The head of the Land Bank has warned that the trend of falling fixed capital formation in South Africa’s agricultural sector needs to be urgently reversed if the sector is to grow and create jobs.

Speaking during the release of the group’s 2016 results, CEO TP Nchocho said the “trends were not encouraging”, with the ratio of fixed investment to debt having declined steadily since 2007.

“Farmers are borrowing money, but it looks like they are not reinvesting their profits into their farms,” he said during a presentation at the JSE, noting that debt levels had climbed significantly over the period.

He called for urgent collaboration between the public and private sectors to deal with the factors constraining agricultural investment and to reverse falling fixed capital formation in the sector.

Besides investing in supportive infrastructure, such as water and irrigation, Nchocho said interventions were needed in the areas of land reform, access to capital and markets, as well as in improving farming techniques and technologies.

The need to intervene had become even more urgent in light of South Africa’s worst drought in a generation, which saw agricultural gross domestic product slump by 8.75% last year.

While the impact of the drought varied from region to region and between subsectors, there had been an estimated 20% fall in hectares planted during 2016, while the average livestock herd is estimated to have shrunk by 10%.

However, the Land Bank’s own finances held up relatively well in 2016 despite the weak conditions – a performance Nchocho attributed to the diversified nature of its lending activities, as well as the fact that over 80% of its lending was to corporates, which had balance sheets capable of weathering two years of drought.

However, he cautioned that many of the emerging-farmer gains made as a result of land reform had been reversed as a result of the drought and warned of serious consequences should South Africa experience a third successive year of severe drought conditions.

The Land Bank’s total loans grew by a marginal 3.2%, or R1.2-billion, to R39-billion, highlighting the challenges that the agricultural sector has had to cope with during the period.

The group’s published profits fell sharply from R311.5-million to R182-million, but the result was heavily impacted by accounting changes and, on a like-for-like basis, the performance was slightly stronger at R395.5-million. However, Nchocho acknowledged that the group had undergone “traumatic restructuring” during the year, which saw its headcount reduce from around 540 people to fewer than 400.

CFO Bennie van Rooy reported that the Land Bank met with Futuregrowth Asset Management in light of its recent announcement that it was suspending financing activities to six State-owned entities, including the Land Bank.

Van Rooy stressed that, as a nondeposit-taking institution, it depended on institutional funders, such as Futuregrowth, to support its activities and expressed optimism about a resumption of support from the asset manager following recent one-on-one interactions.