by Wandile Sihlobo | Apr 3, 2023 | Agricultural Environment and Natural Resource
By Wandile Sihlobo and Johann Kirsten[i], Sunday Times, April 2, 2023
We live in a time of higher food prices, part of the global polycrisis triggered by the pandemic and Russia’s war on Ukraine, which caused seizures in supply chains and pushed up energy and food prices. In short, this is not unique to South Africa.
This is also the wrong time to cry wolf, as the Competition Commission recently did in its Essential Food Price Monitoring Report. If you raise a false alarm when none is warranted, it undercuts your credibility when danger is afoot. Let us consider the real factors that have influenced recent food prices.
The drought in South America in the 2019/20 season and the growing demand for grains and oilseeds in China were the primary drivers of global prices. China was on a path to rebuild its pork industry, which African swine fever devastated, requiring increased volumes of grains and oilseeds. China’s growing demand had a consequential impact on global grain prices because of its share size of imports. For example, the country imports about 60% of globally traded soybeans.
As Covid-19 spread in early 2020, several major grain producers, such as India, Kazakhstan and Vietnam, worsened the increase in global prices by temporarily banning exports. As this unfolded, shipping costs soared, contributing to already elevated global grain prices.
Throughout this period, drought in South America didn’t stop, weighing on global supplies. This matters because Brazil and Argentina account for half of global soybean production and about 15% of global maize production. Thus, when these countries face drought, the impact is visible in global grain supplies and prices. In sum, a combination of trade policy actions by other countries, logistics and weather conditions placed an upward pressure on food prices.
These are all-important fundamentals that challenge food supplies, further worsened by the Russia-Ukraine war. Russia and Ukraine are substantial players in the grains and oilseeds market. The former produces about 10% of global wheat, while Ukraine accounts for 4%. This is nearly the size of the EU’s total wheat production.
Wheat is for domestic consumption as well as export markets. Together the two countries account for a quarter of global wheat exports. Moreover, Russia and Ukraine are notable players in maize, responsible for 4% of production combined. However, their contribution is even more significant in exports, accounting for an average of 14%. Both countries are also among the leading producers and exporters of sunflower oil.
Pre-war, Ukraine’s global exports of the product accounted for 40%, with Russia accounting for 18%. Thus, the start of the war led to a surge in grains and oilseeds prices for much of 2022. As the war intensified, the drought in South America continued.
During this period, there were also sharp increases in energy prices because of Russia’s major contribution to global energy supplies, which was suddenly disrupted. These events affected all countries, and food price inflation suddenly became a worldwide topic.
Linkages to South Africa
South Africa, while a net exporter of agricultural products, was not insulated from the price shock, even with its large domestic harvests. This underlines the interconnectedness of global food supplies.
Some may argue that governments should have placed export bans to limit the surge in domestic grains prices. But such policy prescriptions never work. Notably, in the South African case, one must remember that agriculture is highly exposed to global markets given that about half of output by value is exports and that many inputs into the farming need to be imported.
As a country, we import more than 80% of our annual fertiliser usage and 98% of agrochemicals, fuel and equipment. We had limited control over these prices, which increased pre-war and accelerated further when it started. Before the war, China, which accounts for about 12% of global fertiliser exports, limited these to focus on its domestic market. When the war started, Russia, which accounts for 14% of global fertiliser exports, was suddenly in chaos.
As such, if policymakers considered limiting South Africa’s grain exports to protect the country from global challenges, the results could be a reduction in competitiveness in maize production and, ultimately, lower plantings and output as farmers would opt for other profitable crops. The long-term effects of such an approach would be higher prices, exactly the opposite of what those policymakers would have aimed to control.
In the past year or so, food producers and processors had to deal with higher agricultural commodity prices and process such commodities further to produce the food products we see on shelves. The activities between producer (or importing country) and retailer do not happen without costs.
The food value chain first depends on expansive logistical systems and networks, while processing involves labour, energy, packaging and finance costs, among others. Once the food is processed, it must be distributed to thousands of retail outlets, which also bear these costs. We all know what happened to fuel prices and the interest rate in South Africa. On top of that, we can add inflation-related wage increases and the dramatic costs of load-shedding and crime.
It is, therefore, no wonder that food value chain costs soared, amplifying the initial increase in commodity prices. A lot of these cost increases are self-inflicted through state failure regarding energy, crime and local government collapse. We should think about the terrible conditions in which role players in the food value chain have to do business in South Africa today.
