The poor performance of South Africa’s agricultural economy in the first quarter of this year has raised questions of whether the contraction was on the back of a decline in investment due to policy uncertainty in the sector.
Admittedly, there is a need for a clear framework of land reform and water rights in South Africa in order to boost investment and growth in agriculture. The debate about land expropriation without compensation has not created a conducive climate for increased investment, as illustrated by the Agbiz/IDC Agribusiness Confidence Index which remained in the contractionary territory after having eased to 46 points in the first quarter of 2019. This is below the neutral 50-point mark and implied that agribusinesses are downbeat about business conditions in South Africa.
• But broadly speaking, the despondency has thus far not translated to disinvestment in agriculture. One data point that we observe closely, although it is not a perfect indicator of measuring investment reaction to policy changes in the short term, is the Gross Fixed Capital Formation. This declined by 1% year-on-year to R17.1 billion in 2018, as shown in Figure 1. This decline is partly on the back of unfavourable weather conditions in some parts of the country, which somewhat constrained investment. Going forward, however, the lack of clarity on the agricultural policy path could weigh on investment. In the meantime, we look at Agbiz/IDC Agribusiness Confidence Index levels as a guide of the investment path for the year. The second quarter of 2019 results of this Index will be released on 11 June 2019. The Index results will provide a clear view of the sentiment in the agriculture and agribusiness sectors, which will not only be driven by policy dynamics but exogenous factors such as the weather.
• Given that investments in the agricultural sector have not declined notably in the recent past, the major factor that explains the poor performance of South Africa’s agricultural sector in the first quarter of this year is a poor harvest in some horticultural subsectors owing to unfavourable weather conditions. The potential lower harvest of summer grains and oilseeds in the coming months could lead to a contraction of South Africa’s agricultural economy in 2019.
Recent rainfall in the Western Cape bodes well for winter crops
• After weeks of dryness which prompted farmers in the Southern Cape and Overberg regions to pause planting, the Western Cape received good showers of over 20 millimetres last week. This improved soil moisture and enabled farmers to proceed with plantings in areas that had not completed planting. We now estimate that over 90% of the intended area for all winter crops in the province – wheat, barley and canola – has been planted. The plantings could be completed any day from now as the weather forecast for the week shows clear skies, which will allow farmers to proceed with fieldwork.
With that said, there will be a need for follow-up rainfall in the coming weeks across the province to ensure good germination in areas that have recently planted, and good growing conditions in areas that planted early in the season.
• The activity in other winter crop producing provinces of the country, which are mainly under irrigation, could gain momentum over the coming weeks. Broadly speaking, we think the crops could experience a generally good season as dams across the country are still at healthy levels, measured at over 60% full in the week of 03 June 2019. Overall, these developments reinforce our view that farmers might be able to achieve the intended area of 513 450 hectares of wheat, 118 500 hectares of barley, and 80 000 hectares of canola across South Africa.
• While we are generally optimistic about South Africa’s 2019/20 winter crops production season, we are concerned that the next couple of months could present relatively dry weather conditions which will not be conducive for crop development. We base this view on the South African Weather Service’s Seasonal Climate Watch report, which noted that “there is still no clear indication on rainfall expectations for the winter rainfall areas during mid- and late-winter (June-July-August; July-August-September).
Data previews
The agricultural data calendar for this week is relatively light. The United States Department of Agriculture (USDA) will release the US Crop Progress report in the evening today. This report should give us insights on crop and planting conditions of summer grains, specifically maize and soybeans. Tomorrow, the USDA will release the World Agricultural Supply and Demand Estimates report for June 2019, which will provide insight on global grains and oilseed supplies, and also factor in the recent wet weather conditions in the US production estimates. On Wednesday and Thursday, SAGIS will release South Africa’s weekly grains and oilseeds producer deliveries data, and also grain trade data for the week of 07 June 2019.
The South African Weather Service’s Seasonal Climate Watch report was released on 31 May 2019, as an update of the previous month’s report which had articulated a positive view of higher rainfall. There are now expectations of a drier season, which does not bode well for winter crops.
USDA’s World Agricultural Supply and Demand Estimates report
• We keep a close eye on global agricultural conditions as the Southern Africa region will need grains supplies in the 2019/20 marketing year (corresponds with 2018/19 production season) following the damages in the agriculture fields caused by the recent cyclone in Mozambique and Zimbabwe.
• As set out in our note on 03 June 2019, when the USDA released its preliminary estimates for the 2019/20 global grains and oilseeds production, the sentiment in the agricultural market was that there will be large food supplies. The agency estimated a 1% annual uptick in 2019/20 global maize production to 1.1 billion tonnes. The countries to be responsible for this improvement included the US, Argentina, Canada, Brazil and India. The 2019/20 global soybean production was estimated at 356 million tonnes, down by 2% from the previous season, but still higher than the average long-term production. The US, Brazil, Argentina and Paraguay were amongst the countries expected to produce a large share of the anticipated harvest. But this picture is likely to change in this month’s update owing to slow progress in plantings in most parts of the US on the back of wet weather conditions over the past couple of weeks.
• To illustrate this slow planting progress; consider the week of 02 June 2019, where the US farmers had planted 67% of the intended hectares for maize, compared to 96% in the corresponding period last year, or average five-year progress. As a result of wet weather conditions, the crop-growing conditions have also been poor. About 46% of the maize crop had emerged in the week of 02 June 2019, compared to 84% in the corresponding week last year or the five-year average.
• Soybeans have also been experiencing similar conditions, with only 39% of the intended area for 2019/20 hectares planted in the week of 02 June 2019, which is way behind last year’s pace of 86% in the same period, and five-year average progress of 76% in the same week. In the areas planted, the crop emergence has been slow, with only 19% of the crop out in the week of 02 June 2019, compared to 65% in the corresponding week in 2018, and a five-year average pace of 56%.
Weekly grain trade data
• South Africa’s weekly grain trade data is due for release on Thursday, 13 June 2019. This will mainly be maize and wheat. In terms of maize, this week’s data will show activity for the sixth week in the 2019/20 marketing year which started on 01 May 2019. The first five weeks’ exports amounted to 100 346 tonnes. We expect South Africa to remain a net exporter of maize in the 2019/20 marketing year, although the volume will most likely fall by half from the previous year to about 1.1 million tonnes. This is under the assumption that domestic maize production could amount to 10.9 million tonnes. At the same time, we expect imports of about 450 000 tonnes, all yellow maize, mainly for the coastal provinces of the country. This is up from an estimated 171 500 tonnes in the 2018/19 marketing year. In the week of 31 May 2019, the second batch of imports for the 2019/20 marketing year arrived from Argentina, placing total imports for this season at 42 495 tonnes.
• In terms of wheat, South Africa remains a net importer, although the recovery in the country’s 2018/19 domestic wheat production will lead to a decline in imports this season. South Africa’s 2018/19 wheat imports could fall by 36% from the previous season to about 1.4 million tonnes. So far, the country has imported about 53% of the seasonal forecast. The leading suppliers have been Germany, Russia, the United States and Latvia, amongst others.
