by Wandile Sihlobo | Sep 17, 2020 | Daily Notes
At the outset of the Covid-19 lockdown, agriculture and the food sector were classified as essential services to avoid disrupting the nation’s food supply. But there were always concerns about whether the agricultural value chains and logistics could work efficiently when most other sectors of the economy had ground to a halt.
Industry leaders quickly met, and with the help of the Bureau for Food and Agricultural Policy (BFAP) created a weekly value chain tracker covering all aspects of the sector. This proved an essential tool as challenges emanating from it were elevated to the legislators to be tackled swiftly and ensure the continuity of the sector.
Through the BFAP Covid-19 tracker, we also began to pick up challenges at the ports that led to delays in shipment and had various interactions with industry players. The delays were a great concern as SA’s agricultural sector is export-orientated. As the 2019/2020 production season was bountiful, we had greater volumes of field crops and horticultural produce to export than in previous years.
Continuous co-operation between industry players and the government reduced delays at the ports as the lockdown progressed. Another worry was the logistical challenges at receiving ports and general uncertainty about global trade due to disruptions caused by the pandemic to global supply chains and the debilitating effect lockdowns had on demand.
Yet against all odds, SA has managed to maintain vibrant trade, as illustrated by the agricultural trade surplus, which expanded 32% year on year in the second quarter of the year to $1.1bn, according to data from Trade Map. Exports were little changed compared with the same period in 2019, at $2.4bn, while imports declined notably to $1.3bn. The decline in imports can be attributed to slower domestic demand and large domestic crops.
The growth in agricultural exports was underpinned by citrus, wine, maize, apples, sugar cane, pears, avocados, grapes and macadamia nuts. These products will continue to support SA’s agricultural exports in the remaining two quarters of 2020. Citrus features prominently throughout the year and exports for 2020 are expected to reach a record 142.6-million cartons, up 12% year on year according to data from the Citrus Growers Association of Southern Africa. Similarly, we at the Agricultural Business Chamber estimate SA’s maize exports will reach 2.7-million tonnes this year, up 89% year on year due to a bumper domestic harvest.
The African and Asian continents were the largest markets for SA’s agricultural exports in the second quarter of the year, respectively accounting for 33% and 29% in value terms. Europe was the third-largest market, taking up 28%, and the balance of 10% by value was spread across the rest of the world. The main imports were wheat, palm oil, rice, poultry meat, sunflower oil and sugar. For the rest of the year, rice, wheat and palm oil will likely continue to dominate the imported agricultural product list.
Overall, though the pandemic will result in lower incomes in most world regions due to a decline in demand for goods, the agricultural sector is one of the few that might not be as hard hit. SA’s agricultural exports could increase in 2020 from 2019’s $9.9bn to more than $10bn. The catalyst will be the increase in grains and horticultural output, and the weakening domestic currency.
This all builds from great work various stakeholders in the agriculture, agribusiness, logistics and government sectors have done to ensure the continuous functioning of the sector throughout the lockdown period.
Written for and first appeared on Business Day, September 15, 2020
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by Wandile Sihlobo | Sep 1, 2020 | Daily Notes
The reports of a potential La Niña event during the coming summer months presents mixed fortunes for Southern and East Africa’s agriculture. For parts of East Africa, the La Niña weather event typically correlates with below-average rainfall in the months between December and February, while Southern Africa experiences wetter conditions over the same period. What makes this concerning for East Africa is that this is a period just before the start of the summer grains planting, which occurs in February of each year. Therefore, a La Niña event would raise the risk of yet another poor agricultural harvest for countries in this region.
In the 2019/20 season, major grain-producing and consuming countries in East Africa, especially Kenya and Ethiopia, had mixed fortunes. The United States Department of Agriculture (USDA) estimated Kenya’s 2019/20 maize production at 3.4 million tonnes, down by 11% y/y on the back of unfavourable weather conditions at the start of the season. With Kenya’s annual maize consumption at about 4.8 million tonnes, it implies that the country could require imports of about 1.4 million tonnes within the 2020/21 marketing year, which is still underway. This was a second consecutive season of large maize imports, as the previous season’s imports amounted to 900 000 tonnes. The prospects of a La Niña event means that Kenya could remain a net importer of maize for a third consecutive year.