If food processors and retailers accounted for all these cost increases across the value chain, consumers would face a much sharper increase in prices. But this was not the case in South Africa. Food prices increased at a moderate pace, having averaged 9,5% in 2022, compared with 6,5% year on year in 2021 and 4,8% in 2020. Countries such as the US, Kenya and Brazil, as well as those in the EU, saw much higher consumer food price inflation rates than South Africa, though some had decent agricultural production conditions.
This meant food processors and retailers, if anything, absorbed the costs and didn’t pass them fully on to the consumer. Their strategy is understandable, considering this country’s economic environment and unemployment.
With this in mind, we find the Competition Commission’s comments puzzling and irresponsible. It suggested various food price increases in the past few months were “unjustified”, insinuating someone in the value chain is taking advantage of South African consumers. This is an unfortunate mischaracterisation of reality. If anything, one could argue that food processors and retailers had to apply smart pricing strategies to benefit the consumer while sustaining their businesses.
A regulating body such as the Competition Commission should be mindful of the critical role it plays in society and be more thoughtful in its research and statements, especially on politically and socially charged food security issues.
The drivers of food prices are evident and a global challenge. In the coming months, as the country faces rolling blackouts, which add to the dynamics, food prices are likely to remain elevated, softening in the second half of the year. There is also a lag (of anything between three and nine months) between farm and retail prices, which some researchers tend to ignore.
Public anxiety about high food prices does not need to be further aggravated. Reporting on such must be done responsibly and with great care.
[i] Sihlobo is the chief economist of the Agricultural Business Chamber of South Africa (Agbiz) and a Research Fellow at Stellenbosch University’s Department of Agricultural Economics. Kirsten is the Director of the Bureau of Economic Research (BER.) and a professor of agricultural economics at Stellenbosch University.
Follow me on Twitter (@WandileSihlobo). E-mail: wandile@agbiz.co.za
by Wandile Sihlobo | Mar 30, 2023 | Agricultural Environment and Natural Resource
Over the coming months, we will receive various data releases to help guide our thinking about South Africa’s agricultural growth prospects in 2023. The available soft insights suggest that near-term growth prospects of South Africa’s agricultural economy look weak after subdued growth of 0,3% y/y in 2022.
For example, the livestock and poultry industries, which account for roughly half of the agricultural sector’s value, are under pressure amid relatively muted cattle and beef prices while farmers also continue to face higher input costs for maize and soybeans.
The ongoing load-shedding is particularly challenging for the poultry industry, with the unreliable electricity supply causing significant production interruptions. As various energy solutions are explored in some farms, the financial costs will persist over the coming months.
Similarly, the red meat industry faces an environment where the consumer is under pressure, and thus there is minimal room for upward price adjustments. Moreover, the tail-end effects of foot-and-mouth disease, which interrupted exports, persist, further weighing down demand as the country still can not access some export markets. This is likely to be the reality for some farmers for much of the first half of this year.
Solutions to load-shedding are also crucial for fruit and vegetable farmers who depend on irrigation for their produce. Importantly, this also means the Department of Agriculture, Land Reform and Rural Development (DALRRD) needs to launch its blended finance solution for energy, which should help ease the financial burden of renewable solutions.
This was an intervention mentioned in the national energy task team of the DALRRD but has yet to be communicated to the sector formally. The fruit industry dominates the export activity of the agricultural sector, which means that any negative impact on production would lower the export revenue, which has seen solid growth in the past few years.
For example, South African agricultural exports were up for the third consecutive year in 2022, reflecting favourable production conditions and higher commodity prices. In 2022, South Africa’s agricultural exports reached US$12.8 billion, up 4% from the previous year. That said, the harvest activity in the wine grape and some deciduous fruits will likely infuse positive growth momentum in this subsector in the first half of the year. Still, energy interventions are essential for the overall performance of the subsector this year and in the future.
Field crops are the subsector that is on a much stronger footing. For example, South Africa’s sugar cane crop is projected to recover 7% y/y to 18.4 million metric tonnes in 2022/23, according to data from the Pretoria office of the United States Department of Agriculture (USDA). These expectations are supported by favourable weather conditions, which improved yields, and industry efforts to increase production, especially for small-scale farmers. Still, the Tongaat Hulett troubles linger in this industry and remain a significant risk.
