by Wandile Sihlobo | Dec 18, 2022 | Agricultural Trade
South Africa’s agricultural trade data paint an encouraging picture, though the sector continues to struggle with poor roads and inefficiencies in rail and ports.
In the third quarter of this year, the value of the country’s agricultural exports — food, fibre and beverages — amounted to $3,7bn, up 10% year on year. The main factors underpinning this are sizeable agricultural output in the 2021/22 production season and higher commodity prices.
Citrus, maize, nuts, wine, apples, pears, sugar, fruit juices, berries, soybeans and wool were among the most critical products exported in the third quarter.
We had feared the citrus market access challenges South Africa faced in the EU after plant regulation changes would make a significant dent in export values in the third quarter.
Fortunately, the temporary solution that industry and the government advocated helped to ease trade flows and its outcome is evident in these trade data. However, there are ongoing engagements between South Africa and EU authorities for the long term on new citrus plant safety regulations, which involve stringent cold treatment requirements.
The EU argues that these were introduced to protect them from quarantine organism the “false codling moth”.
Ironically, South Africa has rigorous measures to control this, which the EU should recognise so trade can continue. The outcome of the government’s engagements will be critical.
The EU is a sizeable market for South Africa’s citrus industry and the whole agricultural sector. In the third quarter, citrus was still the top exportable agricultural product by value in this country, with roughly the same value as the third quarter in 2021, just more than $1,06bn (about R18.3bn).
Wool is another key product that faced export restrictions in China earlier this year. The bounce-back on exports we observed in third quarter values also signals the resumption of trade with that country. This is an important market for South Africa’s wool, accounting for more than two-thirds of exports.
From a destination point of view, the African continent remained the largest agricultural export market for South Africa in the third quarter, accounting for 32% in value terms.
Asia and the Middle East collectively were the second-largest region, accounting for 31% of the exports, with the EU holding the third position with a 19% share in total exports in value terms.
The UK is one of the most important agricultural markets for South Africa and accounted for 6% of overall agricultural exports in the third quarter. The balance of 12% value constitutes the Americas and other regions.
South Africa’s trade policy and activity are, of course, not one-directional. The country is also a significant importer of agricultural products, relying on other countries for crucial foods such as wheat, rice, palm oil, sunflower oil and poultry.
These products dominated the food import bill in the third quarter. Some, such as rice and palm oil, cannot be sustainably produced at scale in South Africa because of unfavourable climatic conditions.
As such, in the third quarter of 2022, agricultural imports increased by 5% year on year to $1,9bn.
Aside from the increase in volumes of imports, the higher agricultural commodity prices also contributed to the high import bill.
We believe rice, wheat and palm oil will continue to lead the agricultural import product list when data for the remainder of the year are published.
Overall, South Africa recorded an agricultural trade surplus of $1,9bn in the third quarter of 2022, up by 14% from last year’s corresponding period. The robust exports and a modest increase in imports contributed to this strong trade surplus.
As we have indicated, the critical point from a policy perspective is that South Africa’s agricultural sector is export-orientated. Thus, any improvements in production through various development plans, such as the Agriculture and Agro-processing Master Plan, should be anchored on expanding export markets beyond those that exist.
China, South Korea, Japan, the US, Vietnam, Taiwan, India, Saudi Arabia, Mexico, the Philippines and Bangladesh are key markets in which South African agribusinesses and farmers are interested in expanding their presence. These countries have a sizeable population and large imports of agricultural products, specifically fruits, wine, beef and grains. They are already on the radar of South African authorities.
At the same time, South Africa should not neglect continuous constructive engagements with Europe and Africa as we search for new markets.
All this should happen while domestic efforts to improve network industries (road, rail and ports) are underway. In this respect, there are promising discussions between Transnet and the agricultural industry focused on improving efficiencies and exploring co-investment options in some areas at ports.
This will be a long-term endeavour, but its success will be meaningful for the export-orientated South African agricultural sector.
There also needs to be increased security within logistics as we see escalating cases of criminality against the country’s infrastructure. This will be the only realistic path to maintaining this sector’s growth and, with that, job creation and vibrancy of the rural towns.
Written for and first appeared in the Business Times and Sunday Times, 18 December 2022.
