While it is early to make a definitive assessment, one can argue that South Africa’s agricultural sector has been relatively more insulated from the Covid-19 pandemic than other sectors of the economy that are on complete lockdown.
The food production value chains are operational, albeit not at optimal levels, as take-aways, ready-made meals, meal deliveries and the informal traders selling cooked food along the sidewalks are still prohibited.
The sub-sectors that are still in complete lockdown from a trading perspective include wool and mohair, cotton, tobacco, wine and alcoholic beverages, and floriculture (flowers). The harvesting and storage of primary agricultural produce to prevent wastage is permitted under strict health regulations. With that said, without trading, the farming business that has been adversely affected by lockdown restrictions could experience short-term cash flow challenges.
Over the past few weeks, there have been two major policy interventions that I think will help to ease financial pressures in the agricultural sector. The first, which was not directed specifically at the agriculture sector, is that the South African Reserve Bank has swiftly cut interest rates by a cumulative 225 basis points year to date. For a sector that has a record debt of R168-billion, the relief that lower interest rates could bring is substantial. Assuming that all the debt is on flexible interest rates, I estimate that the lower interest rates could bring savings in debt-service costs of about R3.8-billion for farmers over 12 months.
Second, for financially distressed small-scale farmers, the Department of Agriculture, Land Reform and Rural Development has ring-fenced R1.2-billion. This prioritises the poultry sector, livestock and vegetables, among other agricultural commodities that will be selected on a case-by-case basis. The farmers within the Proactive Land Acquisition Strategy programme are also included in this package.
While it is crucial to assist small-scale farmers who were already struggling prior to the Covid-19 pandemic, it is important to also continuously assess the impact of the pandemic on established farmers to ensure that national food security is maintained at all times. To this effect, the manner in which the department evaluates the impact of the Covid-19 regulations on these specific farmers and the mechanisms on how the funds will be disbursed has to balance the need for transformative disbursements and food security.
I believe that an assessment of farmers’ financial conditions and the ability to produce over the coming months could be helpful in strategically selecting additional beneficiaries for this fund. Ultimately, the goal should be to assist those who have been negatively affected by either weak demand and struggling to proceed into the next production cycle or those whose farming businesses were hard hit by regulations. For this process, one requires a longer time-frame than the one currently stipulated by the government, which is 8-22 April.
What’s more, it is plausible to argue that regulatory easing in the agricultural sector could be more effective than financial interventions. As we approach the end of the lockdown, 30 April, policymakers will have to devise strategies to gradually ease trading conditions in the currently prohibited sub-sectors of agriculture. Some of these sub-sectors, such as the wool and mohair industry, support small-scale farmers in the rural Eastern Cape. The wine industry is also among the key job-creating industries, with roughly 43,000 jobs. The same is true for all the aforementioned industries in terms of economic and job-creating importance in the rural economy.
Overall, the recent policy interventions, specifically on interest rates, are a welcome relief on easing the financial conditions of the indebted farmers. The financial support to small-scale farmers will need further refinement on the criteria and also the timing of the release of the finance to maximise its impact.
Ultimately, the easing of the lockdown restrictions, with strict adherence to health regulations in the process, could have a more positive impact on South Africa’s agricultural sector. In the process, however, it would be important to monitor regulations in South Africa’s trading partners as those could ultimately influence business conditions domestically. Global supply chains are likely to take months to normalise, even after the lockdown restrictions around the world start to ease. South Africa’s agricultural sector is export-dependent, with exports accounting for nearly half of the production in value terms. DM
WEEKLY HIGHLIGHTS
Positive developments in the global wheat market
We have previously warned of the restrictions placed by countries on agricultural commodity exports, specifically rice and wheat. This was concerning as it resulted in drastic price increases of the aforementioned commodities, of which South Africa is a net importer of both – rice (100% depended on imports), wheat (50% dependent on imports). The restrictions on exports were announced in the Black Sea and Asia regions, although the world has large supplies of rice and wheat. The USDA forecasts 2019/20 global wheat production at 764 million tonnes, up 4% y/y. And the 2019/20 rice production is estimated at 496 million tonnes, down by 1% y/y.
This past week, however, Romania, which is the world’s seventh-largest wheat exporter, retracted its statement to ban exports of wheat. Over the past five years, Romania’s wheat exports averaged 5.6 million tonnes. While not directly a big supplier of wheat to South Africa, the easing of exports is a positive move towards boosting the global wheat supplies for export markets. The International Grains Council estimates that the world has 176 million tonnes of wheat for exports within the 2019/20 season, which is a 5% increase from the previous season.
Under such circumstances of increased wheat production and supplies for exports, one would ordinarily assume that wheat prices would be somewhat lower than levels seen this time the previous year. But this is not the case, global wheat prices traded around US$231 per tonne (US HRW) on 16 April 2020, which is up 6% y/y. The increase can, in part, be attributed to the restrictions on exports announced by various countries over the past couple of weeks amid fears about the timeframe of the COVID-19 pandemic. If we could see similar statements as Romania or assurance that there won’t be an export restriction on wheat from major wheat-producing countries, there could be some ease in the global wheat market about supplies throughout the season.
In the case of South Africa, as we outlined in our note last week, South Africa’s 2019/20 wheat imports could increase by 33% y/y to 1.8 million tonnes. This is 13% higher than the five-year average import volume, exacerbated by the decline in domestic wheat production on the back of unfavourable weather conditions in parts of the Western Cape in late 2019. As of 10 April 2020, South Africa had imported 764 783 tonnes of wheat, which equates to 42% of the volume of the country intends to bring into its shores within the 2019/20 season. The leading suppliers thus far are Germany, Lithuania, Poland, Latvia, Ukraine and Russia.
DATA RELEASES THIS WEEK
From a global perspective, on Monday, the United States Department of Agriculture (USDA) will release the weekly crop progress data. This is important data to monitor grain planting activity across the US for the 2020/21 production season.
On Thursday, the USDA will release the weekly export sales data. This is important data to monitor as it will give an indication of the US agriculture exports to China, and help us monitor the progress on commitments made in phase one trade deal and impact of the COVID-19 pandemic on trade.
Here at home, the dates we present could change because of interruptions caused by the COVID-19 pandemic. We tentatively expect that on Wednesday, the South African Grain Information Service (SAGIS) will release the weekly grain producer deliveries data for the week of 17 April 2020. This covers both summer and winter crops. With summer grains, specifically maize, not fully at harvest period, the focus remains on winter wheat data whose harvest was completed in January 2020. We will also monitor the early deliveries of oilseeds, mainly soybeans and sunflower seeds, whose harvest has recently started in a few regions of the country.
In the week of 10 April 2020, about 3 450 tonnes of wheat were delivered to commercial silos. This placed total wheat deliveries at about 1.5 tonnes, which equates to 97% of the expected harvest in the 2019/20 season. There are still relatively small volumes delivered thus far in the oilseeds (soybeans and sunflower seed) market, both still at levels below 90 000 tonnes.
On Thursday, SAGIS will release the weekly grain trade data (wheat and maize), also for the week of 17 April 2020. In brief, maize exports for the 2019/20 marketing year have thus far amounted to 1.35 million tonnes, which equates to 77% of the export forecast for this season.
At the same time, we expect maize imports of about 545 000 tonnes, all yellow maize, mainly for the coastal provinces of the country. This is up from an estimated 171 622 tonnes in the 2018/19 marketing year. The country has thus far imported 509 684 tonnes of yellow maize. (We have alluded to wheat import activity in the aforementioned section of the note).