Moreover, the load-shedding interventions mentioned above also apply within the sugar industry, as 34% of the crop is under irrigation. Fortunately, the frequent rains this year have helped to improve soil moisture and lessen the severity of crop damage from frequent power interruptions.
The grains and oilseeds production conditions for the 2022/23 season also look positive. For example, South Africa’s 2022/23 summer grains and oilseeds production is expected at 19,6 million tonnes, up 5% from the previous season, according to recent data from the Crop Estimates Committee. If we consider the large crops like maize, soybeans and sunflower seed, production is forecast at 15,9 million tonnes (up 3% y/y), 2,7 million tonnes (up 22% y/y), and 797 610 tonnes (down 6% y/y), respectively.
To underscore our point, the expected improvement in the maize harvest is on the back of better yields, as the area plantings are down marginally from the 2021/22 season.
Meanwhile, the robust forecast increase in soybeans results from both expected large yields and an expansion in planted areas. The fall in the sunflower seed production forecast mirrors the reduced planted area and yields in some areas. Other small crops, such as sorghum and groundnuts, have a reasonably large expected harvest of 109 400 tonnes and 47 930 tonnes, respectively.
Overall, these mixed fortunes amongst various subsectors of South Africa’s agriculture mean that growth, at least in the first quarter of half of the year, could be subdued with a potential recovery later in the year.
The positive momentum will mainly be from field crops and some fruits. Still, this assumes that there are no significant downward revisions on the current crop forecasts and that energy interventions to stabilise the power supply in the sector are quick. Such an environment would also mean that primary agricultural employment remains reasonably stable above the long-term agricultural job of 780 000.
In the last quarter of 2022, there were about 860 000 people employed in primary agriculture. The one aspect impacting the jobs outlook we will also monitor is the recent increase in minimum wages which is a concern, specifically for the fruit industry.
Follow me on Twitter (@WandileSihlobo). E-mail: wandile@agbiz.co.za
by Wandile Sihlobo | Mar 26, 2023 | Agricultural Environment and Natural Resource
Most observers of the global agricultural market were focusing on the Black Sea at the weekend where UN representatives and the Turkish government engaged with the Russian and Ukrainian governments in an effort to extend the Black Sea grain deal, which has just expired.
Encouragingly, the deal has been extended for another 120 days and will again be reviewed after this period. This initiative started in July 2022 and its primary goal is to allow grain movement from Ukraine to the world market without military attack by the Russians.
Since the deal started, Ukraine has exported about 25-million tonnes of grains and vegetable oils. Global food prices have also moderated considerably over that period, partly for this reason. In February the Food and Agriculture Organisation (FAO) global food price index was at 130 points, down 8% from July, when the initial deal was reached.
While the intention was to increase grain exports from Ukraine, Russia has arguably also benefited from the grain deal through increased wheat exports. Russia typically exports about 35-million tonnes of wheat a year. Its largest markets include Turkey, Egypt, Azerbaijan, Kazakhstan, Nigeria, Bangladesh, Sudan, Latvia, Saudi Arabia, Yemen, Cameroon and Israel.
Russia also had an incentive to continue with the Black Sea grain deal as it had about 44-million tonnes of wheat for export in the 2022/2023 marketing year, up 34% from the previous year. This is according to data from the International Grains Council (IGC), whose preliminary projections for the 2023/2024 marketing year suggest Russia will again have ample supply due to strong production. Exports are forecast at 42-million tonnes. The Black Sea grain deal, initially set to assist Ukraine, must remain in place for these exports to continue from Russia with minimal interruption.
Ukraine will also remain a critical player in the global wheat market, though its production has declined significantly due to the war. The IGC forecast for Ukraine’s 2022/2023 wheat exports is 14.5-million tonnes, down 23% from the previous season. The preliminary projections for the 2023/2024 marketing year paint an even bleaker picture of decline in Ukraine’s wheat exports to 11-million tonnes. This reflects the harsh production conditions in Ukraine due to the invasion by Russia and shortages of some farm inputs, all of which have led to a decline in the area farmed and yields.
Still, the sharp decline in Ukraine’s wheat exports will not mean the world will face a shortage of wheat. The IGC forecasts 2022/2023 global wheat exports at 199-million tonnes, up 1% from the previous season. Australia, Canada, the EU, Kazakhstan and Russia are expected to boost the available supplies for the world market.
