by Wandile Sihlobo | Jul 4, 2020 | Agricultural Production
The high-frequency data on both domestic and global markets reinforced our view that grain prices could be under pressure this year and that, in turn, could lead to subdued food price inflation. In June 2020, the International Grains Council (IGC) lifted its estimate for 2020/21 global maize production from last monthly estimate to 1.2 billion tonnes, which is the largest harvest on record, and up 5% from the previous season. The downward swing in global maize prices saw a 21% y/y decline by 25 June 2020, with prices trading around US$162 per ton. Low global maize prices are likely going to remain the theme for the rest of the year.
The season is underway in the northern hemisphere, with the crop in most countries reportedly in good condition. Meanwhile, in the southern hemisphere, the 2020/21 production season will start around October 2020. The focus is still on the 2019/20 season, with the harvest process in full swing in all major southern hemisphere maize producing countries such as South Africa, Brazil and Argentina. What’s more, all these countries are forecast to obtain large harvests which will improve supplies, ahead of another expected good 2020/21 season starting in October, as previously noted. In the case of South Africa, the maize harvest is estimated at 15.5 million tonnes, which is the second-largest harvest on record and well above the annual domestic consumption of about 11 million tonnes. This not only means domestic maize prices could be under pressure in the coming months, but also that exports could also increase which is positive in boosting the agricultural trade balance.
In terms of wheat, the IGC lifted its 2020/21 production estimate further from 766 million tonnes last month to a new record of 768 million tonnes. This is underpinned by the anticipated largest harvest in Russia, Canada, Australia, Argentina, China and India, amongst others. While some European countries reported dryness last month, the weather conditions have now improved somewhat, specifically in the Black Sea region, which is conducive for the crop. As a consequence of the expected improvement in production, the 2020/21 global wheat stocks could increase by 6% y/y to 290 million tonnes. This means that global wheat production could be under pressure in the coming months. On 25 June 2020, the global wheat price was down 8% y/y, at US$212 per tonne (I’m using here the US Hard Red Winter wheat).
Wheat importing countries such as South Africa stand to benefit from such an optimistic outlook, more so, because South Africa’s 2020/21 season might lead to yet another small crop because of a potential reduction in area planted. Plantings are set to fall by 8% y/y to 495 000 hectares, mainly due to a decline in an area in the Free State. This means that South Africa will continue to have a large dependence on imports, about 50% of annual consumption.
In the case of rice, the 2020/21 global production was revised down marginally from 507 million tonnes last month to 505 million tonnes, which is still a record harvest. This is boosted by an expected large crop in India, Vietnam, Thailand, Indonesia and Bangladesh, amongst others. The anticipated large production could subsequently lead to a 2% y/y increase in global rice stocks to 180 million tonnes. Similar to the aforementioned commodities, rice prices could also ease in the coming month. Global rice prices harvest already come off higher levels observed in April where there were prospects of trade restrictions and a higher degree of uncertainty about the 2020/21 season harvest. South Africa, as a rice importing country, stands to benefit from this positive outlook. The IGC currently forecasts South Africa’s 2020 rice imports at 1.1 million tonnes, up by 10% y/y.
Soybean is another important crop for global food security, as a key input in animal feed. The IGC forecasts 2020/21 global soybeans production at a new peak of 364 million tonnes, which is up 8% y/y. This is supported by expected large harvests in the US, Argentina and Brazil, amongst others. This expected uptick in production could lead to a 3% y/y increase in stocks to 45 million tonnes. This means, the global soybeans prices could also be under pressure in the coming months, but this could be eased by a rapid push to rebuild the Chinese pig industry, which has been devastated by the African Swine Fever. We doubt that might be the case though. From a South African perspective, the country stands to benefit as it imports around half a million tonnes of soybean oilcake (meal). On average, 97% of soybean meal originated from Argentina over the past 10-years.
These positive global grain and oilseed prospects support our view that food price inflation could be subdued this year, hovering around 4% y/y (from an average of 3.1% y/y in 2019). The key upside risk within the food price inflation basket will mainly be meat, in part, because of base effects and a possible uptick in poultry prices following the recent increase in import tariffs. Overall, however, grains, and also fruit prices could offset the potential increases in inflation and keep the headline number at lower levels.
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by Wandile Sihlobo | Jun 18, 2020 | Agricultural Production
This essay first appeared on Fin24, June 15, 2020
The South African agriculture sector has the potential to be amongst the sectors that will drive economic growth and job creation during the post-COVID-19 recovery phrase. The path to realise this growth does not need new policies.
The South African government should rather, recast its vision of agricultural development using chapter six of the National Development Plan (NDP) as a point of departure. The NDP proposed a three-tier approach for agriculture and agro-processing to reach its fullest potential of creating one million jobs by 2030, namely the development of underutilized land especially in former homeland areas and failed land reform farms (approximately 400 thousand jobs), the expansion of export-led high growth areas (approx. 250 thousand jobs) and the investment on agro-processing with integrated up-and downstream linkages (approx. 350 thousand jobs). But what will need to be done differently post the pandemic is the realization that the broad vision should be followed up with detailed operational plans to guide the officials and various stakeholders at the local level.
