South Africa’s farm economy recovers in Q1, 2020

South Africa’s farm economy recovers in Q1, 2020

I usually blog on Thursday evenings but we had important data today, June 30. So, I figured it would be good to tap in and provide a synopsis of it.

After experiencing four consecutive quarters of contraction because of droughts and foot-and-mouth disease amongst other factors, South Africa’s agriculture economy rebounded in the first quarter of 2020 by 27.8% q/q on a seasonally-adjusted and annualised basis. We expect the following quarters of the year to show solid growth, and the year to average at about 10% y/y (compared to -6.9% y/y in 2019). This will be underpinned by a recovery in all major subsectors of agriculture; namely livestock, field crops and horticulture production. This is all on the back of favourable weather conditions during the 2019/20 production season.

In terms of field crops, South Africa currently expects its second-largest grains harvest on record. In this category, maize, sunflower seed, and soybeans produced in the current season (2019/20 production year) are up 38% y/y, 13% y/y and 8% y/y, estimated at 15.5 million tonnes, 765 960 tonnes and 1.3 million tonnes respectively. Moreover, South Africa’s sugar cane production is set to increase by 1% y/y to 19.4 million tonnes.[1] In the case of horticulture, South Africa has generally had a good fruit harvest this year, with the citrus industry recently noting a 13% y/y increase in available supplies for export markets in 2020. There is also a broad recovery in the production of deciduous fruit, with apple and pear production up by 5% y/y and 1% y/y, respectively in 2020.[2]

The Agbiz/IDC Agribusiness Confidence Index (ACI), which in the past proved to be a good indicator of the growth path of the agricultural economy, has been rather wobbly in the most recent quarters. This will continue to be the case in 2020 because of the negative sentiment caused by COVID-19. In the second quarter of the year, the ACI deteriorated to its lowest levels since the financial crisis, which implied that agribusinesses are downbeat about business conditions.[3] Meanwhile, agricultural output and trading conditions were in relatively better shape despite the lockdown regulations to curb the spread of the coronavirus.

In a nutshell, there could be a disjoint this year between the agribusiness confidence levels and the actual economic performance of the sector (Exhibit 1). The sentiment could be downbeat because of the pandemic, whereas the agricultural economy could perform well on the back of an expected large output in all major subsectors of agriculture.

Exhibit 1: South Africa’s farm economy and Agribusiness Confidence Index
Source: Stats SA, Agbiz Research

 

[1] https://apps.fas.usda.gov/newgainapi/api/Report/DownloadReportByFileName?fileName=Sugar%20Annual_Pretoria_South%20Africa%20-%20Republic%20of_04-15-2020

[2] https://apps.fas.usda.gov/newgainapi/api/Report/DownloadReportByFileName?fileName=Fresh%20Deciduous%20Fruit%20Semi-annual_Pretoria_South%20Africa%20-%20Republic%20of_05-15-2020

[3] https://agbiz.co.za/economic-intelligence-1/agribusiness-confidence


Follow me on Twitter (@WandileSihlobo). E-mail: wandile@agbiz.co.za

Infrastructure investment key to unlocking growth in South Africa’s agriculture

Infrastructure investment key to unlocking growth in South Africa’s agriculture

There is consensus amongst South Africa’s agricultural economists that the next frontiers for growth in the sector will be through the expansion of production mainly in the former homelands provinces (KwaZulu Natal, Eastern Cape and Limpopo).[1] The government land and underperforming land reform farms are also other additional avenues for expansion in agricultural output. The Eastern Cape and Limpopo have been amongst the provinces with the least contribution to the nation’s agricultural fortunes, respectively accounting for 6% and 7%.[2] Meanwhile, provinces such as the Western Cape, Free State, Mpumalanga, to name a few, contribute 22%, 10%, and 9% to national agriculture gross value added, respectively. A crucial step for South Africa is to understand why agricultural development has lagged over the past two decades in these provinces on the one hand, while commercial agriculture in other areas doubled output on the other.[3]

There are several reasons which explain this disparity in fortunes, the most notable being lower levels of investment in agriculture and lack of infrastructure.[4]

  • Concerning investment, poor land governance (lack of secured tenure), both in the former homelands and some underutilized land reform farms, have been the key impediments which disincentivise on-farm investments, in our view.
  • A lack of basic infrastructures such as road networks, rail, silos, irrigation system, water and electricity, has contributed to low agricultural productivity and poor linkages to markets for smallholder farmers.