By comparison, however, Ethiopia might have a fairly good maize season in 2019/20, despite the constant threat of locust invasions. The country’s 2019/20 maize production is estimated at a record of 8.6 million tonnes, up by just 1% y/y, according to data from the USDA. This will be sufficient to cover domestic annual consumption needs. Other countries in the region such as Tanzania and Uganda are projected to have roughly balanced supplies for the year. The challenge, however, could be in the upcoming 2020/21 production season.
With Southern Africa experiencing inverse weather conditions to East Africa, as previously noted, forecasts appear somewhat positive. The Australian Bureau of Meteorology’s increased the probability of La Niña to 70% — roughly three times the normal likelihood – which could lead to increased moisture and potentially higher yields in the 2020/21 production season (see Exhibit 1).
Already in the 2019/20 production season, South Africa and Zambia had bumper harvests in major crops and various horticultural produce. These countries collectively have surpluses of over two million tonnes of maize, which are sufficient to offset maize shortfalls across both Southern and East African countries in the 2020/21 marketing year, primarily for Kenya and Zimbabwe.
Aside from the climatic conditions, there are two additional risk factors for East and Southern Africa’s agricultural sector. First, desert locust swarms still pose a serious threat in Ethiopia, Kenya, Somalia, South Sudan and Sudan, and could stall the agricultural recovery if not effectively controlled. At the end of August 2020, aerial control operations using biopesticides were underway across East Africa. The progress of these control operations over the coming months will be critical determinants of the success of the next season which begins in February 2021. The weather will also have an impact on the locust spread.
Second, the COVID-19 pandemic remains a major risk for agriculture in several countries, specifically the impact of containment measures amongst smallholder farmers and informal markets, which thrive on the movement of people. With an exception of South Africa, the official numbers of the COVID-19 infections remain relatively low in some African countries. It is unclear whether the infections will remain under control in the coming months or if there is going to be a second wave, as we have witnessed in various countries.
In the event of a renewed surge in infections, especially during the planting period, which is from October in Southern Africa and from February in East Africa, there could be disruptions to field activities. Disruptions could emanate from government regulations and containment measures, such as lockdowns and other strict social distancing measures.
With highly mechanized farm sectors are likely to be less affected by containment measures, South Africa appears to be the only country in Southern and Eastern Africa with significant parts of the agricultural economy with a level of mechanization that might not be disrupted by social distancing regulations. This implies that agricultural sectors across the region are at a higher risk. The same is true for informal agriculture and food markets, which are occupy a dominant share in various African countries.
Ultimately, climate and pandemic risks could weigh on agricultural output and farm profitability in the 2020/21 season, and in turn the livelihoods of those who are directly and indirectly dependent on the sector. That said, the climate and the prognosis of the pandemic in the coming months remain highly uncertain. Therefore, these risks warrant close monitoring in the weeks and months ahead.
Exhibit 1: La Niña prospects
Source: Australian Bureau of Meteorology
Note: My good friend, Dr Tinashe Kapuya, contributed to this Morning Note. Dr Kapuya is an agricultural economist and currently leads Value Chain analytics division at the Bureau for Food and Agricultural Policy (BFAP).
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by Wandile Sihlobo | Jul 16, 2020 | Agricultural Production
In the second week of July 2020, the Economic Transformation Committee of the African National Congress (ANC)[1] and Business for South Africa (B4SA)[2], released their respective strategy documents for the post-COVID-19 inclusive economy recovery for South Africa. Both the ANC and B4SA prioritized the agriculture sector, for its transformative potential and aligned their strategies with chapter six of the National Development Plan (NDP)[3], which reflects the commitment of both the government and private sector to the larger development agenda of South Africa.
Both plans highlight that poor infrastructure – both in the former homeland regions and in general logistics to move the produce to the ports and processing plants – is a constraint that needs urgent action; that improving agricultural finance is critical to unlocking the sector’s growth, particularly through the Land Bank; and that strengthening agriculture value chains is critical for fostering inclusive growth.