This improvement in export supplies means global wheat prices could continue to moderate over the medium term. The significant risk market players have worried about was the outcome of the Black Sea grain deal, which has turned out positively for now. Still, the Black Sea geopolitical tone and war remain a major risk to the global grain and vegetable oil market as the uncertainty is likely to continue for the foreseeable future.
The extension of the grain deal is a welcome development, but the period is relatively short. Market players would have preferred a longer time frame to clear up uncertainty about shipments for a prolonged period. Notably, the reprieve at the weekend benefits all wheat- and vegetable-importing countries and users of the products as it will apply downward pressure to prices.
SA is one of the wheat importers that stands to benefit from softer global wheat prices. Ultimately, the events of the weekend are positive for global food prices, despite the uncertainty about events when the current extension ends.
Written for and first appeared on the Business Day.
Follow me on Twitter (@WandileSihlobo). E-mail: wandile@agbiz.co.za
by Wandile Sihlobo | Mar 11, 2023 | Agricultural Environment and Natural Resource
There is an apparent change in sentiment about genetically engineered (GE) crops or Genetically Modified Organisms (GMOs) within the European Union (EU). The region has long restricted the importation and cultivation of GE crops, but in 2022, it approved certain varieties of maize, soybeans and rapeseed.
Still, these had not gone through the authorization stages that would open the door for trade in the approved varieties. It was only on 22 February 2023 that the EU authorized imports of certain types of GE soybeans and rapeseed for use in food and animal feed for a period of 10 years. Still, this authorization does not include cultivation.
These will mainly be imports, all subject to the European Union’s labelling and traceability rules. After roughly a quarter of a century of opposition to GE crops, this perhaps signals a move to wider future acceptance of the technology within the EU. This change in sentiment is probably underpinned by a growing desire for nations and regions to improve their food security conditions after the Russia-Ukraine war caused notable disruption in global grain and oilseed supplies.
Notably, the EU is not alone in the change of sentiments about GE crops. Last year, the Chinese National Crop Variety Approval Committee released two standards that clear the path for cultivating GE crops in the country. This has been the missing piece in the regulations for China’s commercial growth of GE maize and soybeans. The government has two steps in these regulations. These are a “safety certificate” and a “variety approval” before crops can be commercially cultivated. Various GE maize and soybean varieties have received the safety certificate since 2019.
What has been missing has been the “variety approval”. Now that hurdle has been cleared, commercialization of GE crops in China is a real possibility.
Unlike the EU, China currently imports GE maize and soybean but prohibits domestic cultivation of the crops. The regulation change to encourage domestic cultivation would potentially lead to improved yields. Such improvement would align with China’s ambition of becoming self-sufficient in essential grains and oilseeds in the coming years..
Implications for Africa
African countries should pay close attention to this wave of change in sentiment in key economic regions. Some African countries arguably closely followed the EU’s approach to GE crops by prohibiting their imports and cultivation. With this new development in the EU and the authorization process completed, it is plausible that some African countries might consider evaluating their current restrictions, especially for vital staple grains such as maize. Kenya is one such country which seeks to clear white maize cultivation. But in February this year, lobby groups took legal action to block GE white maize seeds planned for release to farmers by the Kenya Agricultural and Livestock Research Organisation (KALRO) in March and April 2023.
Kenya is one of the African countries that could benefit from GE seed cultivation as a major consumer of maize. Recently, Kenya has struggled with poor maize yields because of unfavourable weather conditions and crop disease. Kenya’s 2022/23 maize import forecast is 700 000 tonnes.
Yet, Kenyan consumers cannot access the abundant GE maize in the world market, let alone utilize crop technologies to reduce crop losses. With a change in regulations, Kenya would have been able to access more affordable maize from the likes of South Africa, the US and South American countries, directly benefiting consumers and supporting the struggling animal sector.
Considering the global grains market changes, the most critical step in GE regulations, particularly in Africa, would be permitting cultivation.
Of course, this typically introduces debates about the ownership of seeds and how smallholder farmers could struggle to obtain seeds and support inputs in some developing countries. These are realities that policymakers in African countries should manage regarding reaching agreements with seed breeders and technology developers but not close off innovation, as is currently the case.
Technology developers also need to be mindful of these concerns when engaging various governments in African countries. This discussion should occur even sooner in Africa, as the geopolitical and climate change risks present the urgency to explore technological solutions to increase each country’s agricultural production.
