Who are the producers most likely to exit farming over the next decade? Which factors are driving their decisions in this regard? And, what do their exit plans mean for the availability of agricultural land for farm expansion and new entrants?
These are some of the questions Kandas Cloete considered in her PhD study. Cloete received her doctorate degree from Stellenbosch University’s Faculty of AgriSciences recently.
Her dissertation, titled Investigating farm-level exit decisions and exit rates in commercial agriculture in South Africa: An agent-based approach, provides new insights into factors affecting producers’ decisions to leave the sector.
TO EXIT OR NOT TO EXIT
This study is the largest of its kind yet to investigate farm-level exit decisions and rates in the country.
Cloete, who was raised on a farm outside Laingsburg, completed her studies in the Department of Agricultural Economics in 2021. She now works for the Bureau for Food and Agricultural Policy (BFAP) as a senior analyst.
“We all know someone, or someone who knows someone, who exited farming in the last couple of years,” Cloete says. “The question of why producers quit farming and sell their land is a topic that was covered historically and from a policy perspective. My interest was in predicting whether this pattern will continue, and what the drivers of the decision to exit or stay are.”
In layman’s terms, Cloete’s study focused on the decisions that producers expecting to exit farming will likely make regarding land use and occupation over the next ten years, and on how these decisions could affect the agriculture system as a whole.
She says: “Land supply and demand remain a vast, complex and multifaceted phenomenon, but it can be broken down into smaller parts by using structured analyses like in this study to provide useful insights.”
To identify the factors that drive farmers’ willingness to sell their land, Cloete considered the responses of 450 participants in a survey on land-use patterns.
She included producers with plans to expand, those who want to maintain their farming operations as they are, and those who plan to exit the sector.
Cloete employed various research techniques in her study, including statistical modelling. This enabled her to determine a baseline farming exit rate. This is the rate at which land may become available in the open market.
Through a cluster analysis involving 23 variables, she identified four distinct groups of respondents: the ‘ambitious’, the ‘persistent’, the ‘retrievers’, and the ‘remainers’.
ONE IN FIVE PRODUCERS WANT TO EXIT
Among Cloete’s participants, one out of every five producers indicated that they plan to exit farming within the next decade.
While ‘retrievers’ will be opting out within the next decade, producers in the ‘ambitious’, ‘persistent’ and ‘remainer’ groups plan to keep farming.
The data furthermore show that producers currently aged 30 to 45 years are more likely to exit farming than those aged between 45 and 65.
Cloete is now able to describe, in great detail, the average producer who is likely to exit farming over the next decade. “He is a third-generation, 54-year old individual with 26 years of experience and a college or university degree,” she says. “This producer is typically still repaying long-term loans while also using production loans and other types of debt capital.
“Given the financially constraining, leveraged position he finds himself in — together with a lack of business confidence — his financial strategy is to contract rather than expand his farming operations. As a result, managing multiple loans while planning for retirement remains a challenge.”
Although the decision to remain in or exit the agricultural sector is often a personal one, driven by the unique circumstances of the producer, Cloete did find certain common themes among the four different groups.
Farming exit decisions are affected by investment cost, financial constraints and producers’ age, Cloete’s results show. Other deciding factors include retirement without succession, financial problems, a lack of dependable labour, uncertainty regarding land reform policy, and concerns about rural safety.
While no link between turnover and exit plans could be established, a larger turnover (of more than R10 million per year) could certainly play a role in the intent to stay.
Cloete says producers’ decisions to keep farming are also affected by business confidence and production loans. “It is typically a combination of different factors that determines the decision to quit farming and sell the property,” she says.
‘LAND MARKET IS FUNCTIONING’
Cloete’s results show there is enough land available in the market due to exit plans among certain producers to accommodate others who want to either enter the sector or expand their existing operations.
“The results show that the South African land market is indeed well functioning,” she says. “This is proven by producers’ intention to exit. Hence, land supply — in the general sense — is not a constraining factor in transformation (in agriculture).”
Still, the land market is somewhat constrained by barriers to exiting, which translates into a direct barrier to entry among prospective farmers.
“Often, one man’s decision to exit creates an opportunity for another. Those producers making exit plans are also enabling expansion by others and access for new entrants.”
Cloete categorised the barriers to exiting that affect producers’ decision-making process as relevant to one of three factors: financial vulnerability, sunk cost (assets bought at certain prices that can’t be sold at book value) and transaction cost (the total cost of making a sale). In addition, rent-seeking, land ownership and the perception that land market prices will grow were also identified as barriers to exiting.
Cloete says there is a concerning number of producers who are planning to continue their operations despite being constrained by existing financial commitments and not planning to invest in the future.
“While collectively appearing to have a strong appetite to grab the bull by the horns, so to speak, some producers are driven to deal with the challenges as best they can and while they can in order to add value – on the income and balance sheets. Many producers will, however, eventually retire and sell their farms because no other viable solution is available.”
Yet, financial vulnerability due to the risks associated with farming affects producers’ finances and often leaves ageing producers unprepared for retirement, Cloete says.
“Perhaps the biggest issue is not the loss of 20% of our producers who will exit over the next ten years but rather the fact that the ones that should be exiting find themselves locked in by the barriers to exit and don’t have an exit strategy,” she adds.
Cloete received funding from the National Research Foundation (NRF).
• Written by Jorisna Bonthuys, on behalf of the Faculty of AgriSciences, Stellenbosch University