However, these ideas on how to strengthen the agriculture sector are not new. They first entered the policy arena in 2012.[4] But in the subsequent eight years, little was done on the implementation front. Covid-19 presents an opportunity to change the narrative by focusing on why implementation has lagged and how it can become more effective.
The lack of implementation of agricultural government policy and infrastructure-related constraints are down to three broad reasons. First, weak coordination and misalignment of functions and priorities between different government departments and different spheres of government. Second, a misallocation of the budget by the national and provincial governments. And finally, poor coordination between the government and private sector, which has led to a misalignment of transformation programs, incentives and in some cases, vision.
To solve these challenges, the task largely lies on the government through its various Sector Master Plans to continue working with the private sector and civil society to address the aforementioned challenges. Agricultural growth and job creation will be stimulated through the development of under-utilised land, especially in former homeland areas and underperforming land reform farms (about 400K jobs); the expansion of export-led high growth areas (250K jobs); and investment in agro-processing with integrated up-and downstream linkages (350K jobs).[5]
Additionally, the ANC’s strategy has highlighted the importance of collaboration, by noting that the state should mobilise development partners, including the World Bank, the African Development Bank, the private sector and impact funders to contribute towards developing a thriving rural economy centred on agriculture. This has become more important than ever. The 2015 Development Committee paper ‘Billions to Trillions: Transforming Development Finance,’ highlighted that the Sustainable Development Goals marked a shift from needing billions of dollars in official development assistance, to needing trillions. While the largest supply of development resources remained domestic public spending, the greatest area for expansion was unlocking the transformative potential of the private sector.[6]
There is evidence that partnerships between the private sector and government have, in some cases, piloted successful programmes to drive transformation. Some of these include projects of the Sernick Group, the Humansdorp Co-op and the Mohair Trust, amongst others.[7]
Three common themes run throughout these programmes: first, public-private-partnership structured finance, to help meet development goals; second, supporting market linkages to help agriculture play its part in creating a more inclusive South Africa and third, upgrading skills and technology through farmer training and the adoption of technology in production practices.
The task ahead, particularly the agriculture and agro-processing Master Plans, should focus on upscaling and replicating these strategic partnerships in various value chains across the country. As we have previously argued, incentives for agro-processing could be in a form of tax incentives for various agricultural hubs which will be determined by the type of agricultural activity. For agricultural production, the selection of the value chains to prioritise should follow the NDP’s view of higher growth and labour-intensive value chains, such as horticulture. In regions where this is not possible, livestock and field crops remain key subsectors for agriculture expansion.
Points of deviation
The one important point of deviation between the ANC and B4SA is land reform, which is central to actualizing agricultural expansion. To create more policy certainty for the private sector, B4SA advocated for strengthened property rights and the extension of secure tenure or tradable leases in government land to attract investment, and by extension, stimulate long-term growth. Meanwhile, the ANC, in its efforts to reduce inequality and promote equitable land distribution, advocated that the state should release land to individuals but is not clear on whether on tradable leases or another form of tenure rights will be afforded to the holders and occupiers of these land parcels. The ANC also advocated to acquire land for redistribution, the programme to expropriate land in line with the existing legal and constitutional prescripts should be continued. To further accelerate land redistribution consideration should also be given to the taxation of unused land. A position which was not shared by B4SA.
Concluding remarks
Overall, the ANC and B4SA agricultural development plans have more areas of alignment than a diversion. However, focusing on implementation, rather than just ideas, is crucial to creating inclusive growth and delivering a million jobs envisaged in the NDP. Given the current fiscal constraints, development in the sector will be private-sector driven as acknowledged by both the ANC and B4SA, but the private sector involvement will require clear policy guidance on land reform and more assurance on property rights. The release of the land the ANC argued for, will need to be on long-term tradable leases so that investment could flow, particularly in areas with better infrastructure.
