Land Bank; SA Sugar Association

Meeting report

AGRICULTURE & LAND AFFAIRS PORTFOLIO COMMITTEE
3 April 2001
LAND BANK; SOUTH AFRICAN SUGAR ASSOCIATION: BRIEFING

Chairman: Adv S P Holomisa

Documents handed out:
Land Bank Powerpoint presentation
South African Sugar Association Powerpoint presentation

SUMMARY
The Land Bank is positioning itself to be a leading provider of world class agricultural financial services to the agriculture and allied rural sectors in South Africa. This is in line with the new mandate the Bank received following the Strauss Commission report. However, there has been an increase in competition with other commercial banks for the agricultural sector. There is currently a review of the legislation which governs the bank.

The Chairman of the South African Sugar Association gave a brief overview of the South African Sugar industry. The sugar industry employs 350 000 people, both directly and indirectly. The R5 billion turnover is shared between growers and millers. South Africa ranks 10th among the top producing countries and as an exporter it is ranked 6th in the world. SASA has agreements with many international alliances. SASA supports the policy of the state to distribute land.

MINUTES
The Land Bank
Mr Adrian Toms, Executive Director, noted that the Land and Agricultural Bank of South Africa, commonly known as Land Bank, is a statutory body. Its legal origins and jurisdiction are found in Land Bank Act No 13. of 1944, as amended in June 1998. A Board of Directors governs the Bank, which reports to the Minister of Agriculture and Land Affairs.

The Bank does not receive any funding from the government. Its total assets exceed R15 billion. These funds are mainly from the private sector. The Bank operates in the commercial sector and gives loans to a wide range of clients. Clients include companies, trusts, established farmers, and rural entrepreneurs who have traditionally been denied access to credit.

The Land Bank's mandate is to be a development finance institution providing retail, wholesale, project and micro financial services to agriculture and allied rural sectors.

In order to achieve this new mandate, the Bank has formulated loan schemes and this product has enjoyed considerable growth. He said the loan scheme was in the form of a staircase ranging from: step up, bronze, silver, gold, gold premium to platinum.

The set up stage finances small-scale farmers at three percent interest. Candidates don't have to own land but have to show they have access to land. The second loan, the Bronze loan, is a loan of up to R50 000. It is also given to small-scale farmers, at nineteen percent interest. Third is the Silver loan scheme, aimed at farmers who have secured resources and who have farming experience or land it loans at seventeen percent interest. The Gold scheme is aimed at commercial farmers and gives loans at 15,5 percent. The Gold premium is also aimed at commercial farmers, with interest at thirteen percent. The platinum loan is a short-term loan that funds standing crops.

These products are funded and sustained through an investor program. The current balance on the development fund stands at R500 million. This money comes from the revenue of the Bank itself, and because the Land Bank is exempted from paying the tax paid by other commercial banks, it imputes the tax into the development fund. What is left of this money goes into the Bank's own reserve to sustain bank operations.

In 2000, they experienced a decrease in the net surplus because of the lower interest rate margin in the market. There has also been an increase in competition from other commercial banks. He said the Land Bank has two years' experience in dealing with the question of assisting historically disadvantaged farmers and hence they are constantly improving on this development line.

There has been an increase in the repayment of loans made to the Bank. This is a sign that farmers are able to practice financial discipline. The Bank has entered into an agreement with the Ministry of Agriculture and Land Affairs to use the silver loan to finance farmers who have benefited from land redistribution policy.

The bank historically had 24 branches countrywide. These have been broken down into smaller branches in small farm towns to allow for easy accessibility. The Bank currently has 37 offices in rural areas. It has also set up agencies to distribute funding to struggling farmers.

With regard to loan defaulters, the Bank normally reverts to the court for recovery. For example, the Northern Transvaal Co-operation was on the brink of liquidation when it owed the bank.

There have been instances where the bank experienced fraud within its ranks; for example, the Tzaneen case. The Bank has met with the Minister of Agriculture and Land Affairs, the Minister asked for the assistance of the Scorpions, and it has since come to light that they have made two arrests regarding the fraud.

On the budget target for 2001, The Bank is targeting a 10% net growth in its commercial book and a 50% net growth in its development book. The Bank is looking to keep arrears at less than five percent and to have a 40% expenditure to income ratio. On the immediate focus area, the Bank is looking at creating incentives, such as discounts on interest, for farmers who build schools. It also wants to improve employee interaction within the Bank and client satisfaction.

Advocate Wynand Crowl noted that the Bank is still governed by the old legislation of 1944. The new legislation which is still being formulated has to take into consideration the Strauss report on financial support for agriculture. The new legislation will deal with concerns expressed about some of the securities measures on loans given by the Bank to farmers. The new legislation will also cater for the policies government has adopted to restructure some of its public institutions. The legislation would also take into consideration the current aim of the Bank to be a major player in the financial sector.

