The news cycle has been mainly centred around Brexit this past week as talks between the United Kingdom and European Union culminated in a Brexit deal.
Heading into the weekend, the House of Commons was expected to vote on the Brexit deal from Prime Minister Boris Johnson. However, the House of Commons voted to seek an extension of the 31 October 2019 deadline for Brexit. The extension is meant to effectively prevent a possible no-deal situation by the end of this month in the event that there is no agreement on Prime Minister Johnson’s deal. The deal is now expected to be discussed early this week in the House of Commons, while the request for extension is being considered by the European Union (EU) Parliament.
As these developments are unfolding without a clear and predictable outcome, the question is what are the implications of various possible outcomes for South Africa and the region’s agriculture sector. An important recent development has been the conclusion of an economic partnership agreement (EPA) between the United Kingdom (UK), the Southern African Customs Union (SACU) and Mozambique in September 2019 (i.e. SACU-Mozambique-UK Economic Partnership Agreement). The purpose of this agreement is to ensure the continuity of the uninterrupted flow of goods and services between the two territories. In essence, the agreement maintains the same arrangements that exist with the UK while still being part of the EU.
While a lot has been written about Brexit over the past three years, there are two points which have either been overlooked in the discussions in as far as agriculture is concerned, in light of the SACU-Mozambique-UK EPA.
The first is the provisions that the SACU-Mozambique-UK EPA offers, more specifically, in relation to safeguards, as well as import and export quotas of specific products. For South Africa, the benefits of this trade arrangement will be new quotas on agricultural products such as wine, which will add to the ones that already exist with the EU. This is important because the UK is a major market for South African wine.
More generally, the UK is the second biggest destination for South Africa’s agricultural products in the EU, and the world at large. The UK accounts for 8% of the value of South Africa’s agricultural exports to the world, the latter was at US$10.6 billion in 2018, according to Trade Map data.
The second point is that, for citrus -- a leading agricultural export for South Africa – the sub-sector will expectedly no longer be bound by costly and unnecessary emergency measures for citrus black spot (CBS). This is mainly because the UK carries limited risk as there are no commercial orchards in the country. Therefore, South Africa’s market access in the UK will be enhanced. Within the EU, Spain --the world’s leading exporter of citrus -- had consistently lobbied for restrictions of South Africa’s citrus due to CBS, against scientific evidence which suggested the contrary. This effectively put South Africa’s citrus industry at a competitive disadvantage, even in low-risk CBS markets such as the UK, which have no orchards.
Regardless of the outcome of the Brexit negotiation process, South Africa’s agricultural sector is now in a far much better space due to the aforementioned SACU-Mozambique-UK Economic Partnership Agreement, which ensures continuity in trade. Credit to South Africa’s Department of Trade, Industry and Competition for having the foresight and the urgency to negotiate the agreement, and conclude it before the Brexit deadline.
Looking ahead, it will be important to now consider how to strengthen regional agricultural value chains between the EU, UK, SACU, and Mozambique. The ongoing deliberations around Brexit, as well as future trade relations between the UK and the EU, will remain an important part of the architecture of global agricultural value chains. For instance, the continuity of South Africa’s bulk wine exports to the EU, which are further packaged within the EU territory for re-exports to the UK will largely depend on the outcome of the Brexit talks. Hence, Brexit will still have implications for South Africa’s agricultural sector, despite the conclusion of the SACU-Mozambique-UK Economic Partnership Agreement.
Erratic weather conditions remain a key challenge
The unpredictable weather conditions have become a major risk for Southern Africa’s agricultural sector. Coming out of the 2018/19 production season which was characterised by widespread drought and floods in the case of Zimbabwe, Malawi, and Mozambique, the season ahead looks as unpredictable as the last. A few months back, there were prospects of the timely rains for the 2019/20 production season across Southern Africa, but so far, most regions have remained dry and delayed the start of plantings.