The only country that is an anomaly in Africa is South Africa, which began planting genetically engineered maize seeds in the 2001/02 season. Before its introduction, average maize yields were around 2.4 tonnes per hectare. This has now increased to an average of an expected 6,1 tonnes per hectare in the current production season of 2022/23. Meanwhile, the sub-Saharan African maize yields remain low, averaging below 2.0 tonnes per hectare. While yields are also influenced by improved germplasm (enabled by non-genetically modified biotechnology) and enhanced low and no-till production methods (facilitated through herbicide-tolerant GM technology), other benefits of GE technology include labour savings and reduced insecticide use as well as enhanced weed and pest control.
Overall, with the African continent currently struggling to meet its annual food needs, using technology, genetically modified seeds, and other means should be an avenue to explore to boost production.
Follow me on Twitter (@WandileSihlobo). E-mail: wandile@agbiz.co.za
by Wandile Sihlobo | Feb 25, 2023 | Agricultural Environment and Natural Resource
There is so much in the implementation pipeline of SA’s agriculture policy this year. The past four years have largely seen various initiatives that sought to inject confidence into the sector. These are now ripe for implementation, especially ahead of the 2024 general elections.
A major development in recent times was the launch of the Agriculture & Agro-processing Masterplan, which offers the government and the private sector new possibilities to grow the sector, build competitiveness, attract more investment and ensure inclusion.
More concretely, the department of agriculture, land reform & rural development has finally launched a blended finance instrument that had been in the works for a few years. This is a joint initiative with the Land Bank and the aim is to broaden participation by other financing agencies to achieve the required scale to make a positive dent in transforming the sector.
During various addresses, President Cyril Ramaphosa has underlined the soon-to-be-launched Agricultural Development & Land Reform Agency under the leadership of the department’s minister, Thoko Didiza.
In the past these programmes seemed like a pipe dream. Now they are nearing implementation. There is a window of opportunity for the government to show results in these areas since they are beyond policy development and ripe for action. If implemented effectively, these programmes could boost growth in the sector, sustain employment and even attract new investment.
This year the focus should be firmly on implementation. Admittedly, to some stakeholders, it may feel as if there has been little progress on the above programmes since the year started. The deterioration in the electricity crisis has been a major cause of the delay. To this end, I hope Didiza’s agriculture energy task team’s report is soon tabled to the sector to provide guidance on practical near-term interventions to limit the damage the crisis is doing to intensive energy-consuming farming businesses.
As interventions to mitigate the energy crisis are ramped up, more effort should be directed towards widening the blended finance to include a diverse range of other financial organisations, as well as identifying financing gaps that were previously unforeseen. It is important throughout the implementation of the various government programmes that the relationship between the government and the private sector is strengthened since it is not possible to achieve any meaningful outcomes without collaboration. For example, the success of the Agriculture & Agro-processing Master Plan depends on the accessibility of affordable finance for new-entrant farmers and agro-processing entrepreneurs.
Simultaneously, the department will need to launch its Agricultural Development & Land Reform Agency, outlining its mandate and working plan for the first five years in collaboration with the private sector. Given that new entrant farmers to the sector will require access to land with title deeds or tradable long-term leases, launching the agency is a prerequisite for the comprehensive implementation of the Agriculture & Agro-processing Master Plan.
If the department fails to launch the agency in good time, the deliberations in implementing the master plan will always go back to land needs as a hindrance. Therefore government should unlock all these possible stoppages before advocating for a comprehensive implementation of the plan, possibly in the second half of this year. The master plan’s technical team could use the remaining four months of the first half of this year to resolve outstanding matters that social partners such as labour were not comfortable signing off on last year.
These implementation steps are also vital for building trust and progress in the sector, not just between government and existing participants but also to include other South Africans who aspire to join the sector and have followed these programmes from inception in the hope of finding economic opportunities. Notably, the sector’s stakeholders will also be more appreciative of the seriousness of government programmes and policy if there is a full-scale implementation of all these programmes.
Written for and first appeared on Business Day.
Follow me on Twitter (@WandileSihlobo). E-mail: wandile@agbiz.co.za
by Wandile Sihlobo | Jan 29, 2023 | Agricultural Environment and Natural Resource
As the deepening energy crisis continues to present problems for different parts of the agricultural sector, another major challenge looms — a change in weather conditions from favourable rains to drier, hotter conditions. This would be the outcome if there is a switch from the prolonged period of the La Niña weather phenomenon to El Niño.