While an investment can be increased largely through deeper policy reform and improved land governance (secure tenure), infrastructure tends to be more resource-intensive, complex and requiring more long-term planning and coordination from both public and private sector entities. This makes infrastructure a far bigger challenge to improving agricultural sector fortunes for the majority of smallholder farmers.

In an era of consolidation and fiscal prudence, the tightening of very scarce government resources translates to an ever-growing challenge on how to close the infrastructure gap. Unlike the mining sector, where private sector predominantly leads and paves the way in the effort of building public infrastructure, agriculture – particularly smallholder farming – heavily relies on state-led and government-supported initiatives in developing the required public infrastructure that supports the production and market access.

With government resources stretched, the scope for infrastructure development around areas such as irrigation system, silos, electricity generation and packhouses, which are key for agriculture to thrive, can be entirely led by the private sector. In other essential infrastructures such as roads, rail and dams, the government would ideally take a lead.

But then there is also room for a private-public-partnership approach, specifically for major agribusinesses that are aiming to expand their footprint in these new agriculture growth frontiers (Eastern Cape, KwaZulu-Natal and Limpopo). The approach for this, however, will need to be a bottom-up one, where agribusinesses identify the binding constraints to development in specific areas of their interest and then co-finance infrastructure development aimed at addressing these concerns with the government.

This means the identification of constraints, the design of solutions, as well as project management and execution would involve both parties. Agribusiness will need to take a longer-term view, by providing expertise and finance to help address the bottlenecks to developments that will assist in growing the agricultural sector. Over time, this should increase their return on investment in the agricultural sector.

The spinoffs from infrastructure development and improved land governance (either through long-term tradable leases or title deeds) would result, not only in increased agriculture output but also increase job creation.

Besides the issues impacting the less developed parts of agriculture, commercial agriculture is also hampered by logistical infrastructure constraints. Bottlenecks at the major ports is increasingly an area of concern. Much of South Africa’s agriculture sector is now export-orientated, with half of the produce exported in value terms. If production is to be increased, a similar push for investment to upgrade and expand infrastructure at the ports and routes to various ports of the country is required. This is yet again an area where greater collaboration with private-sector players, but also local government authorities, could be beneficial.

In a nutshell, agriculture has the potential to contribute to job creation and economic growth in the post-COVID-19 phase, but this hinge, in part, on the success of infrastructure investment.

[1] This is a view shared by BFAP, NAMC, Stellenbosch University agricultural economists and Fort Hare University agricultural economists.

[2] Stats SA data.

[3] Abstract of agricultural statistics by the Department of Agriculture, Land Reform and Rural Development.

[4] https://www.news24.com/fin24/opinion/wandile-sihlobo-theres-no-need-to-reinvent-the-wheel-to-boost-growth-in-agriculture-20200615


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There’s no need to reinvent the wheel to boost growth in South Africa’s agriculture

There’s no need to reinvent the wheel to boost growth in South Africa’s agriculture

This essay first appeared on Fin24, June 15, 2020


The South African agriculture sector has the potential to be amongst the sectors that will drive economic growth and job creation during the post-COVID-19 recovery phrase. The path to realise this growth does not need new policies.

The South African government should rather, recast its vision of agricultural development using chapter six of the National Development Plan (NDP) as a point of departure. The NDP proposed a three-tier approach for agriculture and agro-processing to reach its fullest potential of creating one million jobs by 2030, namely the development of underutilized land especially in former homeland areas and failed land reform farms (approximately 400 thousand jobs), the expansion of export-led high growth areas (approx. 250 thousand jobs) and the investment on agro-processing with integrated up-and downstream linkages (approx. 350 thousand jobs). But what will need to be done differently post the pandemic is the realization that the broad vision should be followed up with detailed operational plans to guide the officials and various stakeholders at the local level.