Notes:
[1] ANC,” Reconstruction, Growth and Transformation: Building A New, Inclusive Economy”, June 9, 2020. Available: https://www.scribd.com/document/468680698/ETC-Document-FINAL-8-July-2020#from_embed
[2] B4SA, “A New Inclusive Economic Future for South Africa: Delivering an Accelerated Economic Recovery Strategy”, June 10, 2020. Available: https://www.businessforsa.org/wp-content/uploads/2020/07/B4SA-A-New-Inclusive-Economic-Future-for-South-Africa-Presentation-10-July-Final.pdf
[3] NDP, “An integrated and Inclusive Rural Economy”, August 15, 2020. Available: https://www.nationalplanningcommission.org.za/assets/Documents/NDP_Chapters/devplan_ch6_0.pdf
[4] These appeared in the NDP, chapter six in 2012.
[5] This is generally a view carried in Chapter six of the NDP. Available here: https://www.nationalplanningcommission.org.za/assets/Documents/NDP_Chapters/devplan_ch6_0.pdf
[6] For more information, here is a full document: http://pubdocs.worldbank.org/en/622841485963735448/DC2015-0002-E-FinancingforDevelopment.pdf
[7] I have previously narrated The Co-op work in this article: https://www.news24.com/fin24/opinion/wandile-sihlobo-a-sleeping-giant-the-eastern-cape-20191005
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by Wandile Sihlobo | Jun 4, 2020 | Agricultural Production
I’ve recently cautioned that dryness in parts of Europe and North America could lead to poor grain yields, which would mean that anticipated record harvests in 2020/21 might fail to materialise. But data released by the International Grains Council (IGC) last week proved the opposite of what I had expected. The IGC maintained its view that there are large grain supplies in the global market and that the 2020/21 season promises an even larger harvest (with the previous month’s high estimates being revised upwards).
To start with maize, for the 2020/21 season global production has been lifted marginally from the April 2020 estimate to an all-time high of 1.2 billion tonnes, this is up by 5% y/y. As noted in my previous write-up, this is underpinned by expected larger harvests in the US, Brazil, China and the EU. The planting of this crop has begun in the northern hemisphere and it has progressed with minimal interruptions, albeit with the additional coronavirus-related precautions on farms.
In the southern hemisphere, maize planting for the 2020/21 production season will only begin around October. The focus is currently on the 2019/20 crop which is currently being harvested. South Africa expects the second-largest maize harvest on record, of about 15.6 million tonnes. Therefore, any dynamics on the global maize market will have minimal implications on South Africa as the country remains a net exporter. The preliminary forecast for the 2020/21 production season (next season) released by the IGC suggests that South Africa’s maize production could fall to 14.0 million tonnes. While it is too early to put much weight on such a futuristic forecast by agricultural standards, it is worth noting that the figure is well above South Africa’s long-term average maize production of 12.5 million tonnes, so the country will remain a net exporter of maize.
In terms of wheat, the IGC lifted its forecast from April 2020 to a record 766 million tonnes. This is up 1% y/y and it is attributed to expected large production in Canada, Australia, Argentina, China, India and Kazakhstan, amongst others. This will mean that the 2020/21 global wheat stocks could increase by 6% y/y to 290 million tonnes. The wheat importing countries such as South Africa stand to benefit from such an outlook. Of course, assuming there will be no further restrictions on exports imposed by exporting countries as the data shows that there should not be global supply worries.
South Africa’s production of wheat for the 2020/21 production season is underway and the outlook is not encouraging. Plantings are set to fall by 8% y/y to 495 000 hectares, mainly in the Free State. This means that South Africa will continue to have a large dependence on imports, which account for about 50% of annual consumption.
In the case of rice, the IGC has maintained its production forecast at a record 507 million tonnes, up by 2% y/y. With the main Asian rice-producing regions still some time away from harvesting, the outlook for rice production in 2020/21 is tentative. Nevertheless, under the current production forecast, global rice stocks could expand by 3% y/y to 182 million tonnes. This would add bearish pressure on prices and, in turn, be beneficial to wheat importing countries like South Africa.
While the IGC maintained a positive outlook despite the reported incidence of dryness which is threatening wheat; I still think the grain markets are not completely out of the woods. The weather remains a major risk factor that requires constant monitoring in the global grain markets. Having said that, I still think there is no need for panic at this juncture nor for major grain-producing countries to re-impose restrictive trade policies that some had implemented at the start of the pandemic due to supply concerns. The global grain markets are awash with carryover stocks from the 2019/20 production season, and optimism about the 2020/21 production season will become much clearer in the coming weeks.
