I spent the last Saturday of the month in Rayton – a small town located in north-eastern Gauteng. I attended a farmers’ day where I was asked to present on the upcoming 2018-2019 summer crop production season in the context of rising farm input costs, changing climate and land reform.
The discussion on farm inputs and weather outlook somewhat mirrored the points I presented in my Business Day column this week. What I said was that in a few weeks the summer crop production season will start on a negative note, partly due to rising costs of agricultural inputs such as fertiliser and fuel.
South African fertiliser prices were up an average of 20% in August compared with the corresponding period in 2017, according to data from Grain SA. Given that South African imports account for about 80% of its annual fertiliser consumption and we are also a small player in the global market, accounting for a mere 0.5%, local prices tend to be influenced by developments in the major producing and consuming countries, such as India, Russia, the US and Canada. In the past few months, global fertiliser prices rose, partly due to rising demand in Latin America and Asia, among other regions.
The rand-dollar exchange rate and shipping costs are also important determinants of South African fertiliser prices. The rand has come under much pressure in recent months and at the time of writing had depreciated by about 13.4% against the dollar since the start of 2018. This weakness has added to the increases in fertiliser prices, all contributing to increasing pressure on farmers. While increasing fertiliser costs are not restricted to South Africa, local farmers are in a uniquely adverse position compared to other leading agricultural producers who happen to have some domestic fertiliser production capacity.
Fertiliser constitutes about 35% of grain farmers’ input costs and a notable share in other agricultural commodities and crops.
Clearly, the South African agricultural sector is exposed to global fundamental shocks and currency wobbles regarding farm inputs, but there is some divergence across the different parts of South Africa’s diverse agricultural sector. Much of the fertiliser imported by South Africa is utilised in maize production, which accounts for 41% of total fertiliser consumption in the country, the second-largest consumer being sugar cane at 18%.
The diesel price appears set to increase by more than R1 a litre on October 3, which will further increase input costs in the planting period. This is on top of the cumulative diesel price increases of nearly 20% from March to September. The impact will not be limited to direct farming costs but will extend to the agribusinesses that operate in the transport and logistics industries. On average, 75% of South Africa’s national grain and oilseed crops are transported by road.
Recent updates on the weather front still point to the possibility of an El Niño occurrence during the upcoming summer production season. The potential impact of this weather phenomenon on South African agriculture was discussed in my Business Day column of September 13 but should be restated briefly for context. Global observers such as the International Research Institute for Climate and Society at Columbia University and the Australian Bureau of Meteorology, as well as the local national weather agency, forecast an El Niño developing over the 2018-2019 summer season in Southern Africa, which could lead to dryness, depending on its intensity. All of this could negatively affect the agricultural sector.
While the aforementioned developments are not cast in stone and are largely outside farmers’ control, the hope is that the lessons from the 2015-2016 drought will help the industry cope in the event of another drought season. The input cost increases also come at a time when there is a slight recovery in agricultural commodity prices, at least in the case of maize. This could help offset the uptick in input prices over time.
In terms of land reform, I acknowledged that the uncertainty partially caused by lack of clarity regarding the land reform policy proposal, particularly land expropriation without compensation, remains a key risk that could potentially undermine investment and long-run growth prospects in the South African agricultural sector. At the same time I highlighted that we have not seen evidence pointing to disinvestment yet. Farmers and agribusinesses are somewhat in a wait-and-see mode.
Most importantly, I used the opportunity to listen to farmers so that I can hear more about the transformation projects in their communities and also plans for the future. The feedback was somewhat mixed and emotional, understandably so given the subject of the day. Overall, there was willingness from a certain cohort of farmers to be involved in a private-public partnership approach that could drive inclusive growth in the sector.
Follow me on Twitter (@WandileSihlobo). E-mail: firstname.lastname@example.org