The Department of Agriculture, Land Reform and Rural Development is currently drafting the sector Master Plan, along with private sector players. Such a plan should prioritize high-value job-creating sub-sectors, and not only focus on areas where agriculture sector is established at the commercial level, rather in new areas that still have untapped potential. Such areas involve the former homeland regions of South Africa, government land and also underperforming land reform farms. The Master Plan should map these areas, along with potential agricultural activities which could be promoted. Another crucial step will be to understand why agricultural development has lagged over the past two decades in such regions while in the commercial agriculture areas the output has more than doubled since 1994.

There are several reasons which explain this disparity in fortunes, the major ones being lower levels of investment in agriculture and lack of infrastructure. With respect to investment, poor land governance, both in the former homelands and some underutilized land reform farms, have been the key impediments. With regard to the lack of infrastructure, the problem has been compounded by poor service delivery in various local municipalities, especially those in former homelands towns of South Africa.

Given these structural challenges, the Master Plan will have to lucidly articulate ways and means to increase investment, as well as the improvement or capacitation of local governance. In the case of investment, agriculture is a long-term economic activity with relatively modest returns. Given this reality, the South African government will have to clarify its long-term view on land reform policy, not only for areas that are already farming commercially but also for the former homelands, where investment and commercial agriculture is set to make the most impact.

A renewed drive on the prioritization of joint venture models between the private sector and the government is now critical in bringing about development. The private sector will not only bring a “know-how” to the state but also a capital investment. South Africa already has examples of such development programme from which to build on. These include, but not limited to, Sernick Group in the beef sector in the Free State and the Humansdorp Co-op in the Eastern Cape, which focuses on field crops and horticulture. Both companies have partnered with government and communities for the developed black farming businesses.

The Master Plans should reflect on such examples of successful programmes and further innovate and develop institutions which effectively drive and sustain development. Moreover, this post-COVID-19 agriculture development plan should also encompass the agro-processing side as that will add to job creation and development in various rural towns.  On this particular point, private sector investment should also be encouraged. Therefore, the agriculture and agro-processing Mast Plan should also reflect on strategic incentives for firms to expand agro-processing in various towns which were not predominantly agricultural. This might be in the form of tax incentives for various agricultural hubs which will be determined by the type of agricultural activity. In areas where weather conditions permit, the government should encourage the expansion of horticulture production as this subsector has higher labour absorption multipliers than other subsectors of agriculture, in addition to also having a higher value.

All these ideas aren’t new. There is no need to re-invent the wheel.  Rather, the focus should be on understanding why there have been low levels of policy implementation over the past two decades.  Addressing the stumbling blocks to development (i.e. investment and infrastructure) and focusing on effective implementation are the key ingredients of a successful post-COVID19 agricultural sector.

Given that the private sector’s role might have been less pronounced in the past, the tight fiscal position that the South African government is currently in demands a need for external funding to drive development and agriculture. This means for the better part, agricultural development in a post-COVID19 will require deeper and greater participation of the private sector. However, effective private sector participation demands that government provides greater levels of policy certainty, especially land reform. The government will have to take an investment friendlier approach, which is still anchored in development. The private-public-partnership approach is one such model, and there are a number of case studies that can be used to draw lessons.


Follow me on Twitter (@WandileSihlobo). E-mail: wandile@agbiz.co.za

SA and Zambia able to replace global producers’ maize exports to neighbours

SA and Zambia able to replace global producers’ maize exports to neighbours

This essay first appeared on Business Day, June 9, 2020


Some countries in the Southern and East Africa regions will again need large imports of maize in the 2020/2021 marketing year, which ends in April 2021. However, their saviours won’t be your typical major global producers such as Ukraine, the US or Brazil. Rather it is most likely to be SA and Zambia waiting in the wings.

In Southern Africa, the recent data released by Zimbabwe’s department of lands & agriculture placed its 2019/2020 maize harvest at 907,628 tonnes, up 17% from the previous season. Nevertheless, this is below Zimbabwe’s 10-year average maize production of 1.1-million tonnes and annual domestic consumption needs of between 1.9-million and 2-million tonnes. The 2019/2020 production season corresponds with the 2020/2021 marketing year, which means Zimbabwe will still need to import about 1-million tonnes of maize to fulfil domestic needs in the 2020/2021 marketing year.

