While some farmers in the grains and oilseeds industry benefited from the unusually long period of large yields and higher prices, higher input costs since the start of 2020 have limited the benefits.
For farmers in the horticulture industry, where commodity prices did not increase as much as in grains, the higher input costs were an even heavier burden. These price increases were mainly in agrochemicals (herbicides, fungicides, insecticides), fertilisers and fuel.
Various factors caused the price increases, but the main ones were the disruptions in industrial production when the Covid-19 pandemic started, protracted supply-chain bottlenecks, higher shipping costs, China’s decision to limit fertiliser exports, and, more recently, the Russia-Ukraine war. In the months after the war started prices of some products increased to record highs.
Fortunately, prices have come off these highs in recent months. For example, in early September the global fertiliser price index was down by 18% compared with April’s highs. Despite the recent moderation, price levels are still about 60% higher than a year ago. The market is still far from adjusting to levels before Covid-19 and the Russia-Ukraine war.
Similarly, Brent crude prices have come off recent highs, averaging $93 per barrel in the first half of this month. Still, these levels are 31% higher than a year ago. We see a similar price dynamic in agrochemicals, which have softened over the past few months but are roughly 20% higher than a year ago.
These price dynamics matter, especially as SA approaches its summer crop season which starts in October. This includes the horticulture industry, which will also be busy in the fields in the summer season. That said, the grains and oilseeds industry is arguably still in a relatively better position compared with other subsectors of agriculture that have been confronted by various other challenges over the past few months, which have weighed on profitability for some.
These include the foot-and-mouth disease outbreak and market access glitches in key export markets, all of which have added to business costs over the past few months. The European citrus market access challenges and the vegetable export ban in neighbouring Botswana and Namibia are examples. China’s decision to suspend imports of wool from SA, which has now been resolved, also hurt the industry. Meanwhile, the relatively higher fuel prices have hit all farming subsectors.
As we approach the start of summer elevated input costs will remain top of mind for many farmers. Most farmers have probably already procured inputs at these high prices. Consider grain and oilseed farmers, who will be busy in the fields in less than two weeks’ time in the eastern and central regions of SA.
In that subsector fuel generally accounts for between 11% and 13% of production costs. Fuel consumption is generally throughout the year, with the highest usage periods being planting and harvesting. In terms of annual fuel usage, it is worth noting that SA transports about 81% of maize, 76% of wheat and 69% of soybeans by road. On average, 75% of national grains and oilseeds are transported by road. Farm managers and agribusinesses will have to plan for an environment different from the past few months, but still far pricier than 2021.
SA imports about 80% of its fertilisers annually, and as a minor player, it accounts for a mere 0.5% of global consumption. Local prices tend to be influenced by developments in the major producing and consuming countries, such as India, Russia, the US and Canada. Much of the fertiliser imported by SA is used in maize production, accounting for 41% of total fertiliser consumption in the country, the second-largest consumer being sugar cane at 18%. Fertiliser constitutes about 35% of grain farmers’ input costs and a substantial share in other agricultural commodities and crops.
Overall, while the higher grain and oilseeds prices and harvest prospects might look reasonably supportive on the financial books in the near term, steep input costs haven’t provided much room for flexibility. The financial conditions are possibly even more challenging for farmers in agricultural commodities that didn’t enjoy big price increases.
Another critical factor for domestic farmers will be the performance of the rand, which is key in determining the ultimate prices farmers will pay to foreign suppliers of production inputs when planting begins.
Moreover, with the current rising interest rates, the financial conditions are likely to be even more challenging compared with the previous two years when interest rates were lower and provided some relief for SA’s indebted agricultural sector.
Even so, the cost pressures are unlikely to push SA farmers away from their fields. I remain optimistic that the upcoming season will be favourable and that farmers could till the typical area for crops and maintain roughly the same area for horticulture. The favourable weather outlook, with prospects of a weak La Niña in the 2022/2023 summer season, should bring good showers to support agricultural activity. I had worried that a La Niña could risk bringing excessive rains, as we saw at the start of the 2021/2022 summer season, but current forecasts of a weaker one provide some comfort.
Despite the higher input costs and tough financial conditions for farmers, we have seen some making large purchases of movable assets. Tractor and combine harvester sales have been strong throughout the year. This suggests farmers are still confident about the production conditions and eager for the new season. If fertiliser and agrochemical usage is not reduced on SA farms because of prices, the country will likely see another positive agricultural season.
Beyond these input costs, there is room for policy to ease some of the operational glitches in the sector. First, the challenges in export markets should remain at the top of the government’s agenda, along with attempts to open new markets for growing domestic production.
Second, the continued engagement between the private sector and Transnet is positive for resolving the logistical challenges and will need to intensify and result in tangible project collaboration for the sector’s good. Third, the department of agriculture, land reform & rural development should continue with its farmer support programmes for smallholder farmers that may struggle with input procurement. Simultaneously, the blended finance programme should be accelerated to benefit new entrant farmers in the sector, especially in the current environment of elevated costs.
Lastly, domestic fertiliser production through entities such as Foskor remains a worthwhile endeavour that the department of trade, industry & competition should push through the Industrial Development Corporation.
All of these interventions are key, and in the background, the government should also intensify its work in fighting the organised crime that is undermining domestic infrastructure and, ultimately, the economy.
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