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by Wandile Sihlobo | May 26, 2020 | Africa Focus
Since the pandemic started several countries have adopted restrictive trade policy approaches such as export bans and export quotas. The justification for such policies was consumer-focused, as the countries needed to ensure domestic food security during this pandemic. Fortunately, when International Grains Council data showed ample global grain supplies in the 2019/20 and prospects for a larger crop in the 2020/21 production season; countries such as Russia, Cambodia and Vietnam, amongst others, reversed these protectionist policies. These countries had intended to restrict their wheat and rice trade.
Unfortunately, on the African continent, we continue to witness restrictive trade policy, although the policies are producer focused instead of consumer-focused as has been the case in other continents. Consider Namibia, where the country’s Agronomic Board recently announced that there will be a suspension of imports of maize and millet from 01 June 2020 until the domestic harvest has been absorbed by domestic millers. The Namibian authorities expect this ban to be in place at least until November 2020, which is a period they expect the domestic supplies to last. The rationale provided is that the policy will ensure that domestic farmers have a market for their produce, which will support them during this pandemic.
But I can’t stop to wonder if this policy is practical if one seriously considers Namibia’s maize market as an example. Maize is one of the major staple crops in the country, although largely dependent on imports. Over the past five seasons, Namibia’s maize production averaged 59 000 tonnes, according to data from the United States Department of Agriculture. This is a small fraction against their average annual maize consumption needs of 216 000 tonnes. The difference is usually imported, which is the volume the Namibian Agronomic Board wants to put a temporary stop on. The policy appears to be heavily producer focused at the expense of the consumers that could benefit from competitively priced imports.
With maize import needs of about 72% of Namibia’s annual maize consumption, placing a temporary ban on imports is not an informed policy option, especially during the pandemic where the objective of the governments should be to get the most affordable food to the citizens. Such affordable food, in the absence of trade barriers, could be a reality this year.
South Africa, which is a major maize supplier to Namibia is expecting its second-biggest maize harvest on record, about 15.2 million tonnes, according to data from the Crop Estimates Committee. This means as soon as the harvest process gains momentum around mid-June 2020, South Africa’s maize prices will likely fall to levels below R2 600 per tonne for both white and yellow maize, where they are currently hovering around. Such potential price declines would be beneficial to the Namibian consumers. The Agricultural Business Chamber of South Africa (Agbiz) currently estimates that South Africa could have about 2.7 million tonnes of maize for the export market, up by 90% y/y.
From a Namibian farmers’ perspective, the government is attempting to provide support through trade policy, but that will most likely yield very limited success. There is no certainty that the domestic maize harvest will be of acceptable quality to attract millers. Also, as best as one can tell from Namibia’s aforementioned maize production data, the country has not been self-sufficient in maize production for over the past two decades. Therefore, to boost local maize production and global competitiveness, the interventions would have to be through increased investment in higher-yielding seeds, irrigation, expansion of planting, and various more efficient farming techniques, rather than a temporary ban on imports, which the Namibian Agronomic Board is currently pursuing. These interventions are long-term and could be part of the post-COVID recovery strategy for Namibia’s agricultural sector. In the near-term, the focus should be to ensure that the citizens receive the most affordable and high-quality staple food possible. If this means imported, as is usually the case, that should be permitted.
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by Wandile Sihlobo | May 21, 2020 | Agricultural Trade
Essay by Wandile Sihlobo and Tinashe Kapuya[i]
As countries continue to implement “risk-adjusted” responses to COVID-19 and global leaders and analysts alike continue to assess the evolving implications of the pandemic on global markets. What makes COVID-19 unique is that it is a health shock that has fundamentally affected both the supply and demand side of the global economy.
In the food industry, government policy responses have mainly hinged on three major interventions since the pandemic started. These include (1) an initial intent to implement protectionist trade policies in major agricultural producing countries, followed by a pullback of direct trade restrictions (2) supply-side support for the agricultural industries in the form of historic budgetary support for small and large companies, and (3) demand-side support through a boost in household incomes through wage support.
