Worries about animal feed prices persist

Worries about animal feed prices persist

South Africa’s livestock and poultry industry has had a difficult few years. A variety of external shocks including animal diseases and rising input costs — yellow maize and soya bean prices — made for a challenging operating environment for many farmers and agribusinesses.

While the spread of diseases may be slowing, and organised agriculture and the government have continued to collaborate to address biosecurity risks, concerns about renewed increases in animal feed prices persist. This is particularly the case in the El Niño period, which might result in a lower harvest compared with recent seasons of bumper crops.

The livestock and poultry sector hardly enjoyed the gains of a large domestic harvest of the past two seasons because this did not bring any meaningful reduction in feed prices. Since December 2020, yellow maize prices have broadly traded at more than R3,000 a tonne, while soya beans have generally been more than R5,000 a tonne. In prior seasons, a large harvest would have led to a substantial price decline to much lower levels than we observed in the past two years.

The major reasons for this were higher global maize and soya bean prices on the back of drought in South America, rising demand in China, Covid-related supply chain disruptions and the Russia-Ukraine war. As a small open economy, South Africa is interlinked with the global grains and oilseeds market, and domestic prices tend to follow global price movements — and this is what we observed.

With global maize and soya bean prices declining notably since the start of the year, South Africa’s maize and soya bean prices have followed a similar trend and are roughly 15% lower than the levels we observed in 2022. This benefits the livestock and poultry industry, which is now struggling with more domestic-related costs, such as load-shedding and failing municipalities where various businesses have had to use their own resources to maintain basic services. This has added to their cost of doing business.

In addition to the tendency to follow global price trends, large grain and oilseed supplies are in the market, which adds downward pressure on animal feed prices. For example, the crop estimates committee forecasts 2022/23 maize production at 16.35-million tonnes. This crop is 6% more than the 2021/22 season and the second-largest harvest on record. The 2022/23 soya bean harvest is forecast at a record estimate of 2.76-million tonnes (up 24% year on year).

Still, there are fears that as we transition into an El Niño weather phenomenon, which may result in below-average rainfall in Southern Africa, harvests could decline notably. Such a scenario would lead to an increase in maize and soya bean prices and further strain the livestock and poultry sector.

However, the expected El Niño weather phenomenon might not be as harsh as the 2015/16 season, where grains and oilseed harvests fell below long-term averages, necessitating imports. In that year, livestock suffered and there were cases of livestock deaths across the country, particularly in new-entrant farming regions. There is good soil moisture from the past few seasons’ higher rainfall, which should support natural grazing veld and crops during planting season, which starts in October.

Moreover, the recent crop estimates from the International Grains Council paint a good picture of global grain and oilseed supplies in the upcoming 2023/24 season, which points to moderate price movements. For example, the 2023/24 global maize harvest is forecast at 1.2-billion tonnes, up 5% year on year. Subsequently, the 2023/24 global maize stocks are estimated at 276-million tonnes, up 2% from the previous season. Such stock levels signal an environment of a slight decline in global prices. Regarding soya beans, global production in 2023/24 could reach 402-million tonnes, up 9% year on year.

All else being equal, the 2023/24 summer season may not be as harsh to the South African livestock and poultry industry. The global grains and oilseed prices are likely to be under pressure. If El Niño does not badly hit the domestic harvest as expected, the benefits of the potentially lower global prices will filter into our domestic environment.

Written for and first appeared in the Business Day.

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

The Karoo offers far more than sheep and wool

The Karoo offers far more than sheep and wool

I attended the Karoo Winter Wool Festival at the weekend. Hosted in Middelburg, in the Karoo region of the Eastern Cape, the festival was a wonderful event, showcasing the value chain activities of the sheep industry and the rich Karoo heritage.

I was one of the speakers at this exciting event, and my message to farmers and other stakeholders focused on how SA can promote agricultural growth in this sparse, remote region by unlocking its natural assets and heritage.

There are various opportunities to pursue, including the region’s food heritage, high-end fashion and agritourism. Exploring and expanding these opportunities would ensure that Karoo farmers can diversify and improve their revenue streams by not solely depending on the wool export market.

High dependence on wool exports can come with challenges, such as when China temporarily banned SA wool, leading to a 22% year-on-year decline in the country’s wool export earnings in 2022.

So what to do? At the most basic level we need to eat to live, and food carries the smells and tastes of places, families and histories. It matters to people how, what and when they eat, and sometimes where their food comes from. Thus, food heritage is linked to ecology, sustainability, health and origin.

