs, but the basics are more or less the same. So if you go to one bank and they ask you for proper record keeping, bank statements, proof of residence, cash flow projection, maybe contracts that you have to deliver your yield, those are typically the things. So record keeping is extremely important because that is what you show the bank to make the decision. So they can only make a decision on the information that you show them. So it's important that you keep those records very tight and give a proper picture of what the bank can see, how your operation is progressing.

Antoine, just lastly here we're saying John Deere Financial is your partner and not to look at it as your traditional type bank. That's what we're saying, isn't it?

Yeah, that's exactly what it is. I think the thing that differentiate ourselves from normal traditional banks are the fact that we understand your business. We really do. I mean, that's what our business is, is to understand it. Because we understand that we can provide different levels of advice to farmers than what the normal traditional bank would be able to do. And we provide just a bit of additional knowledge on the structures of your facilities. We know that certain kind of equipment has a longer lifespan, for instance, and we can structure our facilities differently on those. We also know that different countries have different seasons, so we can structure our facilities according to the seasonality of those different countries. So flexibility is the name of the game, 100%.

Antoine and Herman, thank you so much for joining me on Tech Terrain.

Thank you very much.

Well, there you have it. If you're looking for a partner and you want to grow your business in any way whatsoever, make sure you get a hold of John Deere Financial. You heard it from the gentleman, they have a flexible solution that suit your every need. You're watching techterrain. Well, sadly, we've come to the end of this episode of Techterrain, but go on to our website, which is www.techterrain.co.za, for bonus material uploaded every single week. And I've got a bit of bad news because next week will be our last show for this series and it'll be on Wednesday 7th October, October, because that is World Cotton Day. And we'll be celebrating that special day with you here on Tech Terrain. So until next week, Wednesday, bye bye and stay safe.