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A major challenge that emerged this past week that directly affects SA's agriculture is labour-related tensions at Transnet. The logistics utility has declared force majeure at its port operations, citing an illegal strike.
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One major challenge that emerged this past week that directly impacts South Africa's agriculture is labour-related tensions at Transnet. The logistics utility declared a force majeure at its port operations last week, citing an illegal strike. There is a risk that disruptions could escalate this week. The weekend papers cited statements by the representatives of the South African Transport and Allied Workers Union (Satawu) and the United National Transport Union (Untu) that workers are demanding a wage increase of a minimum of 10%, slightly down from the initial demand of 13,5%. However, this is still far from the current offer by Transnet at 4%. Against this, Satawu said over the weekend that it has served Transnet with a 48-hour notice that its members will be striking from today. Disruptions to the flow of goods to and from other countries could negatively impact South Africa’s food, fibre and beverages sector, depending on its duration.
While agricultural production tends to be seasonal, South Africa has diverse agriculture, and there is large trade activity each quarter of the year. For example, exports of food, fibre and beverages in Q4 2021 amounted to $US2.8bn, 23% of the total value of exports in that year. Some of the products that dominated the export activity were citrus, maize, apples and pears, wine, grapes, nuts and berries, wool, soybean oil, apricots, cherries and peaches. Not all these exports were facilitated through Transnet. Still, the point is that the fourth quarter of each year is a high export activity quarter. Given that agricultural production has generally been resilient, we expect that there are substantial volumes of exports of various products scheduled for this month.
Similarly, South Africa imports a range of food products in the fourth quarter of the year. For example, in 2021, during this period, we saw imports of wheat, palm oil, rice, spirits, poultry meat, sunflower oil, and soybeans oilcake, amongst various products. The total imports of food, fibre and beverages in the last quarter of 2021 amounted to US$1,9 billion. In the same way, as the exports, labour-related disruptions would disrupt this import activity.
Importantly, we are not outlining these trade values to signal that this will be the direct loss if there is a strike. Instead, we are outlining the importance of trade in South Africa's food, fibre and beverages sector. Any costs would ultimately depend on the scale and timeframe of disruptions. The focus should be on supporting both parties to find common ground. Indeed, the whole logistics industry is the bloodline of South Africa's export-oriented agriculture or food, fibre and beverages sector.
In the export business, especially of high-value products, the reliability of South African suppliers is key in a highly globalized competitive world. Therefore, any potential prolonged delays would negatively impact the business activities of the South African suppliers to various markets in the world. Different agricultural groupings and commodity associations have already been vocal in the weekend newspapers about the possible negative impact of the Transnet strike on their businesses and the agricultural economy.
Aside from the immediate strike concerns, the logistics industry requires improvements, from roads, rail and ports, to support a growing agricultural sector. Road networks have deteriorated severely across South Africa over the recent past, weighing on agribusinesses and farming entities. Notably, some are using the capital resources which could have been allocated to business expansion, and thus long-term employment, to maintain and build roads. This is a public sector function and shouldn't be covered by private businesses. Similarly, there are long-standing challenges with rail and ports. Fortunately, on this part, Transnet has been working closely with agribusinesses, commodity associations and farmer groupings to refine their agricultural strategy that responds to the sector's needs and devise a long-term solution. This is crucial as South Africa already exports half of its agricultural produce. Any improvements in production going forward will have to be linked to potential export markets, and the logistics industry will be at the heart of this process.
In sum, the current labour disputes at Transnet are an important risk for South Africa's food, fibre and beverages sector. The fourth quarter of the year is as busy as any other quarter in terms of trade. Therefore, stoppages would negatively affect both imports and export activities. The actual costs of it, however, will depend on the duration of the strike. We hope a solution is found quickly between Transnet and the labour unions to minimize disruptions to trade.
Weekly highlights
SA agriculture machinery sales paint a mixed picture in September 2022
After a solid run since the start of the year, South Africa’s agricultural machinery sales painted a mixed picture in September 2022. For example, tractor sales were up by 4% year-on-year (y/y), with 777 units sold. Meanwhile, the combine harvester sales were at 17 units, down 19% from September 2021. Still, a monthly decline in the combine harvester sales does not change the fact that agricultural machinery sales have been on solid footing since the start of 2020.
These strong sales over this period indicate a primary agricultural sector still in a reasonably better financial condition and continues to invest in movable assets. As we have previously argued, when farmers have a good year, allied industries benefit from spending the financial gains or the produce of the farming businesses. Agricultural machinery is one such industry that benefited from farmers' spending in 2020, 2021 and the first nine months of 2022.