Exploring food in the context of heritage can raise interesting questions about identity, people’s relationship to the land, the availability and quality of local produce, poverty and health. This would not be the first time this is done. Various countries in Europe in particular continue to benefit from their food heritage.

In 2010 Spain, Greece, Italy, Morocco, France and Mexico successfully nominated the Mediterranean diet, Mexican cuisine and the gastronomical meal of the French as part of the intangible cultural heritage of humanity under the Unesco Convention.

Food heritage offers obvious spin-offs in product development, economic value and tourism. There are elements of these foreign food heritage products on our leading supermarkets’ shelves, but somehow the same retailers do not showcase our own heritage to the same degree.

The Karoo is SA’s hinterland and one of the natural assets of the Northern, Eastern and Western Capes due to its pristine natural beauty and clean air, as well as peace and quiet. It therefore has strong potential commercial and marketing value, which farmers can use.

“Karoo” has been widely misappropriated by various individuals and businesses, misrepresenting products such as “Karoo lamb”. Karoo region farmers therefore need to reclaim the brand by:

  • Registering it as a geographical indication.
  • Lifting Karoo lamb out of the meat commodity market and creating its own pricing and distribution structure.
  • Creating a different price point for Karoo lamb.
  • Enforcing quality and food safety standards.
  • Ensuring producer control of the supply chain and forming strategic partnerships with abattoirs, packers and wholesalers.
  • Preventing overdominance by major retail chains.
  • Educating consumers about the quality and value of Karoo lamb.

SA consumers are already buying European geographical indication products in our supermarkets. Many cheeses and ham carry the famous EU geographical indication logos, and retailers sell these famous names protected by EU legislation.

SA introduced similar regulations in 2019, enabling rooibos and soon Karoo lamb as the country’s first geographical indication products. Ongoing efforts in this regard have brought about interesting spin-offs in relation to the fashion industry, which have the potential to add tremendous value to the Karoo.

The global fashion industry, especially the luxury goods and clothing industry, is now demanding wool, mohair and leather from the Karoo because of its reputation for quality and its heritage.

The Karoo is an important region in SA, and we need to continuously think of creative strategies to support the sheep and other industries as well as agritourism there.

Written for and first published in Business Day.

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

El Niño at our doorstep

El Niño at our doorstep

South Africa has had four seasons of La Niña induced heavy rains from 2019/20 to 2022/23. These above-normal rains supported agriculture leading to higher yields across various field crops, fruits and vegetables. The livestock industry also benefitted from improved grazing pasture.

Importantly, having four consecutive La Niña seasons was an unusual occurrence. The typical cycles are two seasons of higher rainfall followed by normal-drier seasons.

Excluding the current trend, the only other period in the recent past with three successive years of conducive weather conditions and a large crop harvest ran through 2007/08, 2008/09, and 2009/10 production seasons. This period brought a sizeable agricultural yield to the country.

But there is now a shift from a prolonged period of La Niña to El Niño. This weather phenomenon would bring below-normal rainfall and hotter temperatures in South Africa (and across Southern Africa).

If it is intense, this could resemble the bleak agricultural conditions we witnessed during the last El Niño drought in the 2015/16 season, where staple crops such as maize dropped to 8,2 million tonnes, well below South Africa’s consumption levels 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 I doubt things will be this bad. Also, the soil moisture remains reasonably favourable across South Africa following good rains, which should cushion farmers. Thus, I remain optimistic that the 2023/24 agricultural season in South Africa should be okay, although crop yields could drop considerably from the levels of the past few years.

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

Poor roads limit South Africa’s agricultural potential

Poor roads limit South Africa’s agricultural potential

Despite various challenges in trade and animal diseases, South Africa’s agricultural sector has had a good few seasons. But one other crucial issue is road deterioration; in some provinces, such as the Eastern Cape, roads are almost non-existent in various regions.

These past few days, farmers in areas such as the Ncora region of the Eastern Cape have struggled to receive diesel supplies, which they need to keep the dairy farming entities running given the load-shedding, feeds, and concentrates. The roads are so bad and muddy in this rainy weather that farmers can’t even deliver the milk to processing facilities; it’s a cocktail of challenges.

We should not have such challenges in a province like the Eastern Cape, where the government leadership speaks of its drive for agricultural development, expansion, job creation, and agri-tourism.

The essential ingredients for such a vision of prosperous agriculture (and agri-tourism) are proper roads and water infrastructure (since energy is a separate big issue). With such poor roads, we will also struggle to see decent participation of black farmers at the commercial farming level.

I’ve centred my comment on the Eastern Cape, but the challenge applies across the country, with perhaps an exception of the Western Cape.

