Farming and agribusiness play a crucial role in sustaining local economies and small towns. There is a lot of evidence of this in the literature and in the popular media.
While the international literature tends to focus on the devastation of the small towns in times of drought or when farming lobby groups argue for particular policies, here in South Africa, we see a different pattern where the municipalities fail to provide basic services to their communities and businesses. These are services such as water and sanitation, electricity, good roads and technological infrastructure. A recent study by the Tshwane University of Technology researchers captures this challenge succinctly, stating that "the level of service delivery in rural communities is less compared to urban areas, and there is no sign of improvement. There is a need to improve the level of service delivery in rural areas as the pace of service delivery has been slow and poor."
Governance and service delivery failures directly affect the functioning and efficiencies of farming and agribusinesses in small towns and when they reach unsustainable levels, some agribusinesses move out of the towns. A case in point is the recent announcement by Clover to close its cheese factory in Lichtenburg due to "ongoing poor service delivery" by the local municipality. The consequences of this decision on the sustainability of the town are yet to show. Still, one can anticipate that it will be notable as Clover directly provided jobs, market access to farmers, and various businesses that procured their products from Clover. Some supplied various input solutions to the company. And the income from these activities would have supported many other businesses in the community so the multiplier effects are likely to be large. Therefore, the closure of the firm in such a town will likely have negative spillover effects across the local economy.
The failures of municipalities are not unique to Lichtenburg and not only affect Clover and the community members in the town. We have also recently learned of the Astral Foods case where the Standerton municipality failed to provide water and electricity service to the firm's operation. This led to a disruptive impact on Astral's operations, which subsequently had financial implications. The efficiency and economic sustainability of agribusinesses, which is impacted by the poor service delivery of the municipalities, also affects the level of investment the businesses could continue to make in such towns. Importantly, this may affect even the very sustainability of agribusinesses as some might incur more costs as they try to self-provide the services that were supposed to be the municipality's job.
The farmers face a similar challenge, directly and indirectly. The agribusiness provides a range of solutions and market access to local farmers, and if the agribusinesses’ sustainability is threatened, the farming community also suffers. More directly, the poor roads, unreliable electricity supply, and water supply directly impact the profitability and sustainability of farming operations. Importantly, these are all entities that provide job opportunities to the least skilled South Africans and indirectly sustain the communities around the small towns.
This brings us to the current economic reform and recovery agenda, where agriculture has been identified as one of the industries that will drive economic growth and job creation, especially in small towns. But as we have illustrated with these few examples, South Africa will struggle to develop vibrant agriculture and agribusiness beyond the existing areas if the poor service delivery by municipalities is not addressed. Some of the practical interventions could even be ensuring that a municipality has competent management. Such would require a qualified financial officer, qualified civil and electrical engineering services, proper billing, a non-corrupt mayor and councillors.
Moreover, as the Financial and Fiscal Commission recently argued, municipalities need to look closely at their wage bills so that salaries do not crowd out money for critical service delivery functions such as waste removal, waste management, sewerage systems, roads, water provision, amongst other services. These improvements need to happen simultaneously and not before or after agriculture revitalization, which the Agricultural and Agro-processing Master Plans will support. Importantly, the beneficiation of agriculture (locally) can only happen if the towns are functional. The same for agribusinesses – they cannot operate if the basics are not in place. This is a challenge that the South African government should face head-on, and success in addressing these challenges would also mean the survival of many small towns across South Africa.
Weekly highlights
SA’s agriculture in good shape despite quarterly blip
Tuesday’s GDP data for the first quarter which shows that SA’s agricultural output unexpectedly contracted by 3.2% quarter on quarter on a seasonally adjusted and annualised basis should not be of lasting concern. Stats SA attributes the underperformance to “lower production of field crops and animal products”. But this is a temporary blip and shouldn’t be regarded as a worse season than the robust 2020. Also, important to highlight is that on a year-on-year basis, the agricultural gross value added expanded strongly by 7,5%. The sector is set for one of the best years on record, and such improvements should be reflected in the data in the coming quarters.
For example, the South African Wine Industry Information and Systems forecasts the 2021 wine grape crop at 1.5m tonnes, which is 9% more than the 2020 harvest. The Citrus Growers’ Association projects record exports of 159 million cartons in 2021, up from 146 million cartons in 2020, thanks to a good harvest. The Crop Estimates Committee forecasts the 2020-21 maize and soybean production at 16.2 million tonnes and 1.9 million tonnes, respectively. That’s an increase of 6% year on year — and the second-largest harvest on record — for maize, and a 54% rise to a record harvest for soybeans. Bumper harvests of other field crops are also expected. The healthy production forecast for summer grains and oilseeds is based on increased area plantings and favourable rainfall since the start of the season.
While we expect better harvests than in 2020, the expansion of the sector's gross value-added could be just 5,0% year on year because last year’s base, at 13.1%, is already quite strong. Our colleagues at BFAP are slightly more optimistic than us, projecting 7,6% y/y expansion in South Africa’s agricultural gross value added.
The only place where the robust performance of the sector will likely not show is for jobs. As we set out in the previous Viewpoint, in the first quarter of 2021, South Africa’s agricultural jobs fell 8% from a year ago, with 792 000 people employed, according to Stats SA’s Quarterly Labour Force Survey. That is the lowest since 2014, which was a drought year and we are not in a drought season at the moment. Moreover, the decline in jobs seems to be concentrated within industries most affected by various regulations during the lockdown, such as the horticulture (wine grapes) and game industries.
