Land Bank

1. Land Bank Agri Outlook Conference “Land Bank committed to focus on setting the benchmark in SA agriculture”

2. Content Introduction Government intervention SA Agri finance market Agricultural debt Land Bank Act (2002) objects Turnaround strategy Building the loan book Development Initiatives Target market niches Development Impact Parameters Growth in the development Loan book Land bank 2010 and beyond

3. 1. Introduction Land Bank has been the main driver of agriculture for over 90 years Deregulation in the past within the Agricultural Sector In 2002, the Land Bank Act was promulgated which provided clear mandate for the Land Bank Land bank has embarked on clean up, stabilisation and sustainability initiatives The Land Bank has re-aligned its strategy with the objects of the Land Bank Act The Land Bank has clearly define development as it is the main object of the bank The loan book has started to show the signs of stabilising over the past months Land banks intent to be the premium provider of Agricultural finance

4. 2. GOVERNMENT HAS EFFECTIVELY STOPPED INTERVENING IN THE MARKET TO PROTECT FARMERS FROM VOLATILITY The Agriculture Credit Board (ACB) played an important supporting role in enabling beginner farmers to graduate to commercial farmers The State provided the funding for activities of the ACB During 1997 Government disbanded the ACB and passed over the task of serving the emerging black farmer, small farmers and agribusinesses, to the Land Bank. Land Bank Act of 2002, transformed the Land Bank into a financial development institution with its main focus on facilitating the establishment of emerging farmers in agriculture The Land Bank was not properly equipped to perform this task and did not receive (prior to 2008) any financial support from the state.

5. 2. GOVERNMENT HAS EFFECTIVELY STOPPED INTERVENING IN THE MARKET TO PROTECT FARMERS FROM VOLATILITY Timeline of deregulation of SA’s agricultural sector Historically 1980’s 1990 1991 1992 1993 1996 1997 • Reduction in use of price controls e.g., abolition of consumer price control on fresh milk • Prohibition on building of grain silos repealed Bread price subsidy phased out together with remaining controls over pricing Registration of millers and bakers lifted Restrictions on movement of livestock abolished. Restrictive registration of producers, meat industry players abolished • Control boards for potatoes, dry beans, eggs, bananas and chicory closed down • Klein Karoo Agri ’Coop’s single channel in ostrich marketing terminated Marketing of Agricultural Products Act –all remaining control boards to be closed by end of 1997 National Agricultural Marketing Council established in accordance with ’96 Act. Advises minister and stakeholders on marketing issues in agriculture and food industry 23 control boards determine and execute agricultural marketing policy Cane quota system reformed Domestic market control of citrus fruit abolished • Substitutes and other interventions have been almost completely phased out Loan and subsidy assistance to farmers in SA by the Department of Agriculture Rm 1986 1987 1988 1991 1992 1993 1994 1995 1996 1997 1998 1999 1989 1990 Source: LAPC1993, ‘The deregulation of SA agriculture’, Abstract of Agricultural statistics, 2001

6. 3. SA Agricultural finance market • Removal of government interventions exposing agriculture to inherent volatility, and creating need for risk management and international trade 2 • Increasing farm transactions and corporate activity leading to new opportunities, such as land brokerage and transaction advisory • Agricultural profits declining despite overall growth in production 1 3 Land Bank • Increased consolidation and sophistication among commercial farmers, and emergence of distinct customer segments with segment-specific needs • Increased political pressure to accelerate land reform and create jobs, with few incumbents achieving success 4 6 5 • Growing agricultural debt market, with commercial banks and agri-companies cherry-picking high-value clients

7. 4. The agricultural debt finance grew to R40 bill, and reflects outcome of competition Agricultural financing increased even more since 2002 Most of the growth was attributable to Private sector: aggressive to take good clients Land Bank increased its exposure through LRAD and new products, but most became bad. Coop Finance DoA exposure declined, but focusing on funding land settlements Private sector reduces exposure during drought Land Bank responding to ‘new’ agric mandate LB book decline cause of comm banks

