South Africa’s agricultural sector had a solid start to the year with first-quarter gross value-added growing by 27.8% q/q on a seasonally adjusted and annualised basis .
We noted then that the succeeding quarters would likely continue to show strong growth, a view we still maintain. But the second-quarter expansion could be somewhat milder than the first quarter, possibly at a range of 20-25% q/q on a seasonally-adjusted and annualised basis. The key drivers will remain somewhat the same as the previous quarter, which was an uptick in animal products, field crops and horticulture.
Within field crops, sugar was the main driver, while in horticulture, deciduous fruits were the primary drivers of the bounce in the first quarter. In the second quarter, however, summer grains and oilseeds will likely be the key drivers of growth as harvest processes and deliveries started gaining momentum during this quarter going into the third quarter, as the season was delayed due to dryness at the start of it. Meanwhile, in the horticulture industry, citrus most likely dominated in the second quarter. We doubt that the animal products remained as robust in the second quarter as slaughtering activity softened when the country went into strict lockdown at the end of March. If anything, the animal products activity will probably recover in the third quarter, which is when restaurants started opening more widely.
With that being said, we are still quite optimistic about the performance of this sector in 2020, maintaining our forecast for the year to average at about 10% y/y (compared to -6.9% y/y in 2019). Other institutions such as the Bureau for Food and Agricultural Policy (BFAP) are more optimistic than us, placing their agricultural growth forecast for the year at 13% y/y. BFAP’s underpinning view for this growth estimate is similar to what we have expressed in the previous notes (see here), which is a bumper maize crop of 15.5 million tonnes (the second largest in history), surging export prices of major fruits (further supported by the weak exchange rate) and strong overall sales of agricultural produce in the first four months of the COVID-19 pandemic. This is, of course, with the exceptions of the wine and tobacco industries, where domestic trade has been restricted through various stages of the lockdown, and only permitted in August 2020.
The allied industries have benefited from this improved environment of the agricultural sector. The agricultural machinery industry has been one of such sectors. As we set out at the start of July 2020, the agricultural machinery industry data for the second quarter has continued to show a mixed picture with tractor sales up 8% y/y, while the combine harvester sales are down by a mere 3%. The improved harvest which somewhat boosted farmers’ finances and also farmers’ interest to buy up existing stock at current price levels, ahead of the expected price increases as a result of the weaker domestic currency, has been the key driver of the second-quarter sales.
The only aspect that we remain downbeat on during the second quarter of the year is agricultural jobs, primarily due to the regulations that were introduced to curb the spread of the virus. We think that probably limited the amount of seasonal labour that would have been employed during a year of a bumper harvest as this one. But the full extent of this phenomenon will only be clear when the Quarterly Labour Force Survey is released in the coming weeks.
Overall, Stats SA will release the second-quarter GDP data on 08 September 2020, therefore it is only then that we will know whether the aforementioned exposition truly holds. But with the high-frequency data from the farm-level such as production figures and prices, we are inclined to believe that the sector will register yet another good reading in the second quarter. Unfortunately, however, this will do very little to change the overall GDP picture of South Africa as primary agriculture is a small share of the economy. Recent surveys of macro analysts’ forecasts of Q2 GDP show that the economy could contract by around 40% q/q on a seasonally adjusted and annualised basis, largely reflecting the effects of lockdown restrictions put in place to slow the spread of the pandemic across various sectors. However, the continued resilience of the agriculture sector is important for the rural economy, boosting foreign earnings and stabilizing food security, at least at a national level.
WEEKLY HIGHLIGHTS
SA pineapple production recovers
Pineapples are one of the fruits we seldom cover in our notes, but the recent uptick in production and consumption warrants some attention. First, after hovering at levels below 100 000 tonnes for roughly six seasons, the United States Department of Agriculture (USDA) Pretoria office painted an optimistic picture of this industry this past week. The USDA estimates an 18% y/y increase in South Africa’s pineapple production to 132 000 tonnes in 2029/20 production season. This is underpinned by an expansion in area planted, improvements in yields, and generally favourable weather conditions (the production is done on dryland/rain-fed, which makes the weather crucial to the industry).
Second, domestic consumption is set to increase by 14% y/y to 33 000 tonnes, and the rest of the output will be for the export market. There is already anecdotal evidence of the increase in domestic pineapple demand during the lockdown period, for multi-purpose home use, which includes homebrewed alcohol. While this is encouraging for the pineapples industry, it remains unclear if the demand observed will hold throughout the year as the negative economic impact of the pandemic filters into the households. Moreover, we are yet to observe from anecdotal evidence if the homebrewed alcohol trend will hold, or if it was mainly a temporary substitute when there was a ban on alcohol sales in the country. If this is the case, the industry will have to intensify its export efforts to accommodate the additional increase in output or the domestic processing industry will have to absorb the additional produce.