SA has had a good four seasons of La Niña-induced above-average rains from 2019/2020 to 2022/2023. These supported agriculture, leading to higher yields across various field crops, fruits, and vegetables. The livestock industry also benefited from improved grazing pasture.
Having four consecutive La Niña seasons was unusual. The typical cycle is two seasons of higher rainfall followed by normal to drier seasons. Excluding the current trend, the only other similar period in the recent past ran through 2007/2008, 2008/2009, and 2009/2010 production seasons.
Scientists at the International Research Institute for Climate & Society at Columbia University now warn of the likelihood of El Niño kicking in later this year. In its update of January 19 the institute stated that “the likelihood of El Niño remains low through May-July 2023 (44% chance), but becomes the dominant category after that with probabilities in the 53%-57% range”.
Such a weather phenomenon would bring below-normal rainfall and hotter temperatures in SA. This could resemble the bleak agricultural conditions witnessed during the most recent El Niño drought, in the 2015/2016 season, when the harvest of maize, a staple crop, dropped to 8.2-million tonnes, well below SA’s annual consumption level of 11.8-million tonnes. This shortfall necessitated imports of maize to supplement domestic needs.
Other field crops, fruits, vegetables and livestock also experienced severe losses. But if the El Niño is mild, crop declines could resemble the 2018-2019 episodes, in which the reduction in staple crops such as maize was not as aggressive. The total maize harvest that year was 11.8-million tonnes, in line with annual consumption. By comparison, in the past three seasons (excluding 2022/2023), SA’s maize harvest averaged 16.8-million tonnes and ensured that the country remained a net exporter of maize.
SA agriculture is mainly rain-fed, particularly field crops. Only about 20% of maize, 15% of soya bean, 34% of sugar cane and nearly half of wheat production is produced under irrigation. During droughts much of agriculture thus comes under immediate pressure.
In the case of fruit and vegetables, a sizeable area relies on irrigation. In the livestock sector, specifically dairy, irrigation is just as necessary. While the effect of lower rainfall is not as immediate, prolonged drought presents big risks to SA’s food security.
Even more worrying is that the agricultural regions that irrigate face continuous interruptions due to load-shedding. Organised agriculture and the department of agriculture, land reform & rural development are working on near- and long-term interventions to assist the sector.
One option that should receive serious consideration is incentives for self-generation, even if only covering a few critical parts of each business. The window for this option is limited, about eight months before we see the potential intensification of El Niño. But for regions that already irrigate, reducing load-shedding is the only option as farmers are seeing losses daily. The same extends to livestock, aquaculture (mainly abalone farms), dairy and poultry businesses, as well as various food, fibre and beverages value chain businesses.
The challenge of El Niño-induced drought will not be limited to SA but will be felt across Southern Africa. The last intense drought cycles led to increased food insecurity in the region. This is a particular risk if the upcoming summer season is dominated by drought.
Policymakers in the region should be aware of this creeping challenge and plan accordingly to support communities that heavily rely on agriculture.
Written for and first published on the Business Day.
Follow me on Twitter (@WandileSihlobo). E-mail: wandile@agbiz.co.za
by Wandile Sihlobo | Jan 18, 2023 | Agricultural Environment and Natural Resource
As we start the new year, there is probably no issue more urgent than the worsening energy crisis for South Africa’s agriculture and agribusinesses.
Farmers that rely on irrigation have all expressed concerns that persistent loadshedding is negatively affecting production. In key field crops, roughly 20% of maize, 15% of soybean, 34% of sugarcane, and nearly half of the wheat production are produced under irrigation.
Fruits and vegetables also heavily rely on irrigation and thus face similar challenges. In red meat, poultry, piggery, wool, and dairy production, there are also concerns that loadshedding beyond stage two makes operations and planning challenging, as these industries all require continuous power for their usual activities.
Similarly, agribusinesses in various downstream processing activities, such as milling, bakeries, abattoirs, wine processing, packaging, and animal vaccine production, face similar challenges.
Exporting agribusinesses, especially those with products highly sensitive to delays, such as fruits, red meat, and wine, are also worried about the port activities, which fortunately haven’t been primarily affected.
The financial impact on agribusinesses or on food security more broadly is not yet clear and will be difficult to quantify.