The Bank wants the legislation to be as user-friendly as possible in that it should not be prescribing to the Bank but, rather, enabling it to take its own initiatives if the need arises.

Discussion
Mr F Bhengu (ANC) asked how large a deposit should people have to get a loan from the Bank. Second, he asked how the farmers were empowered in terms of selling their produce.

On the first question, Mr Toms said the Bank wanted a 20% deposit or would hold some of the client's assets as security. He also mentioned that this is now under review with an intention to reduce this deposit. Second, he replied that, as the Land Bank, they could not give additional support to farmers beyond financing them. However, he said, there are institutions like the Agricultural Board that are responsible for giving support.

Mrs B M Ntuli (ANC) asked Mr Toms how much interest there is on each scheme.

Mr Toms replied again (refer to answer in presentation above). He also added there is an 'on time' bonus, a discount on payment, given to clients who pay back the loans on time.

Mrs Ntuli also asked to be provided with a list of the bank satellite offices so that the members can forward it to their constituencies.

Mr Toms replied that the Bank would be glad to provide the committee with the list of agencies within ten working days.

An ANC member said it happens that in the rural areas the money intended for the farmers ends up being used for Bank administrative purposes and the intended beneficiaries of these funds have no access to it. He asked if the Bank is aware of this and how it intends resolving it.

Mr Toms replied they are aware of this problem in areas such as the Eastern Cape. When this happens, the management is replaced. However, if the co-operatives are responsible, their contracts are terminated and they are replaced with people who show efficiency in distributing funds to farmers.

Mr P H K Ditshetelo (UCDP) asked, considering the Bank is a profit-oriented institution, and responsible to its shareholders, how is it accessible to ordinary to South Africans. Do ordinary people experience any huddles in acquiring loans from the Bank?

Mr Toms said the Bank has a dual nature. It has a development funding side, responsible for providing funds to previously disadvantaged communities. It also has both a commercial and a development book, which allows for optimal access to ordinary people.

The Chairperson asked if the Bank received the money from the Agriculture Credit Board.

The reply was that the bank had not received any money from the ACB. To the best of the Land Bank's knowledge, the money was with the Ministry.

The Chairperson also asked how the Land Bank intended to get the R29 billion owed to it and other commercial banks by the commercial farmers.

Mr Toms replied that the Land Bank's share in this debt is R16 billion and legal action is being taken towards recovering the money.

Third, the Chairperson asked what relations the Bank has with other development agencies in the same sector.

Mr Toms replied that the Industrial Development Corporation concentrates on assisting large industries while the Development Bank concentrates on financing infrastructure. The Land Bank meets periodically with these agencies to look at issues concerning the agricultural sector.

South African Sugar Association
Mr Tony Ardington, Chairman of the South African Sugar Association (SASA), gave an overview of the South African sugar industry. Sugar cane is mainly grown in KwaZulu-Natal, Mpumalanga and the Eastern Cape. Currently there are 53 000 sugar growers in South Africa.

The sugar industry generates direct income and employment in the regions where it operates as well as indirect economic activity because of the many linkages between the sugar sector and the core businesses that supply it. Employment in the sugar industry totals 85 000 jobs. Direct and indirect employment is estimated at 350 000 jobs. One million people are estimated to be dependent on the sugar industry. Based on revenue generated through sugar sales on the local market, it is estimated that the industry contributed R1,7 billion to the country's foreign exchange earnings.

In terms of the industry structure, Mr Ardington said SASA is a proceeds-sharing partnership between millers and growers, established in 1935. It consists of two members, the SA Cane Growers Association and the SA Sugar Millers Association Limited.

SASA's objectives include legislative measures affecting the industry, training, scientific and technological research and the compilation of statistics. The SA Cane Growers' Association (Cane Growers) was established in 1927 to administer the interests of independent sugarcane growers. Cane Growers is a Section 21 Company (incorporated not for gain). Individual growers are members through grower groups, and these make up the member organisations of Cane Growers. In each mill area, all members' organisations are represented by fifteen Local Grower Councils.

There are 53 000 registered cane growers. This includes about 2 000 large-scale commercial farmers, farming freehold properties and some 45 000 small-scale growers farming on tribal authority land. Together, they produce seasonally over 20 million tons of sugarcane. The large-scale commercial farmers are responsible for more than 66% of total sugarcane production while small-scale growers produce approximately 17,5% of the total crop. An average mill area provides 22 000 people with employment, mainly in rural areas.

In the local sugar market, there has been a slight increase in the amount of crops produced by individual mills. Although there has been an increase in the total output in the production of sugar in the South African Customs Union market, this country has experienced a decrease of from 95% to 78% in its share of that market. This is mainly as a result of Swaziland and Zimbabwe, the other two large producers of sugar in the region.

Internationally South Africa is ranked tenth in the top 20 countries that produce sugar. Brazil is the largest producer of sugar for the world market. However, as an exporter of sugar to the world market, South Africa is ranked in sixth position. Brazil, which has the capacity to crush the whole South African sugarcane crop in two weeks, is the major factor in the world markets.

