Is the coronavirus outbreak a risk for South Africa’s agriculture?

Is the coronavirus outbreak a risk for South Africa’s agriculture?

Written for and first published in Business Day on 03 March 2020

There is a strong sense of unease in the world right now. The coronavirus outbreak in China is fast spreading across Asia and other regions, and the health implications present risks for global value chains.

From a macroeconomic perspective, we have already seen organisations such as the Organisation of Economic Co-operation and Development slashing growth forecasts for the year. Some of the economic data released in China this week was quite weak.

In my own world of the agricultural economy, I have started to pick up concerns from various stakeholders who are worried about the potential effect of the coronavirus on their fortunes. No-one can blame them for that. With SA’s agriculture being export-orientated and exports totalling about $10bn in 2019, the potential for disruptions to global value chains is significant. This is especially true with respect to Asia, the epicentre of the outbreak and also an area that accounts for a quarter of SA’s agriculture exports. The commodities most exposed to the Asian market are wool, fruit, grains, beverages, vegetables and red meat.

There are two channels to consider when thinking about the potential implication of the virus for the SA agriculture sector. First, the supply side of the aforementioned products SA typically exports to Asia is in good shape, promising to be higher than that of 2019 because of improved domestic weather conditions. SA’s 2019/2020 summer grains production could increase by 26% year on year to about 16.8-million tonnes, according to the latest figures from the Crop Estimates Committee.

Moreover, the production of wine grapes and the fruit subsector in general is set to increase in 2020. All of this should ensure there will be a good supply of products to send to the global market. So, any decline in exports in the near term would be a function of softening demand rather than supply issues.

Second, with China having temporarily closed some of its manufacturing hubs and placed restrictions on human movements as a means of containing the spread of the virus, demand for production inputs will be affected negatively. What’s more, the longer Chinese manufacturers remain closed, the higher the likelihood that some might stop paying their employees, which would also have implications for consumer demand. This presents a risk for SA’s agricultural exports to Asia, which is worth about $2.5bn a year.

Moreover, we observed a significant decline in global commodity prices in the last week of February 2020, in line with what happened in global stock markets. The underpinning reason for this was the fact that Asia is an important agriculture market, not only to SA but to the world. To be specific, the top 15 importers account for nearly 60% of world agricultural imports, of which a quarter goes to Asia (mainly to China, Japan, South Korea and Hong Kong), according to data from Trade Map. That is a big enough share of the market for agricultural goods to account for declining agricultural commodity prices.

The potential decline in Asia’s agriculture demand and falling prices could see the value of SA’s agriculture exports to Asia also declining. Such a scenario would place additional financial pressure on SA farmers, who had hoped this would be a year of recovery after being strained by the drought in previous seasons. While the spectre of what could unfold looks gloomy, at least we have thus far not yet observed disruption to the movement of products to Asia. However, this risk could materialise if the spread of the coronavirus is not contained soon. As things stand, the coronavirus remains a real threat to SA agriculture.


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

South Africa’s farm economy to recover in 2020

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.


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

Good year for SA grain sector

Good year for SA grain sector

This promises to be a good year for South Africa’s grain sector, at least from a production front. The data released yesterday by the Crop Estimates Committee (CEC) show that South Africa’s 2019/20 summer grains production could increase by 26% y/y to 16.8 million tonnes. While this is still the first estimate for this season, with eight more to follow, if it materialises, this could be the second-largest summer grains harvest on record after the 2016/17 crop. The major gains are on maize, soybeans and sunflower seed.

The 2019/20 maize, soybeans and sunflower seed harvest are forecast at 14.6 million tonnes, 1.2 million tonnes, and 699 130 million tonnes. This is respectively up by 29%, 6% and 3% from the previous season. The increase is mainly supported by an expansion in area planted in the case of maize and expected improvements in yields on the back of favourable weather conditions.

The maize production estimate is well above ours of 13.7 million tonnes, while the soybean and sunflower seed estimates are below ours of 1.5 million tonnes and 761 070 tonnes. The variation can largely be explained by adjustments in area plantings, which for maize was revised up and soybean and sunflower plantings slashed from the preliminary estimates released on the 29th of January 2020.

The weather conditions have generally been favourable over the past few weeks with a fair amount of rainfall which improved soil moisture across many regions of the country. As a result, the crop is in good condition, and thus, we are convinced that the CEC estimates are plausible.

In the case of maize, the data essentially means that South Africa would remain a net exporter in the 2020/21 marketing year which starts in May 2020 (this corresponds with 2019/20 production season). This is at a time where Southern African maize import needs could outpace the previous year, with Zimbabwe in need of maize supplies to an extent that the country lifted a ban on the importation of genetically modified maize, which eases access for South African maize exporters.

What’s more, a maize harvest of 14.6 million tonnes would enable South Africa to export maize beyond the continent to other typical markets such as Japan, Taiwan, Vietnam and South Korea who are not prominent in the current marketing year. Unlike maize, however, South Africa could remain a net importer of soybean products, specifically oil cake, and a net importer of sunflower oil, irrespective of the potential improvement in the harvest. This is caused by the growing domestic demand for these particular oilseed products.