First, in the early days of the pandemic, countries such as Russia, Kazakhstan, Cambodia and Vietnam, amongst others, introduced export quotas and bans on rice and wheat exports. These were attempts to ensure stable domestic staple food supplies amid the uncertainty about how long will the pandemic last. But these policies were soon abandoned after a month, as aforementioned countries signalled a return to the open market trading terms within the next two months.
One of the reasons that contributed to this change includes the exemption of agriculture and food supply chains from COVID-19 restrictions that had affected trading in other sectors of the economy. The International Grains Council has lifted its 2020/21 global grains harvest by 2% year-on-year to 2.2 billion tonnes. This is a welcome development for grain importing countries who feared food insecurity risk when the protectionist policies were announced. This includes South Africa and the African continent at large, which relies on rice and wheat imports from the global market.
Second, as initial worries about production abated, it became clear that the biggest challenge was not a lack of food in the market, but logistical disruptions. However, closures of meat processing plants in the US, Ireland, Canada and Brazil, amongst others due to the outbreaks of the virus in production facilities is now bringing renewed fears that the longer the pandemic continues, the more likely that parts of the food system will cease to function. The risks of meat shortages in the global market, as well as the negative ripple effects in other parts of the food system linked to the meat sector, implying that the food system remains extremely vulnerable. The emerging concerns of potential meat shortages – and spillovers into potentially other parts of the food system – are putting intense pressure on political leaders to respond more aggressively, as seen in the US, where President Trump ordered meat plants to re-open to avert an inevitable spin-off crisis.
This specific aggressive intervention is just part of a much broader set of unprecedented policy responses from global leaders, which have been underpinned by large unprecedented fiscal spending which surpasses those of the 2008 financial crises and the Great Depression. Richer countries have implemented financial relief programmes to support small and large businesses, including farmers – to cope with the deep negative impacts of the pandemic. In South Africa, the Department of Agriculture, Land Reform and Rural Development ring-fenced R1.2 billion for financially distressed small-scale farmers. This prioritizes the poultry sector, livestock and vegetables, amongst other agricultural commodities which will be selected on a case-by-case basis. The farmers within the Proactive Land Acquisition Strategy programme are also included in this package.
Third, governments tried to preserve incomes and livelihoods, and in turn, supported the demand side of the food sector. Rapid increases in already high levels of unemployment in most parts of the world translate to weak demand for food, particularly high-value products in the near-to-medium term. Income protection and support in countries such as the UK and the US is expected to mitigate the weakening demand, and somewhat keep demand at levels that ensure that the economy can bounce back quickly once the economies are fully opened up post-COVID-19.
Meanwhile, in the emerging markets, South Africa has been amongst countries that provided support through an increase in social grants, food parcels and food vouchers. While these are short term assistance measures, they somewhat help improve household demand for food products. These measures are short term and are being implemented with the hope that the pandemic will keep the economy closed for a maximum of three months.
But if the global economy does not bounce back sooner, under the pressure of a new wave of infection which leads to a much slower opening of the economy, then household income and purchasing patterns might be altered over the short to medium-term. In this case, the implications for the agricultural and food sector could be dire. We suspect that the demand for higher-value products will inevitably decline somewhat post-COVID-19, but the longevity of this decline could lead to a shift in the supply chains. Depending on the extent and duration of the impact, the shift could be permanent, due to irreparable damage to the supply chains – if critical businesses shut down permanently.
This is crucial for countries like South Africa whose agricultural sector is export-orientated, with rough 49% of the produce in value terms exported. South Africa’s high-value export products are mainly fruit, wine and beef. These are mainly destined to the EU and Asia market which accounted for nearly US$10 billion in 2019, according to data from Trade Map.
In a nutshell, the resilience of global agriculture will continue to be tested as the pandemic impacts both the supply-side and demand-side of the global economy. There is no telling how long the global food system – as currently configured – will continue to sustain the pressure from COVID-19. What is becoming increasingly clear is that, the longer the pandemic continues to impact on the supply and demand sides of the global food system, the more likely we are going to see structural shifts that will fundamentally reconfigure it as it adapts to the changing effects of the pandemic.