Meanwhile, in East Africa, the International Grains Council forecasts Kenya’s 2019/2020 maize harvest at 3.4-million tonnes. This is roughly unchanged from the previous season, though there have been good rains over the past few weeks in the grain-producing regions of the country. With Kenya’s annual maize consumption at about 4.7-million tonnes, the aforementioned production estimate means the country could require imports of about 1.3-million tonnes in the 2020/2021 marketing year.

Unlike the other seasons, where African countries would look outside the continent for maize supplies in seasons of deficiency, SA and Zambia could emerge as key maize suppliers. Both countries are expecting their second-largest maize harvests on record for the 2019/2020 production season. In the case of SA, the expected harvest is 15.6-million tonnes, against domestic consumption of about 11-million tonnes. In the case of Zambia, the 2019/2020 maize harvest is estimated at 3.4-million tonnes against domestic maize consumption of 2.2-million tonnes.

This means SA could have at least 2.7-million tonnes of maize for export markets in the 2020/2021 season, which is 89% up year on year. Meanwhile, Zambia could have 1-million tonnes of maize exports, up from 100,000 tonnes the previous year. This would be the third year on record that Zambia would be able to export as much as 1-million tonnes of maize.

Other key maize producing and consuming countries in the Southern and East Africa regions, such as Malawi and Tanzania, will most likely have balanced supplies for their domestic markets and therefore limited room for exports. Hence our focus is on Kenya and Zimbabwe. Also, worth noting is that SA and Zambia are among the most prominent suppliers of maize to Zimbabwe and Kenya and featured among the top five maize suppliers to both countries in 2019, according to data from Trade Map.

Biosecurity policy is always an important consideration when it comes to African markets. To this end, SA has in the past experienced phytosanitary barriers because of its use of genetically modified maize seeds, which account for about 80% of its output. But this time around things will be different. Zimbabwe lifted its ban on genetically modified maize imports from January 31 as the country tried to improve local supplies after a poor harvest in the 2018/2019 season.

With the harvest of the 2019/2020 season also likely to be relatively low, this policy decision will help ease maize imports into Zimbabwe in the coming months. In the case of Kenya, however, there is still a ban on the importation of genetically modified maize. This might limit SA’s participation in Kenya, while Zambia, which produces non-genetically modified maize, might become a prominent player in the Kenyan market. SA’s importance is likely to be concentrated in the Zimbabwean market, but the bottom line is that SA and Zambia will be key sources of maize imports for the southern and East Africa regions within the 2020/2021 season.


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SA agricultural trade surplus expands by 16% y/y in the first quarter of 2020

SA agricultural trade surplus expands by 16% y/y in the first quarter of 2020

The ongoing Covid-19 crisis has brought uncertainty to global trade because of disruptions in supply chains and weakening demand. South Africa’s agricultural sector, which is export-oriented, is one of the sectors I feared would be disrupted by the pandemic. So far, however, there have been minimal disruptions as the global agricultural and food sector has generally stayed operational.

The coming months could be even better as many countries are gradually easing restrictions on economic activity and the movement of people in the wake of lockdowns. In the first quarter of the year, a period before coronavirus lockdowns were implemented across the globe, South Africa’s agricultural trade was vibrant. The country recorded an agricultural trade surplus of US$773 million, according to data from Trade Map. This is up by 16% year-on-year, with exports having increased at a higher rate than imports.

The exports were underpinned by grapes, maize, wine, wool, pears, apples, plums, lemons and macadamia nuts, amongst other agricultural products. These products could continue to underpin South Africa’s agricultural exports in the second quarter of 2020, which largely corresponds with global lockdowns, but with some decline in wine exports which had briefly been impacted by domestic lockdown regulations.

While the second-quarter data will only be out next month, the high-frequency data from various commodity organisations and agricultural institutions point to continued robust agricultural exports over the past couple of weeks.

Citrus will feature prominently in the second quarter data onward, as its exports for this year are expected to reach a record 143.3 million cartons for the Southern Africa region, mainly from South Africa. The export activity of this particular product has also continued with minimal interruptions during the lockdown period.

Similar to citrus, maize will also dominate South African exports this year with the volume set to increase by 89% y/y to 2.7 million tonnes because of higher domestic harvest. This is also at a time where we expect an increased maize needs in the Southern Africa region, which is a primary market for white maize.