Written for Agbiz.


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

Delayed rains, but SA’s 2019/20 summer crop looks promising

Delayed rains, but SA’s 2019/20 summer crop looks promising

South Africa’s Crop Estimates Committee releases its first estimate of the country’s 2019/20 summer crop harvest today. Market expectations are largely positive because of two factors. First, the area planted for major summer crops such as maize, soybeans and sunflower seeds is up 10% y/y, 4% y/y and 7% y/y, respectively. Second, although summer rains were delayed which subsequently led to a share of plantings occurring outside the optimal window in some regions of the country, weather conditions have improved notably since the beginning of January 2020. And as a result, the crop is in good shape in most regions of the country with anticipation of higher yields.

On the 27th of January 2020, we (Agricultural Business Chamber of South Africa (Agbiz)) tentatively placed our forecast for South Africa’s 2019/20 maize harvest at 12.50 million tonnes. We have now lifted this to 13.72 million tonnes, which is 22% higher than the 2018/19 season’s harvest. This is underpinned by an upward revision of yield estimate to 5.40 tonnes per hectare, from our earlier assumption of 5.00 tonnes per hectare, in an area of 2.54 million hectares.

If such a harvest materialises, South Africa would remain a net exporter of maize in the 2020/21 marketing year which starts in May 2020 (this corresponds with 2019/20 production season). This is at a time where Southern African maize import needs could outpace the previous year, with Zimbabwe in need of maize supplies to an extent that the country lifted a ban on importation of genetically modified maize, which eases access for South African maize exporters.

Other typical maize export markets for South Africa outside the African continent, include Japan, Taiwan, Vietnam and South Korea. While these particular countries have not featured prominently in the 2019/20 marketing year exports, which were largely dominated by African countries, we anticipate that they could return in the 2020/21 marketing year. We think the potential increased supplies could lead to possibly attractive or competitive prices in the coming months, which should be a catalyst for increased exports to countries outside the continent.

Moreover, we estimate that South Africa’s soybeans and sunflower seed 2019/20 season harvest could lift by 26% and 12% from the previous season, to 1.48 million tonnes and 761 070 tonnes, respectively. This too is underpinned by an expansion in area plantings and anticipation of higher yields. Our soybean yield estimate is 1.95 tonnes per hectare, with sunflower seed yield estimate at 1.38 tonnes per hectare. All these are within the historic range of seasons of good rainfall. Unlike maize, however, South Africa could remain a net importer of soybean products, specifically oil cake, and a net importer of sunflower oil, irrespective of the potential improvement in the harvest. This is largely caused by the growing domestic demand for these particular oilseed products.

Overall, an improvement in the summer crop harvest bodes well with South Africa’s food price inflation for the year. As a result of our optimism on 2019/20 summer crop yields, food price inflation could remain benign in 2020, hovering around 4% y/y in our view.


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

This is how President Cyril Ramaphosa’s speech affects agriculture

This is how President Cyril Ramaphosa’s speech affects agriculture

Written for and first published on Business Day on 18 February 2020

CAPE TOWN – My agricultural take on President Ramaphosa’s State of the Nation Address (SONA) can be segmented into three areas. Firstly, the President reaffirmed the government’s commitment to various sectoral master plans that are currently being developed, with specific mention of the textile and clothing, sugar and poultry master plans. These are industries that have been under pressure in the recent past, in part, because of rising input costs and stiff competition from imported products. Trade policy has a role in stabilising these industries. Importantly, the master plans highlight that leveraging public-private partnerships is key to ensuring that plans are not only drafted on paper and shelved, but there is a commitment to execution.

Secondly, the President noted that the government will implement key recommendations from the Presidential Advisory Panel on Land Reform and Agriculture to accelerate land redistribution, expand agricultural production and transform the industry. There has been a lot of talk about this report, which I won’t delve into in this particular column. Worth noting is that not all proposals made in this particular report will require legislative amendments – a long process that requires wide-ranging consultations.

The following nine recommendations contained in the report do not require legislative amendments, but merely political will and stakeholder commitment to initiate: (1) create innovative financing mechanisms, (2) create a ‘land register’ to house donations, (3) identify and release state land, (4) conduct a land audit, (5) subdivide land already acquired by the state, (6) providing tenure grants for certain occupiers, (7) root out corruption in the Department of Agriculture, Land Reform and Rural Development, (8) reallocate water rights in conjunction with land allocation, and (9) finalise outstanding restitution and labour tenant claims.

Be that as it may, the ongoing debate about Section 25 of the Constitution, is the most contentious issue in South Africa’s land reform and agricultural policy circles at the moment. I hope that an unequivocal policy direction will emerge in the coming months when the Parliamentary Ad Hoc Committee on Section 25 finalises its work and reports to the National Assembly. Whatever decisions will be taken, lawmakers should be cognizant of the fact that South Africa’s agricultural sector is capital intensive. Hence, to achieve growth and prosperity, the policies the country adopts should attract capital investment.

