I had the pleasure of participating in a panel discussion on global trade that took place at Nampo earlier this month. My co-panellists, who included respected political and economic analyst, JP Landman; senior analyst at the Bureau for Food and Agricultural Policy, Louw Pienaar; and Dewald Pienaar, CEO of Red Meat Industry Services, made it clear that South Africa needed to stop relying on traditional markets for its agricultural products and prioritise finding new markets.
They were unanimous in their opinions that the trade tariffs imposed by the new US administration currently pose the greatest challenge to South African agriculture. However, they were also unanimous in their belief that this challenge presents an opportunity for our agricultural sector, which has, for decades, been one of the most outstanding performers in our economy. Our farmers now produce double what they produced in 1994. And of that double, 50% is exported. The sector is famously resilient and, as such, the pressure this challenge creates also presents an opportunity to seek alternative export markets more aggressively.
The discussion also made it clear that to capitalise on these opportunities, agribusinesses need expert support to help guide them through the intricacies of exploring new markets. There are so many complexities that agribusinesses cannot be expected to fully understand, including exchange rate volatility, currency and commodity hedging, trade payment instruments, bespoke trade finance, Reserve Bank and trade block agreements, fair trade as well as global certifications. We find that farmers are willing to pay for advisory services to consult on these matters, but this eats into their profit margins. Freight forwarders, for example, often provide valuable services, but these typically come at a significant cost and, while freight forwarders are instrumental in handling freight, many may not be aware of the legal or financial aspects involved.
Look for a trusted trade adviser with a vested interest in your business
It’s vital for agribusiness owners looking to maximise export opportunities to engage with partners who can unlock value. Companies might not be aware that banks have evolved beyond traditional financial institutions. They are now becoming trusted trade advisers, helping businesses grow while protecting them from macroeconomic impacts within their supply chains.
From a bank’s perspective, we approach global trade from two angles: risk mitigation and maximising bespoke trade and working capital to facilitate growth and increase clients’ profitability. Tariffs erode margins, particularly in agriculture, where profit margins are low due to the complexities of the value chain, which impacts the fluidity of movement of produce and cash flow.
For example, marketing agents representing major international retailers typically state that once produce is in cold storage and tested, it takes eight to 10 weeks before producers receive payment. With current trade tariff and exchange rate volatility, this elevates producers’ risk. This makes expanding into ‘friendlier’ markets like Africa, the Middle East and Asia attractive, but requires active currency risk management and hedging foreign exchange exposure amid foreign currency shortages. Similarly, with commodities like grain, where one can buy futures and secure a price, tariff effects can complicate matters. For instance, if the price is locked into a 10% tariff but the tariff increases by 20%, money can be lost on the financed deal, impacting the ability to pay loans.
When businesses cannot repay their loans, there are jobs at risk and potentially insufficient funding to cover overhead costs, capital and liquidity. Unfortunately, we've learnt that many clients notify their bankers only when the situation has already escalated. To mitigate this, Nedbank is striving to become a trade alliance partner to inform farmers’ global strategies to pick up early warning signs such as decreased demand or country dynamics within their banking network. For instance, if you’ve exported less than usual, we want to understand what’s happening and how we can work with you and grow alongside the business to ensure you meet that demand, which can be leveraged through technology or supply chain alliances, regardless of whether it requires funding.
An understanding of regulations and complexities is essential
In addition, some markets have demanding regulations, and tapping into them without certifications that pertain to carbon emissions and biosecurity can be extremely challenging. If banks finance a commodity that doesn't meet these certifications – for example, not meeting blackspot standards – it essentially becomes worthless and will not even return to South Africa, putting both the producer and the bank at risk.
It’s crucial to understand any potential new market thoroughly before attempting to tap into it, and a bank’s familiarity with regulations and Reserve Bank restrictions, rulings, and reporting processes means that they know how to deal with each market’s compliance requirements. For example, recognising that Reserve Banks in Africa have their limitations while free trade agreements in regions like Europe make it easier to move money, means they can plan and advise accordingly. Similarly, the South African Reserve Bank regulations allow farmers to split invoices and their freight payments with no exchange control approval, which can be beneficial, particularly when a farmer's income depends on foreign currencies. They can then convert revenues into other currencies when they appreciate, enabling farmers to earn more without being traders.
Align with partners that believe in the power of collaboration
One of our goals at Nedbank is to penetrate markets by collaborating with alliance partners who possess local expertise and market understanding so that we don't need to reinvent the wheel. When it comes to the opportunities presented in Africa, that partnership is with Ecobank, of which Nedbank owns 22%. This alliance allows us to operate in 37 countries across West and East Africa, and enables us to conduct business effectively, especially in instances where local language knowledge is beneficial.
In a similar vein, a major opportunity lies in using technology to expand and globalise South Africa's agricultural industry and secure higher prices from markets across the globe when demand is high. While it's beneficial to visit auctions and see the livestock or produce in person, this means trade is limited to South African participants. Unless there are buyers and representatives from abroad, farmers miss out on the globalisation potential they seek to unlock. This is where we’re collaborating with agricultural trading platforms to reach global markets, foster international demand and drive growth.
In conclusion, it’s vital to connect with alliance partners who can unlock the value created by global trade. If we increase demand by expanding markets and streamlining value chains and overheads, we can enhance growth, sustainability and profitability, which ultimately creates resilience among agribusinesses. Our aim is to future-proof these businesses because, as they grow economically, it drives job creation and overall economic sustainability.
