MORNING NOTE: SA agriculture to buck the trend in Q2, 2020 GDP statistics

MORNING NOTE: SA agriculture to buck the trend in Q2, 2020 GDP statistics

This is an important day in the South African economics calendar. At 11h30 this morning, Statistics South Africa will release GDP data for the second quarter of the year. Recent surveys of macro analysts’ forecasts of the second quarter GDP show that the South African economy could contract by around 47% q/q on a seasonally adjusted and annualised basis, largely reflecting the effects of lockdown restrictions put in place to slow the spread of the pandemic across various sectors.

The agricultural sector, however, will probably be the only shining star, in part because the sector was classified as essential and didn’t close down during the strict lockdown period, whose effect extended to the second quarter. Most importantly, because this is a boom year in agricultural output, across all subsectors (field crops, horticulture and livestock).

As I have recently highlighted in the previous blog entries, South Africa’s agriculture already had a solid start to the year with first-quarter gross value-added growing by 27.8% q/q on a seasonally adjusted and annualised basis. I noted then that the succeeding quarters would likely continue to show strong growth, a view I still maintain. But the second-quarter expansion could be somewhat milder than the first quarter, possibly at a range of 20-25% q/q on a seasonally-adjusted and annualised basis. The key drivers will remain somewhat the same as the previous quarter, which was an uptick in animal products, field crops and horticulture.

Within field crops, sugar was the main driver, while in horticulture, deciduous fruits were the primary drivers of the bounce in the first quarter. In the second quarter, however, summer grains and oilseeds will likely be the key drivers of growth as harvest processes and deliveries started gaining momentum during this quarter going into the third quarter, as the season was delayed due to dryness when the season began. Meanwhile, in the horticulture industry, citrus most likely dominated in the second quarter. I doubt that the animal products remained as robust in the second quarter as slaughtering activity softened when the country went into strict lockdown at the end of March. If anything, the animal products activity will probably recover in the third quarter, which is when restaurants started opening more widely.

With that being said, I am still quite optimistic about the performance of this sector in 2020, maintaining our forecast, at Agbiz, for the year to average at about 10% y/y (compared to a contraction of 6.9% y/y in 2019). Other institutions such as the Bureau for Food and Agricultural Policy (BFAP) are more optimistic than us, placing their agricultural growth forecast for the year at 13% y/y. This optimism is based on the bumper maize crop of 15.5 million tonnes (the second largest in history), surging export prices of major fruits (further supported by the weak exchange rate) and strong overall sales of agricultural produce in the first four months of the COVID-19 pandemic. This is, of course, with the exceptions of the wine and tobacco industries, where domestic trade has been restricted through various stages of the lockdown, and only permitted in August 2020.

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MORNING NOTE: SA agriculture to buck the trend in Q2, 2020 GDP statistics

South Africa’s farm economy to recover in 2020

South Africa’s farming economy was not in good shape in 2019. This is clear from the agricultural GDP data released this morning by Statistics South Africa. The data show a 6.9% year-on-year contraction for 2019, which is a second consecutive year of contraction in South Africa’s farm economy. While worse than our initial expectations of a 4.0% y/y contraction, this is unsurprising. The output of various crops and horticulture produce declined notably in 2019 because of the drought, while the livestock was negatively affected by the foot-and-mouth disease outbreak.

This year, however, could be different. The improved weather conditions have led to an increase in summer crops area plantings and prospects of higher yields. The data recently released by the Crop Estimates Committee showed that South Africa’s 2019/20 summer crops production could increase by 26% y/y to 16.8 million tonnes, which could be the second-largest summer crops harvest on record after the 2016/17 crop. What’s more, the South African wine grapes production is also set to increase in 2020. There is also general optimism about 2020 harvest in the fruit industry, which supports our view of possible improvement in farming economy this year.

Against this backdrop, we are convinced that South Africa’s farm economy could recover by at least 5% y/y in 2020. The two factors that we are concern about and monitoring are (1) the spreading coronavirus and (2) the foot and mouth disease in the domestic market. The coronavirus could negatively impact the global demand for agriculture products, and subsequently prices. Whereas, the foot-and-mouth disease has led to a ban on South Africa’s livestock products exports since the end of 2019.

Moreover, the Agbiz/IDC agribusiness confidence, which in the past proved to be a good indicator of the growth path of the South African agricultural economy sector has been rather wobbly in the most recent quarters because of policy uncertainty. It remains in the contractionary territory, having eased at 44 points in the last quarter of 2019 (see Exhibit 1 below). This is below the neutral 50-point mark and implied that agribusinesses are downbeat about business conditions in South Africa.

Exhibit 1: SA farming economy
Source: Stats SA, Agbiz Research


Overall, we think the expected improvement in summer crop and horticulture harvest could add some optimism in the sector in the coming quarters. With that said, developments on the agricultural policy environment, depending on how they are perceived by agribusinesses, could always influence the confidence levels much faster than one can observe changes in farm economy which is guided by the seasonal output.

Written for Agbiz.

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South Africa’s agricultural economy not in good shape, for now

South Africa’s agricultural economy not in good shape, for now

Although South Africa’s economy has recovered from the previous quarter’s poor economic performance with a 3.1% quarter-on-quarter seasonally adjusted growth rate (q/q saar), agriculture did not contribute to the improvement. After a strong contraction (16.8%) during the first quarter of 2019, we[1] were optimistic that things would turn around for South African agriculture. We hoped that base effects coupled with improved horticultural production would trigger a recovery for the sector. However, we were wrong.

Data shows that the sector is in recession – having contracted a further 4.2% q/q/ saar in the second quarter of 2019, largely owing to a poor field crop harvest in the summer rainfall areas as a result of droughts earlier this year.

While this surprised us, it is important to note that these are seasonally adjusted numbers, which means that the increased horticulture activity on the ground may not be reflected in a similar size in the data. The data is weighed down by major summer crops, which performed poorly during the 2018/19 production season – maize, soybeans and sunflower seed production are down by 12% y/y, 21% y/y and 24% y/y, to 11.02 million tonnes, 1.17 million tonnes and 680 940 tonnes, respectively.

Given both the data and our observations of broader agricultural activity, we believe that South Africa’s agricultural sector will underperform in 2019.  We predict that the sector will contract by approximately 2% y/y this year, because of generally poor summer grains and oilseed harvest in the 2018/19 production season.

Sentiments across the South African farming environment is relatively negative. The Agbiz/IDC Agribusiness Confidence Index, which has historically proved to be a good indicator of the growth path of the South African agricultural economy, has been rather unstable in the most recent quarters, but remains in the contractionary territory, having eased 44 points in the second quarter of 2019. This is below the neutral 50-point mark and reflects the negative perceptions held by agribusinesses about South Africa’s business climate.

Given that the sector’s poor performance is largely due to unfavourable weather conditions, prospects of higher-than-average rainfall in the 2019/20 summer season provides hope that the blip will be short-lived and that gains are just around the corner – in 2020.

Read my Business Day column tomorrow, 04 September 2019, I provide further evidence for our optimistic view of South Africa’s agricultural performance in 2020.

[1] By using the word “we” — I’m referring to our inhouse view at the Agricultural Business Chamber of South Africa (Agbiz).

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