The South African agricultural sector has thus far successfully harvested summer crops and horticulture with minimal interruptions from the pandemic.
Farmers and agribusinesses had to, however, adjust their usual work processes to comply with health regulations and limit the spread of the virus. In about a month, the focus will shift to planting activity of 2020/21 summer grains, oilseeds and various horticulture products. This is at a time when the COVID-19 infection numbers are on the rise, with the Western Cape, Gauteng, Eastern Cape and KwaZulu-Natal currently being the hotspots of the virus in South Africa. These provinces also account for 60% of South Africa’s agricultural output, which raises questions about whether the surge in infections could negatively impact the planting season.
We doubt that this will be the case. A large part of South Africa’s commercial agricultural sector is highly mechanised, which means the sector could operate with a limited number of people during planting. The periods that typically require increased labour are the harvest period, which for summer grains is currently at completion stage with minimal interruptions from the pandemic. Nonetheless, the seasonal workforce which would have increased somewhat in a year of bumper grains, oilseeds and horticulture harvest as in 2020, might not have seen that opportunity this year given the need for social distancing. What we suspect happened on the farms is perhaps an increase in hours worked with a limited workforce. On the 11 August 2020, Statistics South Africa will release the Quarterly Labour Force Survey data for the second quarter of 2020 which should provide some clarity on the effects of the pandemic on employment in this sector. Other agricultural subsectors which could see a decline in employment because of cashflow constraints not caused by the virus per se, but the stringent regulations on domestic sales, are the wine and tobacco industry. This, however, will only appear in the official data in the third quarter of the year.
The segment of the farming sector, which is not highly mechanised and where operations might be negatively affected if the pandemic continues to spread widely in the coming months, is smallholder farmers. In the context of South Africa, the smallholder farmers output does not affect the country’s national food security, although it plays an important role in supporting household food security. These farmers, who are mainly in the former homeland provinces of KwaZulu-Natal, Eastern Cape and Limpopo, are also critical from a transformation and inclusivity perspective for the sector. In the case of KwaZulu-Natal and Eastern Cape, the infections numbers are already relatively higher than most provinces. The next couple of months, ahead of October when plantings are supposed to start, will be crucial to observe if there will be some flattening of infections or a continuous rise, specifically across rural communities.
Aside from the COVID-19 concerns, the outlook for South Africa’s agriculture in 2020/21 season, at least for weather conditions, are showing some encouraging signs as indicated in our previous notes. The South African Weather Service (SAWS) recently highlighted that “likelihood of a La Niña phase during the coming summer months has drastically improved in the last few months”. Also, the Australian Bureau of Meteorology indicated that “the chance of a La Niña event forming in the coming months has increased to around 50% - twice the normal likelihood.” The La Niña weather events typically result in above-average rainfall in most of South Africa over the summer months, which is favourable for agricultural activity.
Also, the input prices remain favourable although there are worries that the weaker domestic currency could lead to increased prices. The available data for July 2020, shows that on average, domestic fertilizer prices were down by 5% y/y. South Africa imports about 80% of its annual fertilizer consumption and is a small player in the global market, accounting for a mere 0.5%. Domestic prices tend to be influenced by developments in the major producing and consuming countries, such as India, Russia, the USA and Canada. In July 2020, global fertilizer prices fell notably, partly due to rising supplies. The same is true for insecticides and herbicides. The decline in global prices was an underpinning driver of slowing domestic prices in July 2020.
In a nutshell, we continue to believe that South Africa’s agricultural sector could have a strong start to the season, despite the rising number of infections because of the limited workforce that is required for grain planting activities, specifically in large commercial farming operations. Nevertheless, there is a risk in smallholder farming operations if the virus infections rise notably around October. Apart from this, the 2020/21 season promises to be another good year from an agricultural output perspective and also input costs perspective for farmers.
WEEKLY HIGHLIGHTS
CEC revised up SA winter crop area plantings from the earlier intentions
The improved weather conditions in the winter crop growing areas of the country led to the slight uptick in area plantings for the 2020/21 season compared to the initial intended area. This is specifically the case for winter wheat plantings which the Crop Estimates Committee (CEC) currently forecasts at 517 000 hectares, up 4% from the intentions to plant data. The upward revisions were mainly in the Western Cape, North West and the Free State. Nevertheless, this is still 4% lower than the area planted in the 2019/20 season. Canola crop also experienced a similar annual decline, while barley plantings are up, marginally, by 1% y/y, as illustrated in Exhibit 1 (attached file).