Thirdly, and perhaps most interestingly, the president noted that “this year we will open up and regulate the commercial use of hemp products. Thereby providing opportunities for small-scale farmers, formulating policy on the use of cannabis products for medicinal purposes and building this industry in line with global trends. The regulatory steps will soon be announced by the relevant ministers.”

South Africa is not the only African country that is taking interest in cannabis. African countries have in the recent past reformed their cannabis regulations – moving away from it being a prohibited drug to a source of income as an exportable commodity. This seems to be particularly the case for South Africa, although it is still unclear how much revenue the country can derive from this plant.

Such countries include Lesotho, which was the first African country to issue licences for the cultivation of medical cannabis in 2017. Zimbabwe issued its first cannabis licence in March 2019. Zambia is the latest country to legalise medical cannabis, announcing in December 2019 that medical cannabis for export would be permitted in the country. Eswatini have also put in place a draft bill regulating cannabis. Uganda has also taken positive steps towards legalisation of medical cannabis, looking at formalising the process in 2020. Malawi is also making strides in putting in place its own licensing regime.

These agricultural focal areas of the SONA present relevant policy areas that could expand South Africa’s agricultural fortunes, hence, they should resonate well with agricultural and agribusiness stakeholders, as well as venture capitalists. Going forward, swiftly moving formulation and implementation of the necessary policies will be critical.


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

GM maize: less work for her, and more maize for him

GM maize: less work for her, and more maize for him

One of the research papers I read this weekend was by agriculture economists, Marnus Gouse, Debdatta Sengupta, Patricia Zambrano, and José Falck Zepeda published in World Development, a monthly peer-reviewed academic journal, in July 2016. It assesses whether men and women farmers derive different benefits from using genetically modified (GM) maize in South Africa.

While GM crops were introduced in 1996 in the United States, with several countries following through in the years after, in South Africa, the first commercial GM maize was planted in 200/01. Since then, the maize area plantings in the country is over 85%.

There have been several writings about the contributions of GM maize in improving yields and also other non-yields benefits, as well as cost-savings from herbicides and pesticides which I highlighted in a Business Day today (see here). But there hasn’t been much research on the gender question that Gouse et al. (2016) focuses on. The study draws from data collected from smallholder farmers in the KwaZulu Natal province of South Africa. It trenches over a period of eight seasons.

In brief, the study found that men preferred GM maize because of yield benefit (higher yields). Meanwhile, women farmers had a different motivation. They planted GM maize because of the quality and taste of maize (this surprised me), as well as because of it being labour-saving (women farmers save in weeding time).

Overall, what this research reveals is that men and women farmers in South Africa derive differentiated benefits from the cultivation of GM maize, at least from a perception point of view. This can be summed up by; growing GM maize means less work for her and more maize for him.

Download Gouse et al. (2016) paper here.


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

The good of GM seeds

The good of GM seeds

Society still argues about the use of genetically modified (GM) crops. But two lessons are beyond the debate. Firstly, the GM crops have contributed to an increase in yields in countries that have adopted the seeds, notably the United States, Brazil and Argentina, amongst others. This is evidenced in a working paper by agricultural economists, Jayson Lusk, Jesse Tack and Nathan Hendricks, published in the National Bureau of Economic Research in June 2017 (see here).

But there is also compelling evidence here at home. South Africa is the only country in the African continent that has thus far adopted the use of GM seeds. Thus, it is not surprising that South Africa produced 16% of sub-Saharan maize in the 2018/19 production season while utilising a relatively small area of 2.3 million hectares. In contrast, countries such as Nigeria planted 6.5 million hectares in the same production season but only harvested 11.0 million tonnes of maize, which equates to 15% of the sub-Saharan region’s maize output.

GM maize crops were introduced in South Africa in the 2001/02 season. Before its introduction, average maize yields were around 2.4 tonnes per hectare, as illustrated in Exhibit 1 below. These have since increased to an average of 5.2 tonnes per hectare over the past five seasons. Meanwhile, the sub-Saharan Africa region’s maize yields remain negligible, averaging at levels below 2.0 tonnes per hectare.

Secondly, the non-yield benefits come in the form of labour savings, reduced insecticide use, and improved weed and pest control which has facilitated the ability to adopt low and no-till production methods and utilise higher planting densities (Lusk et al., 2017). Another study that corroborates this observation is by agricultural economist, Graham Brookes, published in a Journal of Biotechnology in Agriculture and the Food Chain. Brookes assesses the economic and environmental impacts of using insect-resistant (GM) maize in Spain and Portugal over a period of 21 years (see here). The study found that the use of GM maize seeds resulted in reduced insecticide spraying, as a result, decreased the environmental impact associated with herbicide and insecticide use on these crops.

This ultimately is a contribution towards improving food security. While society might continue to hold different views about the use of biotechnology, one thing we should not ignore is the aforementioned benefits and the improvement thereafter to those in need of affordable food supply. This is the good of GM seeds.

Exhibit 1: South Africa’s maize yields have increased notably over time
Source: SAGIS, Agbiz Research


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

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