I will reflect on this issue with government colleagues at the national level. Still, the provincial government structures and municipalities must do their part and assist with essential infrastructure maintenance to support business activity.

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

Global agricultural commodity prices continue to moderate

Global agricultural commodity prices continue to moderate

By and large, global grains and oilseeds prices have continued to trend lower. This follows the diplomatic interventions by the United Nations representatives, and the Turkish, Russian, and Ukrainian government counterparts to facilitate the safe passage of grain exports out of the Black Sea region through the “Black Sea Grain Deal.”

In March 2023, the Food and Agriculture Organization of the United Nation’s Global Food Price Index, a measure of the monthly change in international prices of a basket of agricultural commodities, was at 126.9 points, down by 2.1% from February 2023. This marked the twelfth consecutive monthly decline since reaching its peak one year ago.

Notably, the index is down 21% from March 2022. This shows that there is an improvement in the affordability of various agricultural commodity prices since their peak in the month after Russia invaded Ukraine last year. This decline has been observed in most commodity prices across the board, which include meat, dairy, cereals, and vegetable oils.

The exception is for sugar prices which are up marginally from March 2022. 2022/23 global sugar ending stocks are projected to tighten as growth in global consumption exceeds the rise in production.

While the downward trend in most global agricultural commodity prices will likely persist over the near term, they will probably not return to pre-covid-19 levels. The global grain stocks are also expected to tighten as the production of some commodities has declined while consumption increases. This will support agricultural commodity prices to remain well above long-term levels.

For example, earlier in March 2023, the United States Department of Agriculture (USDA) indicated in its World Agricultural Supply and Demand Estimates report that 2022/23 global wheat production could reach 788 million tonnes, up by 1% from the February 2023 estimates and the previous season’s harvest. The larger harvest is on the back of expected larger average yields in Russia, the US, Canada, Kazakhstan, China, Australia, and the UK.

That said, the 2022/23 global wheat stocks could decline by 1% from the previous season to 267 million tonnes because of solid consumption.

Moreover, the 2022/23 global rice production is estimated at 509 million tonnes, up by 1% from the February 2023 estimates and roughly the same level as the 2021/22 harvest. Because of solid consumption levels, the USDA currently forecasts an 8% annual decline in global rice stocks, estimated at 173 million tonnes.

However, the maize and soybean monthly production picture is different. For example, the 2022/23 global maize production is forecast at 1,15 billion tonnes, down by 0,3% from the February 2023 estimate and 6% less than the 2021/22 season’s crop. This is mainly due to an expected smaller crop in the US, Ukraine, and the EU.

Subsequently, the 2022/23 global maize stocks are forecast to dwindle by 3% from the prior season, estimated at 296 million tonnes.

Moreover, the 2022/23 soybean production forecast was slashed by 2% from February 2023 due to a poor anticipated harvest in Argentina due to dry weather. Still, this is 5% up from the previous season. The anticipated large soybean harvests in Brazil, Russia, and China are expected to more than offset the expected production declines in the US, India, Argentina, and Uruguay. These deviations in crop expectations are a function of weather conditions and variations in the area planted from season to season.

Overall, I view the 2022/23 global grains and oilseeds production season in a positive light. The expected global production levels should be sufficient to provide relief from the soaring grain and oilseed prices which was experienced in the weeks after the start of the Russia-Ukraine war. Still, the tighter maize and rice stock levels are likely to keep prices at reasonably higher levels than their long-term averages.

South Africa is part of the global agricultural market. Therefore, these anticipated price trends will invariably be transmitted to the domestic agricultural market. In essence, this means that agricultural commodity prices will likely continue to soften from last year’s levels, although not to the extent of reaching pre-covid-19 levels.

This producer price stickiness will be welcomed by grain and oilseed producers, which still have to contend with input costs that are now edging lower but still remain stubbornly high.

Therefore, we still expect the terms of trade in field crop production to remain positive in the short term. The same cannot be said, however, for horticultural production where producer prices have not surged to the same extent (as those of field crops) to provide a much-needed buffer to high input and exporting costs. The livestock subsector has also been taking a strain due to high feed costs.

Nonetheless, the latest field crop commodity bearish trend will somewhat provide a reprieve for the intensive livestock production systems and struggling households as consumer food price inflation gradually moderates.

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

Are retailers and food producers exploiting South Africans through higher-than-warranted food prices?

Are retailers and food producers exploiting South Africans through higher-than-warranted food prices?

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

Insights guiding our thinking about SA agricultural growth prospects in 2023

Insights guiding our thinking about SA agricultural growth prospects in 2023

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

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