What is particularly worrying is the lack of support measures for businesses and households in developing countries. In resource-poor nations – especially those in the African continent, who are already under the weight of worsening debt levels – governments do not have the means to support private businesses and farming communities to the same degree as the US, the United Kingdom, China, and others. This means that the developing world is a part of the global food system and economy that remains extremely vulnerable to the pandemic.
There have been relatively lower numbers of COVID-19 cases in sub-Saharan Africa so far, perhaps due to a lack of testing capacity. But if what is happening in the global north is a harbinger of what is to occur in sub-Saharan Africa over the next couple months, then the largely informal food systems in the continent will likely come under extreme pressure, a scenario which will evoke a food insecurity catastrophe.
[i] Wandile Sihlobo is chief economist at the Agricultural Business Chamber of South Africa (Agbiz). Tinashe Kapuya (PhD) heads supply chain research at the Bureau for Food and Agricultural Policy (BFAP).
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by Wandile Sihlobo | May 17, 2020 | Agricultural Production
This essay first appeared on Business Day, May 12, 2020
No industry will escape the economic pain of the Covid-19 pandemic. The high-frequency economic data for industries that are classified as non-essential during the lockdown period already shows the negative effect. However, for essential industries such as agriculture and its value chains, the data points to a relatively better performance thus far, though the outlook remains uncertain.
This is specifically the case for the agricultural machinery industry. The latest data shows that SA’s tractor and combine harvester sales were down by a mild 4% and 13%, respectively, year on year in April, with 416 units and 20 units sold. By comparison, the automobile industry, which was already in full lockdown, saw new vehicle sales plummet 98.4% year on year. But I doubt the agricultural machinery performance can be sustained.
The main factor behind April’s tractor sales was that SA’s winter crop planting season began, specifically in the wheat, barley, canola and oat producing regions, namely the Western Cape, Northern Cape, Free State and Limpopo. In the case of combine harvester sales, a supporting factor is that SA is expecting its second-largest grain and oilseeds harvest on record in the 2019/2020 production season. The harvesting process for this crop recently started and it is set to gain momentum towards the end of the month.
The trend for agricultural machinery sales, particularly tractors, has actually been subdued since last year, when farmers’ finances were constrained because of drought-induced poor harvests.
Another point to highlight is that the lower tractor sales of the past 16 months were preceded by robust sales in 2018. That year SA’s total tractor and combine harvester sales amounted to 6,687 and 200 units, respectively, up 4% and 2% year on year. As a result, the rate of replacement in 2019 was expected to be lower, and 2020 sales were suppressed by the financial constraints many farmers are experiencing.
But agricultural machinery sales are likely to remain subdued in future, irrespective of the robust agricultural output expected for the 2019/2020 production year. The drag on the industry will emanate from weak exogenous macroeconomic fundamentals. First, the weaker domestic currency will lead to higher prices for imported agricultural machinery, which will reduce farmers’ ability to acquire tractors and combine harvesters. Second, the recent further downgrade of SA’s sovereign credit rating to the subinvestment grade could negatively influence the financing of agricultural equipment.
As I have argued in this column before, in ordinary times the Reserve Bank would have responded to the downgrade by raising interest rates in anticipation of possible exchange rate depreciation and associated inflation risks, which would have increased the cost of capital. However, now the situation is different. The pandemic has disrupted global supply chains, which has led to deteriorating economic conditions. Several central banks, including SA’s, have responded by reducing interest rates to ease financial conditions.
Whereas the implied prime rate after the recent policy rate cuts would suggest easier financing conditions, commercial banks are likely to be more risk-averse in the current unprecedented environment. We have already seen US banks tighten lending standards despite unheard of liquidity provision by the US Fed. Therefore, risk-adjusted lending rates to SA farmers may not be as accommodative as suggested by the 225-basis point cut in the repo policy rate so far in 2020.
The classification of agriculture and its value chain as essential services during the lockdown period has enabled the agricultural machinery industry to operate and record better-than-expected sales compared with other sectors of the economy. However, the weak macroeconomic conditions could weigh on the industry’s performance in the coming months. One silver lining to this cloud is that of higher rand commodity prices as a result of a weaker currency.
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