Follow me on Twitter (@WandileSihlobo). E-mail: wandile@agbiz.co.za
by Wandile Sihlobo | Dec 13, 2022 | Agricultural Trade
There is consensus among agricultural role players that sustainable growth in SA’s agricultural sector can only be achieved through the expansion of production. An expansion of export markets must be a key support pillar for growth.
This has been well-understood for many years. For nearly three decades SA excelled at opening new export markets, which has supported the growth the sector has witnessed since 1994. SA has successfully negotiated several free trade agreements over the past few decades, with critical regional and international markets.
These include the Southern African Development Community (Sadc) free trade agreement, the Sadc-EU economic partnership agreement, the SA Customs Union (Sacu)/Mozambique-UK economic partnership agreement, the African Continental Free Trade Area (AfCFTA) and the Sacu-Mercosur (South American) preferential trade agreement.
All of the agreements highlighted above were concluded over the past 16 years, which was quite a feat given the technical and institutional demands that must be committed to negotiating and successfully implementing trade agreements. I should note, however, that the actual free trade agreements are for only two of SA’s biggest markets — Africa and Europe — which collectively account for two-thirds of the country’s total agricultural exports in value terms.
The SACU-Mercosur preferential trade agreement is a narrowly focused and low-ambition trade arrangement and has not had a significant impact. That said, it could be argued that the opening of markets through these agreements has deepened, consolidated, and improved SA’s position in the EU and Africa.
Recently we have seen a rise in the use of nontariff barriers in these critical markets, such as the regulation of citrus exports in the EU and the ban on vegetable imports from SA by Botswana and Namibia. This means the SA authorities and industry will need to collectively work towards strengthening our relations in these markets and restoring the export position the country has enjoyed for some time.
Simultaneously, SA would be best served by diversifying its export markets beyond Africa and Europe. The Middle East, the Far East, and North and South America now account for about a third of SA’s agricultural exports. This is perhaps where more attention and pursuit of free trade agreements would be most beneficial.
Some of SA’s fiercest competition in a variety of products comes from Chile, Peru, Australia, Argentina, New Zealand, and Uruguay. They have struck trade agreements with most markets in Asia, the Middle East, and the Americas, whereas SA has not, and therefore faces higher tariffs than key competitors. Local producers have to overcome these tariffs primarily through farm-level technical efficiency.
Tariff cuts
SA does not actually have to follow the same path as the countries above and open free trade agreements with all of the countries in those regions. SA is an industrialising economy with a unique set of challenges and with various domestic industries that still require some protection.
We could target low-ambition trade agreements with specific countries, primarily preferential trade agreements, which focus on liberalising a specific set of commodities and agro-processed products. There is little chance of SA embarking on deep and extensive tariff cuts on goods and services, especially given that the costs of opening up markets cannot be determined with certainty.
In this quest to widen SA’s agricultural exports, even within a narrow path, the main countries should be China, South Korea, Japan, the US, Vietnam, Taiwan, India, Saudi Arabia, Mexico, the Philippines, and Bangladesh. These countries have sizeable populations and import a significant volume of agricultural products, specifically fruits, wine, beef, and grains. And they are already on the radar of the SA authorities. At the same time, we should not neglect continuous constructive engagements with Europe and the African continent as we search for new markets.
Aside from the broad trade policy themes, efficiency in the logistics industry remains a crucial area. The sector engages with Transnet and Infrastructure SA, as well as various government departments responsible for roads, to achieve this particular goal.
There also needs to be increased security within the logistics, as we have seen an increase in reported cases of criminality against SA’s infrastructure in recent years. Despite all these challenges, the interventions made by Transnet, industry, and government have yielded positive results when it comes to agricultural exports thus far. In the data, we have for the first eight months of this year SA’s agricultural exports amounted to $8.9bn, up 6% from the first eight months of 2021.
The generally higher commodity prices have also contributed to this increase in export values. In these months Africa and Europe remained vital markets, underscoring the points argued above. Citrus, maize, nuts, wine, sugar, apples, pears, and grapes were among the key exports, especially in the latter months under consideration.
SA’s agricultural trade approach is not one-sided. The country also imports a range of products. Imports for the first eight months of 2021 amounted to $5.1bn, up 13% from the same period in 2021. Palm oil, rice, wheat, and spirits were among the essential imported products, specifically in the later months of the measured period. The key suppliers included Indonesia, Thailand, Romania, China, Argentina, Poland, and Germany.