With the growth of economic development and the empowerment of previously disadvantaged people, a growing number of medium-scale farmers is entering sugarcane agriculture on farms made available at market-related prices by the major milling companies. Currently there are 51 000 small-scale farmers in the industry with more than 50% women and more than 600 black contractors. Milling companies with their own sugar estates produce 16,5% of the crop. This percentage is likely to decrease as companies continue to promote medium-scale farming development. Small-scale growers produce approximately 17,5% of the total crop.

The Chairman of SASA also mentioned that the land provided to small scale black farmers is land suitable for planting sugar cane and easily accessible to the market. On credit support for these farmers, he said a financial scheme was established in 1973. Currently R 220 million has been loaned to farmers.

The policy by the government to change to a dollar-based reference price created the opportunity for SASA to lobby for the reduction of the levels of tariff protection. By using a diagram that showed the percentage on tariffs on white sugar from 1979 to 2000, the Chairman showed the tariff was gradually reduced so as to allow the South African sugar industry to find its feet in the global market. It was only recently as a result of the change to the dollar pricing that the country is experiencing a reduction in tariffs. SASA does not want to be 'perfect in an imperfect world'; by this he meant it des not want government protection from global competition.

The South African Sugar Industry is striving to improve its international competitiveness. Second, the industry promotes international trade liberalisation. Third, it seeks the development of small scale and medium scale growers. Fourth, it wants to continue socio-economic programme. Last, it wants to maintain research and training leadership.

The vision of the South African sugar industry complements the vision of South African Development Community (SADC) to capture an increasing share of steadily improving world markets.

SADC countries produce 4,5 million tons of sugar. It is predicted that by 2010 the potential production will be six million tons. Consumption by the SADC countries is 2,5 million tons. All the major producers of sugar in the region are land-bound hence the need for these countries to co-operate. The SADC countries have gone into co-operative agreements: Reciprocal Market Liberation after 2010, Non-Reciprocal market access to the southern African Customs Union, co-operation in areas of common interest and the establishment of a technical committee on Sugar (TCS) which would manage market access.

SASA has links with the Global Alliance for the Reform of the World Sugar Trade. SASA's objective in joining the lobby group is to achieve a fair World Trade Organization agreement on agriculture. The group also sought to achieve a concerted and co-ordinated reduction in tariffs and lastly it strives for a meaningful and a progressive reduction in domestic support.

SASA is also part of the Federation of SADC Sugar Producers. This federation seeks to give effect to SADC protocol, to co-operate on issues of production in becoming a world class sugar producing bloc.

There is currently a review of the Sugar Act. Both SASA and the Global Alliance have met the review of this Act with great concern. The Act review has to look at three conflicting forces: the free market is best; the millers' monopolistic powers must be controlled; massive government interference has corrupted the world market e.g. the Australian sugar industry.

The sugar industry fears being made perfect in an imperfect world, meaning tariffs government normally put on imports do little to prepare the local industries for the role they will have to play when they enter the global markets. They are not looking for any assistance other than the assurance that protection would benefit all equitably.

The Chairperson said the industry is studying the Distribution of Agricultural Development Policy document to seek ways of supporting it.

Discussion
Mrs Ntuli B M (ANC) asked why is the sugar industry losing sales. She also asked what could remedy the problem of growers being trapped into selling their sugarcane to one miller.

Mr Ardington replied the South African industry is losing sales for two main reasons. First, Swaziland, one of the largest producers of sugar in the region, is a member of the South African Customs Union and it has progressed its sales in the sugar market within the region. Second, as a result of bilateral agreement entered into years ago between South Africa and Malawi on sugar trade, Botswana, Namibia and Zimbabwe signed similar agreement that gave them the right to sell sugar duty free among them.

In the past, he said, growers used to divert their sugarcane to nearby millers if the millers they normally used could not take all the sugar cane in the area. Other steps that could be taken to rid the market of growers being trapped into selling to one miller was to restrict growers on their produce.

Mr Maphalala M A (ANC) said he appreciates the fact that the South African industry supports the transfer of land to disadvantaged black people. He therefore asked the Chairman of SASA what plans the sugar industry has for transferring land.

Mr Ardington replied that SASA does not own land and hence has no plans for land redistribution. He however said millers who own 62 000 hectares have a programme of selling land to growers. This process (transferring land) is a difficult one because of the tremendous amount of red tape involved. The cost of transactions are huge and it is also difficult to create a structure that makes it viable. Millers and growers decided to sell farms to people who worked on the their farms. Some farmers retrenched their labourers and encouraged these retrenched people to start up a trust, which bought the land for them.

Adv Holomisa S P (ANC) asked what financial assistance was available for small-scale farmers. Mr Ardington said there is a financial aid trust called Mthombo, established to finance sugar farms. He also said they SASA had established a small-scale growers development trust.

The meeting was adjourned.