The winter crops in the country are in good conditions because of improved soil moisture in various regions of the country, both under irrigation and rainfed. In the Western Cape, which accounts for two-thirds of winter wheat plantings, over 80% of barley, and all canola plantings, the recent rains have led to a notable improvement in crop-growing conditions. If there are good follow-up rains this month, it is reasonable to assume that this could be one of the good seasons for winter crop farmers in the province. There is certainly a case for such optimism if we consider the latest reports from the SAWS.
The SAWS forecasts increased chances of above-normal rainfall over the south-western and southern parts of South Africa between July and October 2020. We have already received good rained in July which contributed to improvement in crop conditions. The late start of the season means that crops will require moisture for a longer period than usual, hence, the SAWS forecasts are a positive signal for these winter crop-growing regions of the country.
Nevertheless, it will be a month until we have a sense of how much the latest rains and the forecast rains this month will contribute to overall winter crop yields and output, as the CEC will release the first production forecast on 27 August 2020. All current indications point to possible higher yields, which is the tonnage per hectare, when compared to the 2019/20 season. This is the case regardless of the reduction in area plantings for wheat and canola relative to the previous season.
SA food price inflation slowed in June 2020
South Africa’s food price inflation slowed to 4.5% y/y in June 2020, from 4.8% y/y in the previous month as inflation rates of items that hold the largest weightings on the food basket -- meat, bread and cereals, and fruit and vegetables -- all eased. These items account for over two-thirds of South Africa’s food price inflation basket, and hence their price movements will continue to underpin the direction of the headline food price inflation data.
The farm-level analysis of output and potential price direction of the aforementioned products points to a possible slowdown in food price inflation in the coming months. Firstly, the outlook for South Africa’s grain production is positive, with the maize harvest estimated at 15.5 million tonnes, which are the second-largest harvest on record. Moreover, global wheat and rice prices, which South Africa is a net importer of, could soften in the coming months due to large supplies. The USDA forecasts the 2020/21 global wheat and rice harvest at 761 million tonnes and 502 million tonnes, each respectively up by 1% y/y. The slightly firmer ZAR/USD, and if sustained, bodes well for imported products amid subdued international oil prices. Secondly, South Africa has had a generally good fruit harvest this year, with the citrus industry recently noting a 13% y/y increase in available supplies for export markets. This could keep prices at relatively lower levels this year. There is also a broad recovery in the production of deciduous fruit, with apple and pear production up by 5% y/y and 1% y/y, respectively in 2020.
Thirdly, meat price inflation was subdued in 2019 because of the ban on red meat exports on the back of a foot-and-mouth disease outbreak at the start of that year. This year, the base effect of 2019 will mean that meat price inflation could show a mild uptick. Hence, on balance, we still think that South Africa’s food price inflation could average around 4% y/y in 2020 (from 3.1% y/y in 2019). The upside pressure will largely come from meat; it will mainly be base effects in the case of red meat, and an uptick in poultry products prices on the back of a recent import tariff adjustment.
DATA RELEASES THIS WEEK
From a global perspective, today the USDA will release the weekly crop progress data. This data will provide insight into the US 2020/21 grains and oilseeds growing conditions following reports of dryness in parts of the US. In the week of 26 July 2020, while various regions of the US were experiencing a strain from dryness, the overall crop conditions were still relatively good compared to the corresponding period the previous year. This was the case for both maize and soybeans.
On Thursday, the USDA will release the weekly export sales data, which also helps in tracking the agricultural trade activity between the US and China, which in recent weeks experienced heightened confrontation. With that said, these past few weeks there was still reported exports of US maize and soybeans to China.
On the domestic front, on Wednesday, the South African Grain Information Service (SAGIS) will release the weekly grain producer deliveries data for the week of 31 July 2020. This data covers both summer and winter crops. But the focus is on summer crops which are currently being harvested. The winter crops are still at early growing stages for the 2020/21 season. In terms of maize, in the week of 24 July 2020, about 59% of the expected 15.5 million tonnes of harvest had already been delivered to commercial silos. While in oilseeds, the harvest process is virtually done.
On Thursday, SAGIS will release the weekly grain trade data for the week of 31 July 2020. In the previous week of 24 July 2020, about 991 255 tonnes of maize had already been exported, to neighbouring countries, as well as Vietnam, Ethiopia, Japan, Taiwan and South Korea. This equates to 37% of the seasonal export forecast of 2.7 million tonnes, which is up by 89% from the 2019/20 marketing year because of an expected large harvest. In terms of wheat, South Africa is a net importer, and in the week of 24 July 2020, about 86% of the expected 1.8 million tonnes of imports in 2019/20 season had already landed on the domestic shores.