There are also food security concerns as the effect of loadshedding will probably show in the volumes of products to be harvested/produced later in the coming months due to the time lag in agricultural production stages.
The other emerging concern is the impact on jobs if businesses are severely affected. There is a real danger that some farmers could lose their crops and that would impact the financial future of the farms and likely to have a negative impact on agricultural financiers.
Total exemption of the sector from loadshedding will be near impossible. Many food processing companies and farms are technically linked to other localities and cannot be easily insulated from loadshedding.
With Eskom’s challenges likely to be with us for some time, reducing reliance on Eskom will probably be a strategic business survival consideration for many businesses, although costly. Investing in alternative power sources will need to be prioritized, where financial resources permit. This alternative generation may not necessarily take a business “off the grid,” but ensure the continuity of crucial business activities during the cycle of loadshedding.
The financial commitments associated with this may be quite large and businesses may also encounter regulatory hurdles. These financial or regulatory limitations should be shared with the Department of Agriculture, Land Reform and Rural Development (DALRRD) so that they can help address them within their available resources and means.
One possible step DALLRD can consider is streamlining the application processes under the Subdivision of Agricultural Land Act (SALA) and Spatial Planning and Land Use Management Act (SPLUMA) to authorize the use of land for energy generation. Additionally, if the government could also consider subsidies for solar panels and battery storage on top of relaxing these requirements many farmers could possibly go off the grid and generate enough power for their systems.
In recent engagements with the private sector, the DALRRD clearly stated that it would explore any incentives for alternative power generation in the sector. Minister Thoko Didiza expressed deep concerns about the impact of loadshedding in agriculture, agribusinesses, and the broader food, fibre, and beverages sectors.
Against this backdrop, the DALRRD will this week set up a task team of industry players, energy experts, and government officials to explore possible near-term and long-term energy solutions for the sector. The task team route makes sense, given that the sector is wide and diverse, and this is a specialized matter that needs swift and focused intervention from experts on energy and sectoral matters.
The energy crisis matter is urgent and needs practical solutions, not an “academic” exercise. In the near term, while various business attempt to survive this challenge, the public-private sector solution will primarily come from this collaborative effort for the sector.
Away from the ongoing concerns about the energy crisis, agricultural conditions in the country are generally favourable, having benefitted from the rains of the past few months. Provided a near-term solution for the sector’s energy shortage is found, this could be another year of generally large agricultural harvests across all subsectors and possibly positive growth (from the contraction we estimate for 2022).
Still, given the large-scale nature of areas that depend on irrigation and some that rely on efficient ports and processing facilities, uncertainty is high. The interventions to be made by both government and private sector to the energy crisis will be a key determinant of the sector’s performance for 2023.
Other factors beyond our control, such as the weather, have been positive for the first part of the year. Still, the heatwave of the moment requires irrigation in various areas to sustain the crops and orchards in good condition.
Follow me on Twitter (@WandileSihlobo). E-mail: wandile@agbiz.co.za
by Wandile Sihlobo | Jan 16, 2023 | Agricultural Environment and Natural Resource
South Africa’s agriculture remains an important sector of the economy and holds great potential to reduce poverty. It’s also central to the political economy of the country, as evident in the governing African National Congress’s (ANC) recent policy documents.
The ANC acknowledges that agriculture:
holds the potential to uplift many poor South Africans out of poverty through increased food production, vibrant economic activity, and job creation.
This is not a misplaced view. There is compelling evidence that, on average, growth in agriculture is more poverty-reducing than an equivalent amount of growth outside agriculture. This brings home the need to invest in and expand agricultural production, particularly for the benefit of poor rural communities.
This is a view that many have held since the publication of South Africa’s National Development Plan in 2012. The plan argued for the expansion of agricultural production and agro-processing and held up the prospect of nearly a million jobs that could be created.
But year after year, challenges have distracted the country from its agricultural expansion goals.
The year 2023 will be no different. There are six key themes that are likely to underpin the sector, particularly in the first half of this year.
These are:
- the impact of energy shortages and associated costs to businesses and consumers, after the severest power outages the country has ever seen
- the expansion of exports
- land reform
- the fallout from collapsing local administrations
- lack of progress on key regulations
- the financing of the sector.
Unless these challenges are addressed, the country’s agricultural sector won’t achieve the growth and job creation prospects it’s capable of.