Focused trade policy
Overall, SA’s agricultural growth path needs a focused trade policy strategy, but this should not be at the expense of existing agreements that have sustained the sector over the years. The industry and government should work collaboratively on strengthening the existing markets through continuous engagements at the political and business level while simultaneously exploring new and promising markets.
Conversations and collaboration between industry and logistics entities such as Transnet are crucial for the success of the export strategy. Logistics efficiency improvement is an integral part of the agriculture growth agenda that will ultimately deliver jobs and economic activity in rural SA.
Written for and first published on Business Day.
Follow me on Twitter (@WandileSihlobo). E-mail: wandile@agbiz.co.za
by Wandile Sihlobo | Oct 11, 2022 | Agricultural Trade
One major challenge that emerged this past week that directly impacts South Africa’s agriculture is labour-related tensions at Transnet. The logistics utility declared a force majeure at its port operations last week, citing an illegal strike.
There is a risk that disruptions could escalate this week. The weekend papers cited statements by the representatives of the South African Transport and Allied Workers Union (Satawu) and the United National Transport Union (Untu) that workers are demanding a wage increase of a minimum of 10%, slightly down from the initial demand of13,5%.
However, this is still far from the current offer by Transnet at 4%. Against this, Satawu said over the weekend that it has served Transnet with a 48-hour notice to be on strike from Monday, October 10. Disruptions to the flow of goods to and from other countries could negatively impact South Africa’s food, fibre and beverages sector, depending on its duration.
While agricultural production tends to be seasonal, South Africa has diverse agriculture, and there is large trade activity each quarter of the year. For example, exports of food, fibre and beverages in Q4 2021 amounted to $US2,8bn, 23% of the total value of exports in that year.
Some of the products that dominated the export activity were citrus, maize, apples and pears, wine, grapes, nuts and berries, wool, soybean oil, apricots, cherries and peaches. Not all these exports were facilitated through Transnet.
Still, the point is that the fourth quarter of each year is a high export activity quarter. Given that agricultural production has generally been resilient, we expect that there are substantial volumes of exports of various products scheduled for this month.
Similarly, South Africa imports a range of food products in the fourth quarter of the year. For example, in 2021, during this period, we saw imports of wheat, palm oil, rice, spirits, poultry meat, sunflower oil, and soybeans oilcake, amongst various products.
The total imports of food, fibre and beverages in the last quarter of 2021 amounted to US$1,9 billion. In the same way as the exports, labour-related disruptions would disrupt this import activity.
Importantly, I am not outlining these trade values to signal that this will be a direct loss if there is a strike. Instead, I am outlining the importance of trade in South Africa’s food, fibre and beverages sectors.
Any costs would ultimately depend on the scale and timeframe of disruptions. The focus should be on supporting both parties to find common ground. Indeed, the whole logistics industry is the bloodline of South Africa’s export-oriented agriculture or food, fibre and beverages sector.
In the export business, especially of high-value products, the reliability of South African suppliers is key in a highly globalized competitive world. Therefore, any potential prolonged delays would negatively impact the business activities of the South African suppliers to various markets in the world.
Different agricultural groupings and commodity associations have already been vocal in the weekend newspapers about the possible negative impact of the Transnet strike on their businesses and the agricultural economy.
Aside from the immediate strike concerns, the logistics industry requires improvements, from roads, rail and ports, to support the growing agricultural sector. Road networks have deteriorated severely across South Africa over the recent past, weighing on agribusinesses and farming entities.
Notably, some are using the capital resources which could have been allocated to business expansion, and thus long-term employment, to maintain and build roads. This is a public sector function and shouldn’t be covered by private businesses. Similarly, there are long-standing challenges with rail and ports.
Fortunately, on this part, Transnet has been working closely with agribusinesses, commodity associations and farmer groupings to refine their agricultural strategy that responds to the sector’s needs and devise a long-term solution.
This is crucial as South Africa already exports half of its agricultural produce. Any improvements in production going forward will have to be linked to potential export markets, and the logistics industry will be at the heart of this process.
In sum, the current labour disputes at Transnet are an important risk for South Africa’s food, fibre and beverages sector. The fourth quarter of the year is as busy as any other quarter in terms of trade.