South Africa is generally a net exporter of pineapples, on average about 3 000 tonnes a year (see Exhibit 2 in the attached file). But this is a small share of the country’s pineapple produce, roughly 2%. The key markets are mainly Botswana, Namibia, Saudi Arabia, UAE and Zimbabwe. About 72% of the domestic pineapple produce is mainly for processing and the rest sold in various fresh produce markets and on-farm.
Overall, the expected harvest will bring South Africa to closer levels last seen in 2007/08 when South Africa’s pineapple production was over 150 000 tonnes a year. The major expansion in production is mainly in the Eastern Cape, within the Bathurst area, which accounts for over two-thirds of South Africa’s pineapple output. Other major producing regions which combined account for about 34% of South Africa’s pineapples production are KwaZulu-Natal (33%), Limpopo and Mpumalanga (1%).
What to make of the data releases this past week in SA agriculture market?
This past week was relatively quiet in the South African agricultural data calendar. The only notable data releases, which we had highlighted in our weekly note, were (1) the weekly grain producer deliveries and (2) trade activity for the week of 14 August 2020. First, the producer deliveries figures reaffirmed the view that South Africa’s grain harvest activity has been a bit delayed than normal because of the late start of the season, specifically for maize. Roughly 78% of the expected maize crop of 15.5 million tonnes had been delivered to commercial silos in the week of 14 August 2020, and fortunately, the quality of the crop is mainly good. The oilseeds harvest is virtually over, so nothing much to say at this point. Also, the winter crops are still at early growing stages, therefore, we will only start looking at the producer deliveries data for these crops around harvest period, which is towards the end of the year.
Second, South Africa exported 14 941 tonnes of maize in the week of 14 August 2020, all to the regional markets. This was the quietest week since May 2020, as exports have been running at a volume of over 50 000 tonnes since the end of that month. South Africa’s total maize exports are currently at 1.1 million tonnes, which equates to 41% of the seasonal export forecast (2.7 million tonnes). The leading markets thus far are the Southern African countries, mainly for white maize, and Japan, Taiwan, Vietnam and South Korea for yellow maize. About 73% of all maize exports thus far is yellow maize, with 27% being white maize. We will likely see an uptick in white maize exports towards the end of the year into 2021, which is when Zimbabwe’s maize stock will be low and the country will increase its import activity. Another country that will have low domestic supplies then is Kenya, but we doubt if South Africa will be amongst their countries of interest because of the prohibitions of the importation of genetically modified maize.
In the case of wheat, South Africa is a net importer and brought in 9 798 tonnes from Poland in the week of 14 August 2020. This placed South Africa’s 2019/20 wheat imports at 1.6 million tonnes, which equates to 89% of the seasonal import forecast. The leading suppliers of wheat to South Africa in the 2019/20 marketing year include Poland, Germany, Lithuania, Russia, Ukraine and Latvia, amongst others. This marketing year ends in September 2019, which means South Africa will have to bring in an additional 200 000 tonnes of wheat within the next few weeks if we are to meet the import forecast of 1.8 million tonnes for the year.
Overall, these data didn’t introduce anything new that market participants haven’t factored in their thinking. The strong export demand for maize and slow harvest process is something we have previously discussed and viewed it supportive of prices (we maintain this view). The weekly trade activity on wheat is too insignificant to matter for price direction of the commodity. The only things that matter most for the price direction of this commodity are global wheat market developments and domestic currency movements.
DATA RELEASES THIS WEEK
Starting from a global calendar, today we have the US weekly crop progress data which will be released by the USDA. We have a particular interest in this data following windstorms that destroyed crops in Iowa. The data will provide insight into the country’s 2020/21 grains and oilseeds growing conditions, after factoring the aforementioned crop damaged. This is important in assessing whether the global grains and oilseeds harvest will remain as robust as previously anticipated.
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. As set out in our previous note, while China continues to purchase large volumes of the US agricultural produce, the overall value is still behind the levels agreed on as part of “phase one” trade agreement between the two countries. Also, on Thursday, the International Grains Council (IGC) is set to issue its latest global crop forecasts. In addition to the point we made about the US crop conditions, this particular report will provide insight into whether the supply concerns on the back of crop damages and dryness in parts of Europe fueling a recent price rally are set to continue.
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 21 August 2020. This data covers both summer and winter crops. But the focus is on summer crops which are currently being harvested.
Also, on Wednesday, Stats SA will release the Consumer Price Index (CPI) data for July 2020. For background, 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.
On Thursday, SAGIS will release the weekly grain trade data for the week of 21 August 2020. On the same day, Stats SA will release the Producer Price Index (PPI) data for July.