The impact of power cuts
The country can expect intensified discussion about the impact of energy shortages on agriculture, food, fibre, and beverages production.
South Africa’s persistent power cuts are a significant challenge across the economy. At the end of 2022, the South African Reserve Bank highlighted the risks that persistent power cuts represent to the growth prospects of the country’s economy in 2023.
The agricultural sector and food producers have not always been as vocal as, for example, the mining industry, about the impact on their businesses. This is likely to change this year. Power outages have started to disrupt the production of even essential food items This includes potato chips processing, milling, and poultry meat processing.
At primary production, farmers using irrigation systems face production difficulties in the current environment.
And there are disruptions across a range of food value chains. Importantly, this also brings extra costs to food companies and farmers, some of which could be transferred to the consumer over time. Consumer food price inflation is already elevated, estimated to have averaged around 9% in 2022 (from 6,5% in 2021), driven mainly by global agricultural commodity challenges.
Export expansion
Expect a major focus on the need for the expansion of agricultural export markets.
South Africa’s agricultural sector is export-oriented, exporting roughly half its products by value. Organised agriculture groups are pushing to expand exports.
This is not a new discussion, but it is likely to gain momentum in 2023 as the growth in domestic production necessitates that South Africa reaches new markets. The priority countries should be China, South Korea, Japan, the USA, Vietnam, Taiwan, India, Saudi Arabia, Mexico, the Philippines, and Bangladesh. All have sizeable populations and large imports of agricultural products, specifically fruits, wine, beef, and grains.
Land reform
Land reform will be back at the top of the agricultural agenda as the drive for the inclusion of black farmers in the sector is highlighted in the Agriculture and Agro-processing Master Plan.
But the discussion is likely to focus on redistribution (rather than land restitution and tenure). The focus could be on the launch of the Agricultural Development and Land Reform Agency. For much of 2021 and 2022, the agency was mentioned on various occasions by South African president Cyril Ramaphosa and the minister of agriculture, Thoko Didiza.
Working with the private sector and redistributing some state-owned land, the agency is expected to accelerate land redistribution.
Deteriorating municipalities
The threat of deteriorating municipal service delivery, corruption in public offices, and the failures in the network industries such as roads, rail, water, electricity, and ports have occupied agribusiness leaders for some time.
These inefficiencies have:
- increased the cost of doing business
- taken investment away from productive agribusiness activities to maintaining roads and other infrastructure
- constrained expansion, and
- made conditions even more challenging for new entrants.
This year, the country’s organised agriculture groupings are likely to be more vocal about these challenges as they continue to constrain the agricultural sector expansion and make conditions even more challenging for new entrants.
Slow progress in fixing regulations
There are likely to be signs of growing unease about the slow progress in agricultural regulations.
The country’s agricultural sector faces regulatory constraints, such as the dysfunctional State Veterinary Service. This dysfunction negatively affects the production of key vaccines. There is also a need to modernise the Fertilizers, Farm Feeds, Seeds, and Remedies Act 36 of 1947. This is key in enabling the importation and registration of key agro-chemicals that are essential for boosting productivity of the agricultural sector.
For an extended period, South Africa embraced science and led the continent in agricultural productivity, benefiting from the adoption of critical agrochemicals, seeds, and livestock remedies.
But there’s been a drift away from this positive path. The country now lags behind its competitors due to delays and large backlogs in the office of the Registrar of Agricultural remedy. The result has been that crucial productivity-enhancing inputs haven’t been released to the agricultural industry.
The failures in national vaccine production also remain an issue.
The pressure will intensify to resolve all of these issues, especially as they are part of the legislative points the Agriculture and Agro-processing Master Plan should address. The plan seeks to address key hindrances to growth at a commodity level. Notably, the master plan is a social compact approach. It has already been given the support of major agricultural private sector role-players.
Finance
The need for agricultural finance, particularly developmental finance for new farmers, hasn’t been given enough attention.
At the end of 2022, the focus was on the blended finance instrument by the Department of Agriculture, Land Reform and Rural Development, and the Land Bank. The instrument will contribute positively to the sector’s growth and to serving the needs of some new farmers.
In 2023, there will be a drive for the Department of Agriculture, Land Reform, and Rural Development to broaden the blended finance instrument to accommodate more financial institutions and increase its scale to reach more farmers.
Follow me on Twitter (@WandileSihlobo). E-mail: wandile@agbiz.co.za