Therefore, stoppages would negatively affect both imports and export activities. The actual costs of it, however, will depend on the duration of the strike. I hope a solution is found quickly between Transnet and the labour unions to minimize disruptions to trade.
Follow me on Twitter (@WandileSihlobo). E-mail: wandile@agbiz.co.za
by Wandile Sihlobo | Oct 6, 2022 | Agricultural Trade
International trade has been at the core of South Africa’s agricultural progress since the early 2000s. Since 1994, the country has excelled in opening up new markets, as evidenced by several free trade agreements with critical regional and international markets.
The country exports roughly half of its produce in value terms. The top exportable products are high-value and labour-intensive horticulture produce, a subsector that expanded significantly over the past two decades. Citrus, table grapes and a range of deciduous fruits dominate the export list.
This means international trade has become crucial for sustaining farm profitability and job creation in South African agriculture.
Over the past decade, agriculture and agro-processing exports have averaged 11% of the country’s overall exports, up from 9% in the decade before. This shows South Africa’s success in opening export markets, and farmers’ ability to produce high-quality products that meet global standards and needs.
Even though agriculture’s share of gross domestic product (GDP), a measure of economic output, has shrunk over the years, from just under 10% in the 1960s to around 2.5% now, the sector has grown in both output and value terms. Trade has been the core of the sector’s growth.
Still, South Africa’s agricultural sector remains vulnerable on two fronts. It is too reliant on a few markets. And there are inefficiencies in the domestic logistics chains.
It is against this background that talks about the potential expansion of production should be viewed. First, there should be a greater effort to increase access to existing and new markets. There should also be a sharper focus on improving the efficiency of logistics to move to produce domestically and to export markets.
Over the past few months, there have been several reports of efficiency challenges in the domestic ports and market access constraints in key export markets such as the EU. These could hinder long-term growth of the sector, as new land comes into production to expand output.
Recent challenges in key agriculture export markets
An example of South Africa’s vulnerability to a lack of diversification was illustrated recently by two events. China temporarily banned imports of South African wool and the EU restricted citrus imports.
This mattered because, outside the African continent, South Africa’s agricultural exports are heavily concentrated in a few Asian countries and the EU.
Export diversification contributes to a country’s economic resilience, especially in the face of disruptions to global supply chains or if one of the major markets imposes non-tariff barriers to protect its producers from competition, as is increasingly the case.
Recent challenges regarding South Africa’s access to the wool market in China have now been resolved. But the losses from when the ban was in place are clear in the trade data. Wool exports fell by 42% in the second quarter of 2022 compared with the corresponding period in 2021.
For citrus, which continues to experience protectionist tendencies in the EU after changes in plant regulations, the impact could show more pointedly in the third quarter of the year. Still, a lot will depend on the engagements between the South African and EU authorities on the new plant safety regulations, which involve stringent new cold treatment requirements.
In the second quarter of this year, citrus was still the top exportable agricultural product by value in South Africa, although down by 22% from the second quarter of 2021. The loss of the Black Sea market since the start of the Ukraine war might have also contributed to the slowing of exports. Before the war, Russia accounted, on average, for 7% of South Africa’s citrus exports in value terms. It also accounted for 12% of South Africa’s apples and pears exports.
The other challenge is logistics. The state-owned transport facility Transnet showed great agility in rebuilding the port of Durban after the destructive floods in April this year.
Similar energy and focus are necessary to improve the ports and rail functioning. Another example is the road network that is in disrepair across numerous agricultural towns. It could slow export activity if not properly improved.
What’s driving growth
In the second half of this year, South Africa’s agricultural exports rose by 5% year on year, reaching US$3.4 billion. The top exportable products were citrus, maize, apples, pears, wine, grapes, figs, dates, avocados, nuts, fruit juices, wheat, wool and sugar, among others. We expect some of these products to have continued to dominate the export list in the third quarter.
Underpinning this robust export value are the sizeable agricultural output in the 2021/22 production season and generally solid global demand, even at higher commodity prices for maize.
Maize, apples and pears, grapes, and sunflower oil saw a significant uptick from the first quarter of 2021, and thus overshadowed the decline in citrus exports during the period under review.
There are still ample agricultural and beverage exports, which should support the activity in the third and last quarter of the year.