The South African Weather Service has recently indicated prospects of above-normal rainfall in the central and eastern parts of the country between November 2019 and January 2020. This would bring much-needed relief and accelerate plantings, which are set to begin this month in some areas, especially in the case of maize (Figure 1 in the attached file). It is not clear if this will also extend to the broader Southern African region, which means there is still a greater level of uncertainty about the upcoming summer crop production season and the health of agricultural sector at large.
Even if it rains across the region, there is uncertainty about the distribution and variation of rains. To cope with this unpredictability, there is the need for shorter-season seed varieties. While this might be a feasible solution in South Africa, the broader Southern Africa faces numerous constraints in its seed regulation. This would affect accessibility to technologies that promise to slightly alleviate the impact of erratic weather conditions on crops.
SA diesel price to decline marginally next month
As the planting season is yet to start in some parts of South Africa, fuel is increasingly an important factor to monitor as it is largely utilised in this period. The recent data from the Central Energy Fund points to a possible 7 cents per litre decline in the price of diesel on 06 November 2019 (Figure 2 in the attached file). This is mainly driven by the cooling off of the Brent Crude price after a sudden uptick following the attack of the Saudi Arabian oilfields a few weeks back.
While this possible decline in the diesel price is marginal, it will add to already declining fertiliser prices. South Africa’s fertiliser prices were down by 9% y/y on average in August 2019, according to data from Grain SA. The herbicides and insecticides prices are also down compared to levels seen in August 2018.
Much of the fertiliser imported by South Africa is utilised in maize production, which accounts for 41% of total fertiliser consumption in the country, the second-largest consumer being sugar cane at 18%. Fertiliser constitutes about 35% of grain farmers’ input costs and a notable share in other agricultural commodities and crops. Meanwhile, fuel accounts for roughly 11% of grain farmers’ input costs.
From a data front
On the data calendar this week, we start off on Monday, with the US Department of Agriculture’s US crop conditions data, which should give us a sense of the US crop-growing conditions, and thereafter the potential size of the harvest.
Thereafter on Wednesday, the South African Grain Information Service (SAGIS) will release the grain producer deliveries data for the week of 18 October 2019. This covers both summer and winter crops. What we will particularly be interested in, however, are data for winter crops. This provides an indication of the progress in harvest activity which recently started in parts of the Western Cape wheat-producing regions. In the week of 11 October 2019, only 12 927 tonnes of the expected 1.8 million tonnes of wheat in the 2019/20 season had been delivered to commercial silos.
Also, on Wednesday, Stats SA will release the Consumer Price Index (CPI) data for September 2019. In August 2019, South Africa’s food price inflation accelerated to 3.8% y/y from 3.0% y/y in the previous month. While food product prices were mixed within the basket, the uptick in headline food price inflation was primarily underpinned by meat, bread and cereal product prices. The increase in prices of these products reflected the dynamics at the farm level.
On Thursday, we will get the weekly grain trade data (wheat and maize) for the week of 18 October 2019. In brief, maize exports for the 2019/20 marketing year have thus far amounted to 513 318 tonnes. Looking ahead, we expect South Africa to remain a net exporter of maize this marketing year, although the volume will most likely fall by half from 2018/19 to about 1.1 million tonnes. At the same time, we expect maize 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. The country has thus far imported 283 615 tonnes of yellow maize, all from Argentina.
In terms of wheat, South Africa’s 2019/20 wheat imports could increase by 14% y/y to 1.6 million tonnes because of expected lower domestic harvest on the back of unfavorable weather conditions in the Western Cape. The second import consignment of the 2019/20 marketing year was 102 429 tonnes. This placed total imports for the 2019/20 season at 135 270 tonnes, which equates to 8% of the seasonal import forecast. This week we will receive data for activity in the week of 18 October 2019.
Also, on Thursday, the National Crop Estimates Committee (CEC) will release the third production estimates for South Africa’s winter crops, and also farmers intentions to plant summer crops in 2019/20 season.