SA tractors and harvesters’ sales remained robust in May 2020
We continue to observe robust activity in South Africa's agricultural machinery market, and this optimism has been underway since May 2020. Last week, the figures released by the South African Agricultural Machinery Association show that tractors' and harvesters' sales were each up by 13% y/y in May 2021, with 518 and 35 units sold, respectively. As we indicated last month, the improved farmers' finances have supported the sale. This is on the back of the large harvest in 2019/20, prospects for yet another good agricultural season in 2020/21, and higher commodities prices. The relatively stronger exchange rate has also been a positive buffer for the imported agricultural machinery.
We focus on the major summer grains to illustrate the positive prospects of the 2020/21 production season. The South African Crop Estimates Committee (CEC) currently forecasts maize, soybeans and sunflower seed at 16,2 million tonnes (up 6% y/y – the second-largest harvest on record), 1,9 million tonnes (up 54% y/y, a record harvest) and 716 240 tonnes (down 9% y/y). The expected decline in the sunflower seed harvest is a result of a reduction in area plantings as farmers switched some areas to maize. Generally, the expected large grains harvest is also mirrored on other subsectors of agriculture and underpinned by favourable weather conditions.
While South Africa is now in a busy period of the agricultural calendar – completing winter crops planting, and harvesting for summer crops in full swing, we remain cautious that the excellent momentum of agricultural machinery sales might slow in the second half of the year. In our view, the expected large harvest in the 2020/21 production season might not lead to sustained sales and another year of higher agricultural machinery sales. Typically, a relatively good sales year, such as 2020, is likely to be followed by a somewhat lower sales period. This is because the replacement rate of machinery with new ones would usually be down from the previous years. Another factor to keep a close eye on is the exchange rate, although the current firmer levels support the sales. Any changes into a weaker domestic currency will likely lead to higher prices for imported agricultural machinery and discourage sales.
The USDA remains optimistic about the 2021/22 global grains production
Last week’s data from the United States Department of Agriculture (USDA) maintained a fairly positive picture about the 2021/22 global grains and oilseeds production. The improved weather conditions in Europe, Canada and the US have been the game-changer of crop expectations. The crop expectations are now roughly in line with the International Grains Council (IGC) forecasts we shared in the previous Viewpoint. For example, the USDA forecasts 2021/22 global maize production at 1,2 billion tonnes, up by 6% y/y, which is roughly in line with IGC estimate. Importantly, the global stocks estimate was placed at 292 million tonnes, up 4% y/y. This suggests that there is room for softening in global maize prices from the highs we observed in recent months. The same picture holds for wheat. The 2021/22 global wheat harvest is estimated at 788 million tonnes, which is a 2% increase from the previous season. The 2021/22 global wheat stocks will also likely nudge up marginally by 1% y/y to 295 million tonnes. The 2021/22 global soybeans harvest is estimated at 385 million tonnes, up by 6% y/y. Concurrently, the 2021/22 global soybeans stocks are estimates at 91 million tonnes, which is a 4% y/y increase.
To stress a point, we made last week while analyzing the IGC data, these production forecasts suggest that global crop prices from June 2021 going forward could soften slightly from the recent months' levels. That could also influence the South African consumer food price inflation outlook. However, the price developments in the case of soybeans will be influenced more by Chinese buying decisions and the broader vegetable oils market developments. The critical point is that global crop conditions are in a better state than in the past few months, which should be reflected in prices in the coming months.
Data releases this week
We start the week with the US Crop Progress report on the global agricultural data calendar, which will be released by the USDA today. The previous report of 07 June showed that US maize plantings were completed and about 90% of the planted area or crop had emerged, which is slightly above the previous year’s pace in the same week. In the case of soybeans, planting was near completion, with 90% of the intended area for the season already planted, and 76% of that emerged. This too surpasses the previous year’s pace. The US weekly export sales data is due for release also on Thursday.
On the domestic front, on Wednesday, SAGIS will release the Weekly Grain Producer Deliveries data for 11 June. This data cover summer and winter crops, although we only focus on summer crops for now as the harvesting process gains momentum, particularly on oilseeds. To recap, on 04 June, about 5 355 tonnes of soybeans were delivered to commercial silos. This placed the soybean producer deliveries for the thirteenth week of the 2021/22 marketing year at 1,72 million tonnes, which equals 90% of the expected harvest of 1,92 million tonnes. Moreover, 416 860 tonnes of sunflower seed for the 2021/22 season had already been delivered to commercial silos in the same week, out of the expected crop of 716 240 tonnes.
In maize, the marketing year is different from the oilseeds; we are still in the fifth week of the 2021/22 marketing year, which began at the start of May. The producer deliveries currently amount to 4,9 million tonnes, out of the Crop Estimates Committee's expected harvest of 16,2 million tonnes (compared to our estimate of 16,7 million tonnes).
On Thursday, SAGIS will release the Weekly Grain Trade data for the week of 11 June. In the week of 04 June, which was the fifth week of South Africa's 2021/22 maize marketing year, total maize exports amounted to 356 396 tonnes. The seasonal export forecast is 2,8 million tonnes (up 10% y/y) because of the expected sizeable domestic harvest. In terms of wheat, South Africa is a net importer. On 04 June, imports amounted to 1,05 million tonnes, equating to 66% of the seasonal import forecast of 1,58 million tonnes.