The African continent remained South Africa’s largest agricultural exports market in the first quarter of this year, accounting for 35% in value terms. Asia was the second largest region (28%) and the EU held the third position with a 21% share.
The UK is one of the most important agricultural markets for South Africa and accounted for 7% of overall exports in the second quarter. The balance of 9% value constitutes the Americas and other regions of the world.
The country’s trade policy and activity are not one-directional. South Africa is also a significant importer of agricultural products. It relies on other countries for crucial food products such as wheat, rice, palm oil, sunflower oil and poultry.
Policy direction
South Africa’s agricultural sector is export-oriented. Thus, any improvements in production through various development plans, such as the Agriculture and Agro-processing Master Plan, should be anchored on expanding export markets.
Japan, China, India, Saudi Arabia, Bangladesh, the Philippines and South Korea are key markets in which South African agribusinesses and farmers are interested in expanding their presence. It’s also important to maintain a relationship with the existing key markets.
All this should happen while domestic efforts to improve the functioning of the network industries are underway. This will be the only realistic path to maintaining the growth of this sector and, with that, job creation and vibrancy of the rural towns.
Follow me on Twitter (@WandileSihlobo). E-mail: wandile@agbiz.co.za
by Wandile Sihlobo | Sep 5, 2022 | Agricultural Trade
Trade is at the core of SA’s agricultural progress. But the past few months brought challenges in key markets such as China and the EU, threatening SA’s export activity. Fortunately, some of these challenges have now been resolved, and SA could see continuous exports, specifically to China.
We now also have the second quarter data of SA’s agricultural exports, which shows a 5% improvement from the second quarter of 2021. The top exportable products were citrus, maize; apples and pears; wine; grapes; figs, dates, avocados, nuts; fruit juices, wheat, wool, and sugar, among others.
From a destination point of view, the African continent remained the largest South African agricultural export market in the first quarter of this year, accounting for 35% in value terms. Asia was the second largest region accounting for 28% of the exports, with the EU holding the third position with a 21% share in the total exports in value terms.
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by Wandile Sihlobo | Sep 4, 2022 | Agricultural Trade
Written for and first appeared in Business Day.
SA’s wool exports to China recently resumed after nearly four months’ suspension. China had cited the foot-and-mouth disease outbreak as a reason to suspend SA’s wool imports, despite the existence of a unique protocol to handle wool shipments and avoid contamination in the event of such an outbreak.
SA and China agreed on this protocol after the 2019 outbreak, which weighed on exports. However, China may have faced capacity constraints during the Covid-19-related lockdowns of recent months, possibly leading to delays in activating the protocol. Notably, this foot-and-mouth disease outbreak has been specific to cattle, not sheep. Industry role players were therefore appropriately dismayed when China suspended wool imports from SA citing this outbreak as the reason.
Credit for assisting in reopening this critical trade channel for wool must go to the practical and quiet cooperation over the past few months between the department of agriculture, land reform & rural development, the wool industry and the Agricultural Business Chamber of SA, among others. The reopening of exports comes at an opportune time as the wool season has recently started.
China is SA’s primary wool export market, accounting for an average of 70% of annual exports. Other SA wool industry markets are the Czech Republic, Italy, India, Bulgaria, Germany, the US, Malaysia, Japan and Mexico. But these are relatively small and thus could not absorb the volume usually destined for China over the past few months.
Wool is likely to remain a significant contributor to SA’s agricultural export revenue and not fall off the top of the exportable products list as initially feared. In the first five months of 2022 wool was the eighth-largest exportable agricultural product, accounting for 3% of the $5.1bn in total agricultural exports. Germany and Italy’s share of SA exports increased from April as Chinese exports declined, and accounted for a larger market share than China in May. The hope is that the European market will remain vibrant as the Chinese market reopens to SA wool.
The cooperation between the government, industry and organised agriculture during the wool ban is an example of the approach that should be taken to deal with the sector’s other challenges. The foot-and-mouth disease continues to affect the livestock industry, and the industry and regulators should come together to assemble a plan. On August 16 the department aptly decided to restrict the movement of cattle for 21 days, reviewable weekly, but the path forward at the end of this period requires the input and support of all cattle industry players while leaving sufficient room or flexibility for the regulators to do their job.