The Department of Agriculture, Land Reform and Rural Development is currently drafting the sector Master Plan, along with private sector players. Such a plan should prioritize high-value job-creating sub-sectors, and not only focus on areas where agriculture sector is established at the commercial level, rather in new areas that still have untapped potential. Such areas involve the former homeland regions of South Africa, government land and also underperforming land reform farms. The Master Plan should map these areas, along with potential agricultural activities which could be promoted. Another crucial step will be to understand why agricultural development has lagged over the past two decades in such regions while in the commercial agriculture areas the output has more than doubled since 1994.
There are several reasons which explain this disparity in fortunes, the major ones being lower levels of investment in agriculture and lack of infrastructure. With respect to investment, poor land governance, both in the former homelands and some underutilized land reform farms, have been the key impediments. With regard to the lack of infrastructure, the problem has been compounded by poor service delivery in various local municipalities, especially those in former homelands towns of South Africa.
Given these structural challenges, the Master Plan will have to lucidly articulate ways and means to increase investment, as well as the improvement or capacitation of local governance. In the case of investment, agriculture is a long-term economic activity with relatively modest returns. Given this reality, the South African government will have to clarify its long-term view on land reform policy, not only for areas that are already farming commercially but also for the former homelands, where investment and commercial agriculture is set to make the most impact.
A renewed drive on the prioritization of joint venture models between the private sector and the government is now critical in bringing about development. The private sector will not only bring a “know-how” to the state but also a capital investment. South Africa already has examples of such development programme from which to build on. These include, but not limited to, Sernick Group in the beef sector in the Free State and the Humansdorp Co-op in the Eastern Cape, which focuses on field crops and horticulture. Both companies have partnered with government and communities for the developed black farming businesses.
The Master Plans should reflect on such examples of successful programmes and further innovate and develop institutions which effectively drive and sustain development. Moreover, this post-COVID-19 agriculture development plan should also encompass the agro-processing side as that will add to job creation and development in various rural towns. On this particular point, private sector investment should also be encouraged. Therefore, the agriculture and agro-processing Mast Plan should also reflect on strategic incentives for firms to expand agro-processing in various towns which were not predominantly agricultural. This might be in the form of tax incentives for various agricultural hubs which will be determined by the type of agricultural activity. In areas where weather conditions permit, the government should encourage the expansion of horticulture production as this subsector has higher labour absorption multipliers than other subsectors of agriculture, in addition to also having a higher value.
All these ideas aren’t new. There is no need to re-invent the wheel. Rather, the focus should be on understanding why there have been low levels of policy implementation over the past two decades. Addressing the stumbling blocks to development (i.e. investment and infrastructure) and focusing on effective implementation are the key ingredients of a successful post-COVID19 agricultural sector.
Given that the private sector’s role might have been less pronounced in the past, the tight fiscal position that the South African government is currently in demands a need for external funding to drive development and agriculture. This means for the better part, agricultural development in a post-COVID19 will require deeper and greater participation of the private sector. However, effective private sector participation demands that government provides greater levels of policy certainty, especially land reform. The government will have to take an investment friendlier approach, which is still anchored in development. The private-public-partnership approach is one such model, and there are a number of case studies that can be used to draw lessons.
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by Wandile Sihlobo | Jun 11, 2020 | Agricultural Production
This essay first appeared on Business Day, June 9, 2020
Some countries in the Southern and East Africa regions will again need large imports of maize in the 2020/2021 marketing year, which ends in April 2021. However, their saviours won’t be your typical major global producers such as Ukraine, the US or Brazil. Rather it is most likely to be SA and Zambia waiting in the wings.
In Southern Africa, the recent data released by Zimbabwe’s department of lands & agriculture placed its 2019/2020 maize harvest at 907,628 tonnes, up 17% from the previous season. Nevertheless, this is below Zimbabwe’s 10-year average maize production of 1.1-million tonnes and annual domestic consumption needs of between 1.9-million and 2-million tonnes. The 2019/2020 production season corresponds with the 2020/2021 marketing year, which means Zimbabwe will still need to import about 1-million tonnes of maize to fulfil domestic needs in the 2020/2021 marketing year.
Meanwhile, in East Africa, the International Grains Council forecasts Kenya’s 2019/2020 maize harvest at 3.4-million tonnes. This is roughly unchanged from the previous season, though there have been good rains over the past few weeks in the grain-producing regions of the country. With Kenya’s annual maize consumption at about 4.7-million tonnes, the aforementioned production estimate means the country could require imports of about 1.3-million tonnes in the 2020/2021 marketing year.