The farmers, specifically grain and oilseed producers, expanded their area planted in the past two years and maintained a decent area in 2022. Weather conditions were favourable, specifically in the past two seasons, resulting in a large harvest for two consecutive seasons.
This was also when commodity prices remained elevated, supported by global events such as dryness in South America and Indonesia and rising demand for grains and oilseeds in China. Had it not been for higher global agricultural prices, the local grain and oilseed prices would have softened due to large harvests, and that would have weighed down the profitability. Therefore, these past few years' financial gains went to agricultural equipment improvement, among other farm activities. This year, the factors above continued to support grain and oilseed prices, along with the Russia-Ukraine war, which disrupted the supplies.
Importantly, this year the reasonably higher input costs and rising interest rates did not reduce farmers’ spending on machinery as we initially anticipated. In a way, this speaks also to the farmers’ confidence about the 2022/23 production season which has recently started.
Data releases this week
As always, we start the week with a global focus. On Tuesday, the United States Department of Agriculture (USDA) will publish its Weekly US Crop Progress data. In these data, our focus is on the US crop-growing conditions as the season progresses, and the harvest has started. This data also helps us form a view of the crop quality in the US. In the previous release, in the week of 02 October 2022, about 52% of the maize crop was rated good/excellent, which is the same level as the previous week. Importantly, this is down by 7% from the same week a year ago. This general decline is mainly explained by the drier weather conditions in some States over a few couple of months.
Moreover, about 20% of the crop had already been harvested, slightly behind last year's pace of 27% in the same week. Meanwhile, about 55% of the soybean crop was rated good/excellent, also unchanged from the previous week. This is down by 3% from the previous year's rating in the same week. In terms of the harvest, about 22% of the crop had already been harvested, compared with 31% in the same week last year.
In addition, on Wednesday, the USDA will release its monthly flagship report, the World Agricultural Supply and Demand Estimates report. This report will provide an updated view of the world grains and oilseeds supply and demand conditions, and notable adjustments on it could be "market moving". The USDA will release the US Weekly Export Sales data on Thursday.
On the domestic front, on Wednesday, SAGIS will release the Weekly Producer Deliveries data for 07 October 2022. This data will help us get insight into the size of the crop as harvesting has been recently completed in most regions of the country. In the previous release of the week of 30 September, about 13,6 million tonnes of maize had already been delivered to commercial silos, out of the expected harvest of 15,3 million tonnes. In the same week, about 2,1 million tonnes of soybeans had already been delivered to commercial silos out of the expected harvest of 2,2 million tonnes. Moreover, 831 876 tonnes of sunflower seed had already been delivered on the same day out of the expected harvest of 845 550 tonnes.
On Thursday, SAGIS will publish the Weekly Grain Trade data for 07 October 2022. In the previous release on 30 September 2022, which was the 22nd week of South Africa's 2022/23 maize marketing year, the weekly exports amounted to 128 998 tonnes. About 37% of this went to Taiwan, 31% to Mexico, 22% to Japan, and the rest to the Southern Africa region. This brought the total 2022/23 exports to 1,8 million tonnes out of the seasonal export forecast of 3,5 million. This is slightly down from 4,1 million tonnes in the past season due to an expected reduction in the harvest.
South Africa is a net wheat importer, and 30 September was the 53rd week of the 2021/22 marketing year. The total imports are now 1,6 million tonnes, far surpassing the seasonal import forecast of 1,5 million tonnes (and the 2020/21 marketing year imports of 1,5 million tonnes). The major wheat suppliers are Argentina, Lithuania, Brazil, Australia, Poland, Latvia and the US. As we stated in our previous notes, if one looks into South Africa's wheat imports data for the past five years, Russia was one of the major wheat suppliers, accounting for an average share of 26% yearly. Next week, the focus will be on the new marketing year of 2022/23.
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International trade has been at the core of South Africa’s agricultural progress since the early 2000s.
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When we look at South Africa's agricultural and food import data for the past five years, wheat ranks as the second most valuable product after rice. It accounted for 6% (or US$417 million) of the annual average agricultural imports of US$6,6 billion during this period.
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We spent time this past week engaging with some of our members in the Free State. The conversations focused on broad policy themes such as land reform, agriculture and agro-processing master plan, biosecurity, rural rejuvenation, trade policy and challenges in the network industries (water, electricity, roads, rail, and ports). Generally, the spirit is upbeat about this sector but, as with other provinces, agribusinesses are troubled by the deteriorating infrastructure in the above-mentioned network industries and the poorly functioning municipalities. These are all themes that the Agbiz office continues to focus on, amongst other activities. In terms of agricultural conditions, we shared our downbeat view of the sector for this year, which we will paraphrase in this issue of the Agricultural Market Viewpoint.