Industry input will help enrich the government’s understanding of the financial impact of their decisions on the industry, but collaboration on the scientific side in helping to curb the spread of the disease is just as important. Industry role players have various ideas, such as the need to issue cattle movement permits rather than a ban, or vaccination options. These are the kinds of discussions and richer scientific insights that specialists in the field could exchange for the good of the SA cattle and broader livestock subsector.
SA’s export-orientated agricultural sector faces numerous challenges in export markets. Still, the success of the reopening of wool exports to China and the effective collaboration between the government, industry and agribusiness offers an approach to future engagements, especially when dealing with foreign stakeholders and other domestic challenges.
As we continue to struggle with foot-and-mouth disease in the cattle industry, changes to the plant safety regulations in the EU affecting our exports, and the temporary ban on vegetable exports to Namibia and Botswana, the newfound collaborative approach between the government and industry will be a key to finding a productive path for the good of SA’s agriculture.
Follow me on Twitter (@WandileSihlobo). E-mail: wandile@agbiz.co.za
by Wandile Sihlobo | Aug 21, 2022 | Agricultural Trade
Written for and first appeared on Business Day.
SA’s agricultural export activity is likely to soften this year from the 2021 record of $12.4bn. Lower production of key crops, the spread of animal disease and changes in phytosanitary regulations in key markets such as the EU will all weigh on export activity this year.
The changes in export volumes and values might not show in the first half, but are likely to reflect in the second half. SA’s agricultural exports for the first five months of this year amounted to $5.06bn, up just 2% from the corresponding period in 2021. Over this period the EU, UK, Japan, UAE and several African countries were still our primary markets. Citrus, maize, apples, pears, wine, nuts and wool were the dominant exportable products.
I worried that exports would deteriorate in April after the severe floods that damaged infrastructure in KwaZulu-Natal and the port of Durban. Surprisingly, the data paints a positive picture of continued export activity, which reflects well on Transnet and other logistics role players’ tireless efforts to restore the functioning of the port after the floods.
The spread of foot-and-mouth disease in the livestock industry intensified from the end of April. This outbreak meant exporting wool, beef and other livestock products faced restrictions in key markets such as China, mainly from May.
Discussions between the SA and Chinese authorities on this issue are still underway. In the meantime, wool exports have declined since the announcement of the temporary ban by China. The fallout is likely to be reflected in the third quarter of the year’s trade data. The same is true for beef exports, though wool and beef export regulations differ.
Wool has a unique protocol that allows China to handle wool exports even when SA has a foot-and-mouth disease outbreak. However, beef exports have no such protocol and are therefore extremely exposed during such outbreaks, compared with the sheep and goat industries.
At the time of writing the SA wool industry had not received clear direction about China’s adherence to the agreement between the two countries to facilitate wool exports during the outbreak. The SA government is the only avenue to assist in resolving this impasse and should thus deepen its engagements with China.
In the case of citrus, the EU imposed protectionist measures on agriculture in July by changing its plant safety regulations for citrus without notifying its trading partners within a reasonable time. The new regulation purports to protect the EU from a quarantine organism, the false codling moth, by introducing stringent new cold treatment requirements, particularly on citrus imports from Africa. This mainly affects SA, Zimbabwe and Eswatini.
SA has put rigorous measures in place to control the false codling moth, which the EU uses as a pretext to restrict citrus imports from Africa and to protect Spain. In the past couple of weeks of July and into August SA citrus growers struggled to access the EU market because of these regulation changes.
The breakthrough for the shipments stranded in the EU waters came in the second week of August. Still, the challenge of the new regulations remains for export activity in the months ahead. The solution to this requires continuous and intensified engagement by the SA government with the EU authorities.
Aside from the challenges of animal disease and regulatory constraints, lower domestic output of key crops may also dampen exports. The decline in crop output does not risk domestic food security but it does reduce the available supplies for the export market.
The most notable decline in key exportable crops is maize, down 10% from the 2020/2021 season at about 14.7-million tonnes. As a result, I expect maize exports to amount to about 3-million tonnes this season, from roughly 4-million tonnes last year. This deterioration in will show in the figures for the second half of the year.
Overall, the constraints that require government intervention to support our exports, such as wool and citrus, should be prioritised.