Unlike the other seasons, where African countries would look outside the continent for maize supplies in seasons of deficiency, SA and Zambia could emerge as key maize suppliers. Both countries are expecting their second-largest maize harvests on record for the 2019/2020 production season. In the case of SA, the expected harvest is 15.6-million tonnes, against domestic consumption of about 11-million tonnes. In the case of Zambia, the 2019/2020 maize harvest is estimated at 3.4-million tonnes against domestic maize consumption of 2.2-million tonnes.
This means SA could have at least 2.7-million tonnes of maize for export markets in the 2020/2021 season, which is 89% up year on year. Meanwhile, Zambia could have 1-million tonnes of maize exports, up from 100,000 tonnes the previous year. This would be the third year on record that Zambia would be able to export as much as 1-million tonnes of maize.
Other key maize producing and consuming countries in the Southern and East Africa regions, such as Malawi and Tanzania, will most likely have balanced supplies for their domestic markets and therefore limited room for exports. Hence our focus is on Kenya and Zimbabwe. Also, worth noting is that SA and Zambia are among the most prominent suppliers of maize to Zimbabwe and Kenya and featured among the top five maize suppliers to both countries in 2019, according to data from Trade Map.
Biosecurity policy is always an important consideration when it comes to African markets. To this end, SA has in the past experienced phytosanitary barriers because of its use of genetically modified maize seeds, which account for about 80% of its output. But this time around things will be different. Zimbabwe lifted its ban on genetically modified maize imports from January 31 as the country tried to improve local supplies after a poor harvest in the 2018/2019 season.
With the harvest of the 2019/2020 season also likely to be relatively low, this policy decision will help ease maize imports into Zimbabwe in the coming months. In the case of Kenya, however, there is still a ban on the importation of genetically modified maize. This might limit SA’s participation in Kenya, while Zambia, which produces non-genetically modified maize, might become a prominent player in the Kenyan market. SA’s importance is likely to be concentrated in the Zimbabwean market, but the bottom line is that SA and Zambia will be key sources of maize imports for the southern and East Africa regions within the 2020/2021 season.
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by Wandile Sihlobo | Jun 6, 2020 | Agricultural Trade
The ongoing Covid-19 crisis has brought uncertainty to global trade because of disruptions in supply chains and weakening demand. South Africa’s agricultural sector, which is export-oriented, is one of the sectors I feared would be disrupted by the pandemic. So far, however, there have been minimal disruptions as the global agricultural and food sector has generally stayed operational.
The coming months could be even better as many countries are gradually easing restrictions on economic activity and the movement of people in the wake of lockdowns. In the first quarter of the year, a period before coronavirus lockdowns were implemented across the globe, South Africa’s agricultural trade was vibrant. The country recorded an agricultural trade surplus of US$773 million, according to data from Trade Map. This is up by 16% year-on-year, with exports having increased at a higher rate than imports.
The exports were underpinned by grapes, maize, wine, wool, pears, apples, plums, lemons and macadamia nuts, amongst other agricultural products. These products could continue to underpin South Africa’s agricultural exports in the second quarter of 2020, which largely corresponds with global lockdowns, but with some decline in wine exports which had briefly been impacted by domestic lockdown regulations.
While the second-quarter data will only be out next month, the high-frequency data from various commodity organisations and agricultural institutions point to continued robust agricultural exports over the past couple of weeks.
Citrus will feature prominently in the second quarter data onward, as its exports for this year are expected to reach a record 143.3 million cartons for the Southern Africa region, mainly from South Africa. The export activity of this particular product has also continued with minimal interruptions during the lockdown period.
Similar to citrus, maize will also dominate South African exports this year with the volume set to increase by 89% y/y to 2.7 million tonnes because of higher domestic harvest. This is also at a time where we expect an increased maize needs in the Southern Africa region, which is a primary market for white maize.
The African continent and Europe continued to be the largest markets for South Africa’s agricultural exports, respectively accounting for 44% and 29% in value terms during the first quarter of 2020. Asia was the third-largest market, taking up 19% of South Africa’s agricultural exports in the first quarter of 2019. The balance of 8% value was spread across other regions of the world.
In terms of imports, the leading products included wheat, palm oil, rice, poultry meat, sunflower oil and sugar. For the year, rice, wheat and palm oil will dominate the agricultural import product list. South Africa’s 2020 rice imports could amount to 1.1 million tonnes, up by 10% from 2019. Meanwhile, South Africa’s 2019/20 wheat imports could increase by 29% y/y to 1.8 million tonnes.
In a nutshell, while the pandemic will result in a loss of incomes in various regions of the world, and in turn, decline in demand for goods; the agriculture and food sector is one of the few that might not be as hard hit. As such, for 2020, South Africa’s agricultural exports could increase to levels over US$10 billion from US$9.9 billion in 2019. The key catalysts this year will be the increase in grains and horticulture output and to some extent the weakening domestic currency.
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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 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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