8. 5. Land Bank Act (2002) objects Land Bank Mandate Guided by the Land Bank Act, 15 of 2002 Role is to Promote, Facilitate and Support agricultural development in the following areas Land and agrarian reform Entrepreneurship, innovation, commercialisation and growth Resource managements Social transformation and poverty alleviation This is done by Providing financial services to the sector Facilitate and mobilise finance (incl private sector)

9. Land Bank measured against the objects of the Land Bank Act Has the Land Bank met its objects? Root causes for non adherence Land Bank ActObjects • Weak control environment incl. breakdown in certain processes and controls • Lack of appropriate risk management • Lack of policies, procedures and practices • Weak information systems to support all control components • Lack of appropriate capacity, oversight and internal control over financial reporting • Equitable ownership of land • Agrarian reform • Access to land • Agricultural entrepreneurship • Removal of past racial & gender discrimination • Enhancement of productivity & profitability • Stimulation of growth and better use of land • Environmental sustainability • Rural development & job creation • Commercial agriculture • Food security

10. 6. An appropriate turnaround strategy to respond to this context Development (mandate adherence) Strategic Intent Legacy issues (Clean-up & Stabilisation) Stop the Bleeding Sustainability The pillars which will enable the Land Bank to normalise its operations & move to development Improve service delivery Implement systems & drive innovation Ensure partnership & stakeholder engagement Make development core to business Secure affordable funds and maintain sustainability Ensure adequate people & skills Governance, compliance & risk management

11. 6. Phases of turnaround strategy

12. 6. Phases of turnaround strategy (cont’d) CLEANUP STABILISATION • 2008 Audit report matters (qualifications & other matters) • Management letters of the auditors • SCOPA resolutions & portfolio committee undertakings • Government guarantee conditions • Forensic investigations • Improve staff capacity • Information technology • Funding dynamics • Balance sheet • LDFU • Cost to income ratio SUSTAINABILITY • Building the book • Development

13. Turnaround strategy - SUSTAINABILITY 1. Building the book 2. Development

14. 7. Building the loan book – Retail customer profile • Micro-scale / subsistence farmers (HDI) • Small scale farmers (HDI) • New commercial farmers (mainly HDI) • Established commercial farmers (incl. HDI) • Description • Predominately subsistence scale • Typically very small piece of tribal land • Individuals or group projects • Small-medium pieces of land (bought or PTO*) • HDIs in commercially significant operations, little experience • Existing commercial farmers. Medium to large scale operations • Input grants (seed, fertiliser, pesticide, etc.) • Micro-finance • Production credit • Land loans (secured and unsecured) • Buffer financing to under-write risk • Infrastructure grants • Holistic offering incl. debt products and financial services • Additional equity to reduce gearing to manageable levels • Holistic offering incl. debt products and financial services • Financialsupport needs • Technical support needs • Primary level extension services support • Basic livestock and crop lifecycle management • Mentorship for groups of farmers • Specialist extension and advisory services support • Regular mentorship to individual farmers • Specialist technical services • Little or no training required • Very basic business skillstraining (savings, etc.) • Training in cash flow management, budgeting, etc. • Marketing assistance • Business and farm mgmt training, incl. marketing mgmt, negotiation and deal making • Little or no business skills training • Business training support needs 14

15. 7. Building the loan book – CFU customer profile Medium agri-business Large agri-business • Description • Technical supportneeds • Financial needs • Basic commodity training • Mentorships for individuals and groups • Small start up agri-businesses • Typically sell products to local community • Could be one person or a group • Start up capital • Working capital • Loans between R5 000 and R200 000 • Working capital • Capital expenditure for expansion • Typically ranges from R200 000 up to R20m • Medium sized agri-processors • They sell their products to the main stream market • Employs 30 to 150 employees • Specialised commodity training • Limited mentorship • Working capital (stock and debtors) • Capital expenditure (plant and equipment) • CFU currently lends between R10m to R1 billion • No training required • Existing large agri-processors • Currently serviced through CFU • Employees of +150 Small agri-business ‘start-ups’ • Business training support needs • Business planning training • Training in cash flow management, budgeting etc. • Very little or no business training required • No business training required • CFU currently serves the large established agri-businesses • LB gearing retail network to fund Small and medium size agri-businesses are not currently served 15 Source: Team analysis