Follow me on Twitter (@WandileSihlobo). E-mail: wandile@agbiz.co.za
by Wandile Sihlobo | Jul 25, 2022 | Agricultural Trade
Written for and first appeared in The Conversation
If Russia keeps to the deal it has signed with Ukraine allowing for the resumption of grain exports, much-needed relief will be provided to importing countries, including many in Africa.
The relief would be significant as Ukraine has roughly 22 million tonnes of grain (wheat, maize, sunflower seed and other grains) in silos. It has not been able to ship these to export markets because of Russia’s invasion, which disrupted infrastructure and the attacks on vessels transporting goods.
Ukraine is a notable player in the global grain and oilseeds export market. And thus, the blockage of exports has contributed to the notable increase in agricultural commodity prices observed since the war started.
The aim of the “grain deal”, signed between Kyiv and Moscow on July 22 2022, was to change this chaotic situation. Under the agreement, Russia promised not to attack grain vessels in the Black Sea region. But this promise didn’t last long. Less than 24 hours after the deal was signed Russian missiles struck the critical Ukrainian port of Odesa.
The attack is likely to undermine the deal, a multinational effort to avert the global food crisis. In addition, grain traders and merchants might be reluctant to be involved in the zone if they consider it to be too risky. This would ultimately defeat the deal.
But if Russia keeps its word, the benefits will be immediate. Grain prices could soften as more grain supplies become available to the world market. Overall this would be a good development for consumers, particularly those living in poor developing nations.
The possible softening of prices would add to an already positive picture of global grain prices, which have come off from the record levels seen in weeks following Russia’s invasion of Ukraine. For example, the United Nation’s Food and Agriculture Organisation Global Food Price Index, a measure of the monthly change in international prices of a basket of food commodities, was down 2% in June 2022 from the previous month. This was a third monthly decline.
Still, this is up 23% year on year, which means that the recent deal and possible resumption of trade would bring much-needed relief to the grains market.
Nevertheless, the deal’s impact on grain prices is likely to be marginal. Grain prices are unlikely to return to pre-war levels. A number of factors had been driving up agricultural prices in the two years prior to the conflict. These included drought in South America, East Africa, and Indonesia and rising demand for grains in China have weighed on global grains supplies.
Implications for Africa
The possible price decline and increase in supply as a result of the deal between Russia and Ukraine is likely to benefit all importing countries and consumers in the medium term.
This assumes that the deal holds – and that shipping lines will start taking orders and moving grains.
From an African perspective, the continent imports about US$80 billion worth of agricultural products a year, mainly wheat, palm oil and sunflower seed. The annual food import bill from the sub-Saharan Africa region is roughly US$40 billion per year.
Therefore, however marginal, a potential decline in the prices of these commodities would be positive for importing countries – and ultimately consumers.
Importantly, Africa imports US$4 billion of agricultural products from Russia, 90% of which is wheat and 6% is sunflower seed. The major importing countries are Egypt (50%), followed by Sudan, Nigeria, Tanzania, Algeria, Kenya, and South Africa.
Similarly, Africa imports US$2.9 billion worth of agricultural products from Ukraine. About 48% of this was wheat, 31% maize, and the rest included sunflower oil, barley, and soybeans.
A resumption of the trade activity would release about 22 million tonnes of grains out of Ukraine. It’s also safe to assume that grain orders from Russia to various markets in the world will also increase.
Africa’s biggest wheat importers would benefit the most from a resumption of shipments out of Ukraine’s ports. More generally, the softening in prices would benefit consumers across the world.
In addition, the World Food Programme will be able to source food for donations in struggling African regions, such as East Africa, where there is a bad drought, as well as parts of Asia.
One can’t miss the fact that Ukrainian farmers would benefit too. They have been worried that, without a resumption of trade, their crops would rot in silos. The deal signals hope for some relief and the prospect of creating space to store the new season crop.
Uncertainties
There’s still a great deal of uncertainty around the deal in the wake of the Russians following the missile attack on Odesa. Multinational discussions will be a crucial determinant of whether grain trade resumes from the Black Sea.
Measures will also need to be put in place to assure merchants of the safety of their cargo.
The grain price dynamics and possible benefits for importing countries will all depend on these uncertain developments. Still, any success in the exports of grains from Ukraine will benefit the African countries directly through the delivery of physical supplies – or indirectly through possible global price softening.
Follow me on Twitter (@WandileSihlobo). E-mail: wandile@agbiz.co.za
