Financial Planning

How SA farmers can sow seeds for future financial growth

A 2022 Centre for Strategic and International Studies (CSIS) research article called “Access to Finance for Smallholder Farmers” found that finances are a significant barrier hindering most smallholder farmers in Sub-Saharan Africa from increasing their crop yields and income. Gert Bezuidenhout at Sanlam, says financial literacy and planning are vital for farmers to achieve growth and cultivate long-term prosperity and resilience in the dynamic and often unpredictable agriculture landscape.

Just as fertile soil and favourable weather conditions are essential for a bountiful harvest, a strong foundation of financial knowledge and skills empowers farmers to navigate the complexities of managing their resources effectively. From budgeting and cash flow management to grasping the nuances of investment and risk mitigation, financial literacy and planning are crucial for sustainable success in the agricultural sector.

Weathering challenges in a dynamic landscape

Gert explains that farmers must contend with natural disasters posing existential threats, particularly those who can’t afford insurance to transfer this risk. Adding to this is the unpredictability of seasonal and variable income.

“There’s no regular income in the farming space; it’s seasonal. Additionally, farmers are at the mercy of market forces, with prices for their products fluctuating daily based on supply and demand dynamics. They must strategically decide when to sell and hold back their produce to optimise returns.”

He says farmers then need to manage the disconnect between their irregular income and regular expenses, such as salaries, electricity, and vehicle payments. “Within that seasonal and variable income, you still need to match provision for monthly production costs because your costs aren’t seasonal. Navigating this complex web of challenges requires astute financial planning and cash flow management skills to ensure long-term sustainability and resilience.”

The role of financial planning

Gert says financial planning is a crucial financial literacy component for farmers, particularly those with mature and established businesses. He says while financial literacy focuses on fundamental skills like cash flow management, budgeting, and risk transfer, financial planning involves more sophisticated considerations around business structuring, asset protection, succession planning and exit strategies.

“It’s important to acknowledge that many farmers are already quite financially literate and adept at planning strategically. The more sophisticated farmers that have gone through a mature cycle in their businesses need financial planning in the sense that now they’re working with legal structures, wanting to protect their assets, making provisions for exiting the industry and what the succession plan should look like.”

He adds that seasoned farmers can optimise their business structures for tax efficiency, to mitigate risks and ensure a smooth transition when the time comes to pass the reins to the next generation by engaging in proactive financial planning with the support of and legal consultants.

Crucial components of financial literacy and planning for farmers

While the specific financial literacy and planning needs of farmers may vary based on factors such as the scale of their operations and level of experience, several aspects are universally important:

Budgeting and cash flow management

Effective budgeting and cash flow management are essential for farmers to navigate the seasonal nature of agricultural income

Risk management and insurance

Agriculture is inherently risky, with farmers vulnerable to various threats, from adverse weather conditions to market volatility. Financial literacy empowers farmers to understand and manage these risks through insurance to transfer risk

Investment decisions and capital allocation

Farmers must make complex investment decisions, from acquiring new equipment and technology to expanding their operations. Financial literacy enables farmers to evaluate the potential returns and risks associated with different investment opportunities and to allocate their capital

Succession planning and business structuring

Financial literacy and planning also encompasses the intricacies of succession planning and business structuring for established farmers

"...many farmers face significant challenges and barriers in accessing the necessary education and resource"

Barriers to financial empowerment in the sector

Despite the clear benefits of financial literacy and planning, many farmers face significant challenges and barriers in accessing the necessary education and resources. Gert identifies a considerable gap in the market from the formal education platforms due to the lack of targeted short courses and programmes from tertiary institutions.

He says Sanlam has focused on grassroots initiatives to bridge this gap, working directly with local farmer unions and agricultural organisations to provide on-the-ground financial literacy training and resources. “We decided that we’re going to focus more on where we can see the end-user, and that’s the farmer through the local farmers union. Our advisers and legal consultants get involved by speaking to these farmers about investment decisions, financial planning and financial literacy,” explains Gert.

Reaping the rewards of financial planning

In the agricultural landscape, financial literacy and planning aren’t just a desirable skill, they’re necessities for farmers to flourish in an increasingly complex and competitive environment.

Gert shares how improved financial literacy and strategic investment decisions transformed a rural cattle farmer’s business, empowering him to invest around R25 000 in better genetics for his herd.

“By selecting a superior bull and focusing on genetic quality rather than quantity, the farmer could dramatically improve his calves’ weight gain and market value. This strategic investment decision, guided by a deeper understanding of the factors driving profitability, boosted the farmer’s income and expanded his market opportunities. Whereas previously, buyers had bypassed his farm due to inconsistent quality, they now actively sought out his superior cattle.”

Gert concludes, “By equipping farmers with the knowledge and tools to make informed financial decisions, we can foster a resilient and prosperous agricultural sector that continues to drive economic growth and social upliftment. At Sanlam, we’re committed to walking alongside farmers on this journey, providing the education, resources and the support they need to cultivate enduring success.”