Romania agriculture outlook: How are banks trying to help farmers

Farmland is the most important asset for investors seeking to take out loans from banks, but the ongoing issues that Romania has with the registration of such plots makes financiers very cautious, according to legal and banking experts.

Ovidiu Posirca

The lack of infrastructure and small number of large compacted surfaces of farmland that could be put up for sale are some of the challenges facing the local sector, according to Mihaela Hunca, industry expert agriculture at UniCredit Bank.

Production rates still tightly linked to weather

“Broadly speaking, the main challenges facing the sector are: the time-consuming red tape for getting all the documents to sell terrain outside the city, the high degree of fragmentation for farmland (we come third after Malta and Cyprus according to Eurostat) and the lack of cadaster, the full dependency on weather conditions, with immediate impact on yield per hectare, correlated with the lack of a strong irrigation system, given the extended periods of drought in recent years,” Hunca told BR.

She added that UniCredit has focused on financing the vegetal sector, which accounted for 70 percent of the total output in the agriculture industry last year, and on the zootechnics segment.

According to data from the World Bank, the average farm yields for agricultural products are only a third of those in the EU15 for common wheat and for oil seeds. Romania is also lagging behind on animal productivity. For instance, on dairy yields, Romania registered 3.0 tons/head, while the EU15 average is more than double.

“Unlike the EU28, whose agriculture output feeds off animal production, Romania’s agricultural production is more vulnerable to climate change. Favorable weather conditions in 2013 and 2014 led to a positive agricultural trade balance in Romania, but the recent severe drought in 2015 demonstrated the vulnerability of the sector and further widened the production gaps,” said the World Bank in a report published in April.

Radu Ciocoiu, head of the agriculture and food industry department, large corporate directorate, corporate banking division at Raiffeisen Bank, said that farmers should make sure they have enough equity when starting negotiations over a bank loan.

“Banks cannot replace the actual equity participation, own shareholder capital. The basic principle of commercial banking is based on the assumption that external financing sources can have a positive impact upon the overall future development of a business as long as core resources are related to equity participation,” Ciocoiu told BR.

According to statistics provided by the National Bank of Romania, the total value of loans granted to companies in the agriculture, forestry and fisheries sector increased by almost 6 percent to RON 12.4 billion last year against 2014.

Figuring out the legal issues before getting the money

Although the loans granted to companies in the agricultural sector are growing, the structural issues in the industry give both lawyers and bankers headaches.

“The potential for an increase in the financing is obvious with both bankers and farmers looking for such opportunities; however, the increase will only occur after the cadastral works are completed. Since agricultural land is the most valuable security and, given the lack of cadastral documentation and registration in the land book of the land intended to be put up as security, the banks cannot accept it as collateral,” Crina Ciobanu, managing associate at Suciu Popa Attorneys law firm, told BR.

In the last decade, banks have financed mainly industrial farms, while non-banking financial institutions have leant money to small and medium sized farms and the suppliers of pesticides, drugs and crops chemicals, encouraging delivery with payment after harvesting, according to Ciobanu.

Alina Solschi, senior associate at law firm Musat & Asociatii, added that bank financing costs might prove much too high for smaller players in the agriculture sector looking to develop their operations.

“Lending by banks remains quite low; access to credit remains limited for small and medium-sized farmers; EU funds can’t compensate for the limited access to loans; the subsidy/direct payment from the European Agricultural Guarantee Fund and the national funds granted to farmers for each hectare is half of the average amount granted in Western Europe; the interest rate of bank loans in euros offered to farmers is double that granted in the rest of Europe for similar products,” Solschi told BR.

Ciobanu of Suciu Popa Attorneys said that while the law allows a French farmer to receive almost EUR 400 per hectare, a farmer in Romania can get a maximum of EUR 160 for each hectare, while the prices for the input such as diesel and chemicals are the same.

“Moreover, from 2018, no subsidies will be awarded for land for which the cadastral works are not completed,” said Ciobanu.

What are banks bringing to the farmers’ table

Hunca of UniCredit Bank said that the lender continues to focus on agriculture and provides a wide array of products for this segment, from the financing of current expenses such as the acquisition of specific stocks to the purchase of farmland, equipment and the upgrade of production halls.

She added that the bank will continue to support EU-backed projects through the National Program for Rural Development (PNDR), which represented around 35 percent of total financing for EU-funded projects in the 2009-2013 period.

“We cover with financing proposals the entire value chain in the sector, from farmers to food processors. The applied principles are different according to the size of each customer given the specific needs generated by the actual financial position,” said Ciocoiu of Raiffeisen Bank.

In a bid to help smaller farmers get loans, the minister of agriculture, Achim Irimescu, announced in May the creation of a special fund with an initial size of EUR 92 million. He said that it should become operational by the end of the year.

“This year we will have a loan fund for agriculture, through the Ministry of Agriculture, which will be based on EU funds. It has already been structured, through the European Investment Fund, and a tender will be organized this summer so we can have four-five banks that can distribute these funds. The idea is to have normal conditions for accessing loans,” said Irimescu, according to news portal economica.net.

The fund will be used to provide working capital for farmers and micro-loans. The fresh source of funding would help companies in the agriculture industry, as profits have gone down in some segments.

According to Agricover Credit IFN, the production of cereals, including oilseeds, fell by 30 percent in 2015.

“Taking into account the recent developments, many of the supplier credit lines that are widely used by farmers for the acquisition of inputs for production are likely to be replaced by the financial loan, which is more attractive and transparent,” said officials from Agricover this spring, when it announced its financial results for last year.

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