16. 7. Results of sustainability – Building the loan book Initiative Achievements • Loan book has stabilised • Retail book showing signs of growth • CFU migrate customers returning Stabilise the loan book - Seasonality - Recovery of NPLs i.e. YTD – R550m

17. 7. Results of sustainability – Building the loan book Initiative Achievements • Recent months show loan book is stabilising Stabilise the loan book …

18. 8. Results of sustainability – Development (Dynamics) Social imperatives Agricultural dynamics Challenges • Increasing pressure to meet land reform objectives • Land Bank Act of 2002 • Agri-BEE charter • Socio-political pressures • 30% of commercial agricultural land to be transferred to HDI’s by 2014 • Increased pressure on agriculture to provide employment • Food security • Profit margins declining • Increased volatility and risks due to deregulation • Export earnings dampened by strong rand • Unfavourable commodity prices and global economics • Increasing consolidation and sophistication of commercial farmers • High rates of default among HDI farmers • HDI’s do not have sufficient security leading to high interest rates • HDI’s lack equity capital leading to unsustainable debt levels • HDI’s lack technical farming expertise • HDI’s lack of access to markets • HDI’s lack appropriate management skills • Risk management • Business management Source: Team analysis

19. 8. Results of sustainability – Development (cont’d) Initiative Achievements • Development policy approved which formalised: • - Definition of development • Developmental impact of lending measured • Development impact parameters formalised • - Identification, quantification & monitoring • - Mainstreaming of development • - Implementation plan • - Funding approach • Improved mechanisms to fund development • - Post disbursement support (aftercare) • Government inter-departmental body established • - Partnerships established with various Agri stakeholders • Co-operatives • Agricultural Unions • Developmental funding institutions • Financial institutions • Governmental Departments • Pilot projects Make development core to business

20. 8. Results of sustainability – Development (cont’d) Development Impact Parameter (DIP) The bank has developed the following parameters to measure the effect of funding on development

21. 8. Results of sustainability – Development (cont’d) Mechanisms to finance Development 1. Indirect funding of emerging and non-HDP entrepreneurs via large corporate clients such as existing co-operatives and other entities Indirect funding of emerging entrepreneurs via newly established co-operatives and existing commercial infrastructure, including banks 3. Direct funding of emerging entrepreneurs in expanding agricultural enterprises 4. Direct funding of emerging entrepreneurs via enterprises that utilise land now available through the national land reform initiative 5. Direct funding of the participation by emerging entrepreneurs in commercial agriculture (primary & secondary) enterprises 6. Direct funding of the acquisition by emerging entrepreneurs of shares in existing of expanding enterprises 7. Direct funding of focused rural development enterprises, projects or initiatives

22. Growth in the development loan book 8. Results of sustainability – Development (cont’d) Target March 2010 R450 million March 2011 R1.1 billion March 2012 R1.7 billion

23. 9. Land Bank 2010 and beyond • Moving up the value chain • Provision of tailor made finance solutions • Premium provider of Agri-finance solutions • Capture lost market share • Improved customer service: Client centric approach • Credit and sales perspective • Provide more client driven products • Revision of current product portfolio • Introduction of new products • Review the pricing and credit policy • Report comprehensively on development impact of lending

24. In summary • Land Bank becoming a normalised institution moving towards development in compliance with the Land Bank Act objects. • Land Bank continuing to provide financial solutions to commercial farmers • Land bank’s role will go beyond financial activities but into the realm of providing strategic advice and policy support in the agricultural space, in partnership with: • National Treasury • Department of Agriculture • Department of Rural Development and Land Reform • Private sector (leveraging of partnerships) • Land bank will provide innovative solutions that will guide and lead the sector into a greater future