The African continent and Europe continued to be the largest markets for South Africa’s agricultural exports, respectively accounting for 44% and 29% in value terms during the first quarter of 2020. Asia was the third-largest market, taking up 19% of South Africa’s agricultural exports in the first quarter of 2019. The balance of 8% value was spread across other regions of the world.

In terms of imports, the leading products included wheat, palm oil, rice, poultry meat, sunflower oil and sugar. For the year, rice, wheat and palm oil will dominate the agricultural import product list. South Africa’s 2020 rice imports could amount to 1.1 million tonnes, up by 10% from 2019. Meanwhile, South Africa’s 2019/20 wheat imports could increase by 29% y/y to 1.8 million tonnes.

In a nutshell, while the pandemic will result in a loss of incomes in various regions of the world, and in turn, decline in demand for goods; the agriculture and food sector is one of the few that might not be as hard hit. As such, for 2020, South Africa’s agricultural exports could increase to levels over US$10 billion from US$9.9 billion in 2019. The key catalysts this year will be the increase in grains and horticulture output and to some extent the weakening domestic currency.


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Large global grains supply

Large global grains supply

I’ve recently cautioned that dryness in parts of Europe and North America could lead to poor grain yields, which would mean that anticipated record harvests in 2020/21 might fail to materialise. But data released by the International Grains Council (IGC) last week proved the opposite of what I had expected. The IGC maintained its view that there are large grain supplies in the global market and that the 2020/21 season promises an even larger harvest (with the previous month’s high estimates being revised upwards).

To start with maize, for the 2020/21 season global production has been lifted marginally from the April 2020 estimate to an all-time high of 1.2 billion tonnes, this is up by 5% y/y. As noted in my previous write-up, this is underpinned by expected larger harvests in the US, Brazil, China and the EU. The planting of this crop has begun in the northern hemisphere and it has progressed with minimal interruptions, albeit with the additional coronavirus-related precautions on farms.

In the southern hemisphere, maize planting for the 2020/21 production season will only begin around October. The focus is currently on the 2019/20 crop which is currently being harvested. South Africa expects the second-largest maize harvest on record, of about 15.6 million tonnes. Therefore, any dynamics on the global maize market will have minimal implications on South Africa as the country remains a net exporter. The preliminary forecast for the 2020/21 production season (next season) released by the IGC suggests that South Africa’s maize production could fall to 14.0 million tonnes. While it is too early to put much weight on such a futuristic forecast by agricultural standards, it is worth noting that the figure is well above South Africa’s long-term average maize production of 12.5 million tonnes, so the country will remain a net exporter of maize.

In terms of wheat, the IGC lifted its forecast from April 2020 to a record 766 million tonnes. This is up 1% y/y and it is attributed to expected large production in Canada, Australia, Argentina, China, India and Kazakhstan, amongst others. This will mean that the 2020/21 global wheat stocks could increase by 6% y/y to 290 million tonnes. The wheat importing countries such as South Africa stand to benefit from such an outlook. Of course, assuming there will be no further restrictions on exports imposed by exporting countries as the data shows that there should not be global supply worries.

South Africa’s production of wheat for the 2020/21 production season is underway and the outlook is not encouraging. Plantings are set to fall by 8% y/y to 495 000 hectares, mainly in the Free State. This means that South Africa will continue to have a large dependence on imports, which account for about 50% of annual consumption.

In the case of rice, the IGC has maintained its production forecast at a record 507 million tonnes, up by 2% y/y. With the main Asian rice-producing regions still some time away from harvesting, the outlook for rice production in 2020/21 is tentative. Nevertheless, under the current production forecast, global rice stocks could expand by 3% y/y to 182 million tonnes. This would add bearish pressure on prices and, in turn, be beneficial to wheat importing countries like South Africa.

While the IGC maintained a positive outlook despite the reported incidence of dryness which is threatening wheat; I still think the grain markets are not completely out of the woods. The weather remains a major risk factor that requires constant monitoring in the global grain markets. Having said that, I still think there is no need for panic at this juncture nor for major grain-producing countries to re-impose restrictive trade policies that some had implemented at the start of the pandemic due to supply concerns. The global grain markets are awash with carryover stocks from the 2019/20 production season, and optimism about the 2020/21 production season will become much clearer in the coming weeks.


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