Economic and institutional factors affecting the performance of the graduated mortgage loan repayment scheme used by medium-scale sugarcane farmers in KwaZulu-Natal.
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Date
2003
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Abstract
Private sector sugar millers and Ithala Development Finance Corporation (Ithala)
implemented a graduated mortgage loan repayment scheme in the 1995/96 sugarcane
production-season to try and improve access to farmland by aspirant commercial
farmers in KwaZulu-Natal. By March 2001, the scheme had financed 106 "medium
scale farmers" (MSFs), 99 of whom were still in the scheme (one loan had been
repaid from own funds, and another six from the proceeds of life insurance policies).
The first aim of this study was to analyse factors affecting whether or not the MSFs
were current or in arrears on loan repayments as at 31 March 2001. A logit model
based on full information for 83 MSFs shows that the estimated probability of a MSF
being current on loan repayments was higher for clients with higher levels of average
annual gross turnover relative to loan size, and for clients with access to substantive
off-farm income. This suggests that farm size (proxied by annual farm gross turnover)
does matter when policymakers in South Africa consider future similar schemes
designed to improve access to commercial farmland by people that previously could
not buy farmland. Smaller-sized, creditworthy farms with loan sizes that are relatively
low compared to the expected average annual gross income may also be viable.
Access to off-farm income could also be considered as a criterion in selecting
potential farmers for future similar schemes, as it helps to provide additional liquidity
to fund future operations and debt repayments, and can reduce leverage levels.
The second aim was to conduct personal interviews with the 99 MSFs between July
and September 2001 in order to identify what aspects of the scheme could be
improved for new members . Responses from 88 of these MSFs show that 68% of
them would opt to first rent land before purchasing, while 78% of them recognize, or
have experienced, the cash flow problem associated with land purchase. Most of the
MSFs felt that long-term sugarcane supply agreements constrain enterprise
diversification, and that the quality of mentorship that they currently received was not
satisfactory. Industry players could consider leveraging donor funding for
empowerment projects to improve the quality of future mentorship programmes.
There is also some scope for Ithala to improve the client-lender relationship by better
clarifying the structure of the graduated repayments, sending loan statements on time,
and helping clients to interpret loan statements. Growers perceive the need for a
coordinator to monitor, and advise on how to improve, their financial performance this
could be a new commercial service opportunity. Using an independent valuer to
conduct farm valuations may also be necessary to avoid perceptions of bias in the
value of farms offered for sale by the millers.
A logit model of the MSFs' preferences for first renting land before purchase shows
that new growers joining this scheme, or similar schemes for other farm products, with
relatively less liquidity and less farming experience should be given the choice to rent
land with an option to purchase. The preference for first renting by most of the
surveyed MSFs could indicate that many very highly leveraged MSFs still experience
cash flow stress despite the interest rate subsidy. A second policy implication,
therefore, is that the current subsidy level, which reduces the effective starting interest
rate level to about ten per cent relative to a typical five per cent current return on land,
could be increased to promote access to farmland markets. Alternatively, loan terms in
the next round of the scheme could be changed to require higher proportions of own
equity (lower leverage levels), or to permit the deferral of principal payments, or to
permit the purchase of smaller farms by creditworthy, part-time farmers. Another
strategy to improve liquidity is to advise growers to limit family drawings in the early
years after farmland purchase.
Description
Thesis (M.Sc.Agric.)-University of Natal, Pietermaritzburg, 2003.
Keywords
Agricultural credit--KwaZulu-Natal., Ithala Development Finance Corporation., Land redistribution for agricultural development (South Africa), Sugarcane--Economic aspects--KwaZulu-Natal., Sugar industry--KwaZulu-Natal., Farms, Size of--Economic aspects--KwaZulu-Natal., Agricultural credit--Management--KwaZulu-Natal., Theses--Agricultural economics., Sugar growing--Finance--KwaZulu-Natal.