South Africa’s agricultural sector was one of the bright spots of our economy during the Covid-19 lockdown period. This was the only sector that showed robust growth as other sectors of the economy were constrained by the lockdown restrictions, various supply chain disruptions and reduced consumer activity due to fear of contagion. But this year, the predominant message South Africans will hear and read regarding the growth performance of the agricultural sector will likely be more downbeat compared with the last two years.
We are already in the camp of those that forecast a mild contraction in South Africa’s agricultural sector this year. There are a number of things that concerns us. For example, the livestock industry, which accounts for roughly half of South African agriculture's gross value added, continues to suffer from foot-and-mouth disease outbreaks and rising feed costs. Meanwhile, some field crops' harvests are not as robust as the 2020/21 season due to heavy rains at the start of the season. It is worth acknowledging that while some of these harvests will be lower than in the previous season, they are well above the long-term harvest levels. That said, these reduced harvests and the challenging in livestock farming will likely overshadow the robust activity we have seen in field crops such as soybeans, sunflower seeds, and various fruits.
These challenges are also mirrored in the sentiment indicators of this sector. For example, the Agbiz/IDC Agribusiness Confidence Index deteriorated further by 7 points to 53 in the third quarter following a 2-point decline in the second quarter of 2022. Moreover, on a slightly more technical note, the exceptionally high base created by two years of solid growth where the sector expanded by 14,9% y/y in 2020 and 8,8% y/y in 2021, will also be a major factor to likely lead to a mild contraction in the sector’s performance this year.
Respondents to the third quarter Agbiz/IDC Agribusiness Confidence Index survey provided more details about some of the challenges the sector is currently experiencing. Aside from the aspects we noted above, the higher input costs, friction in some export markets, rising interest rates, intensified geopolitical risks which disrupted supply chains, and ongoing weaknesses in municipal service delivery and network industries were some of the factors that survey respondents cited as the key concerns.
But as usual, one has to treat these sentiment indicators with care and realize that moderation is something to monitor but does not necessarily signal that the sector is in terrible shape. To this end, a level of the Agbiz/IDC Agribusiness Confidence Index above the neutral 50-point mark implies that agribusinesses remain cautiously optimistic about operating conditions in South Africa. With this line of thought, the third quarter of 2022 results still reflects broadly favourable agricultural conditions, albeit not as strong as the previous seven quarters.
One other aspect worth monitoring is jobs, as many of us view agriculture as a key employer. Here, we are not as concerned as we are about the broad growth numbers. For example, in the second quarter of this year, there were 874 000 people in primary agriculture, up by 1% year-on-year (and up 3% quarter-on-quarter). Notably, this is well above the long-term agricultural employment of 780 000.
When we observe the activity on the ground and chat with farmers and agribusinesses, we do not get a sense that there will be a notable fall in employment despite the downbeat view we hold about the sector’s broad growth performance for this year. In fact, the Agbiz/IDC Agribusiness Confidence Index has a subindex that also assesses the sentiment about employment conditions in the sector. In the third quarter, that subindex was robust, measured at 61 points (performed much better than the overall composite index).
In sum, while we anticipate some moderation in South Africa's overall agriculture growth prospects this year, we are not suggesting that the sector is in bad shape per se. The output in a range of commodities is well above the long-term levels, and the contraction that we project is largely a reflection of the exceptional performance of the past two years rather than the depressed production conditions in the current year. Notably, the sector can return to a positive growth path if the livestock disease is controlled and if we get a favourable rainy season in 2022/23 summer. This means that to get this sector back into a positive growth path, the Department of Agriculture, Land Reform and Rural Development, together with organized agriculture should accelerate the collaborative efforts of resolving the animal disease challenge, as we have previously argued.
We would add to this list the issue of trade, where various agribusinesses and farmers continue to highlight the need for expansion of export markets to markets such as China, South Korea, India, Saudi Arabia, Bangladesh and Japan. These are countries with strong economies and can be key buyers of our high-value products such as beef, wine and fruits. Simultaneously, we need to maintain the existing export markets such as the EU, the African continent and some Asian markets, which are instrumental for our growth path. This is a long-term endeavour that requires active engagement by the South African authorities in consultation with other role-players in the sector.
Regarding the upcoming 2022/23 agricultural season, the prospects of a weak La Niña provide a good foundation for an excellent rainy season. This is notwithstanding the lingering challenges of higher prices of critical farm inputs such as fertilizer, agrochemicals, and fuel, which will put pressure on farmers’ and agribusinesses' finances when the summer crop season starts in October.
From a policy position, South Africa’s agricultural sector recently launched an Agriculture and Agro-processing Master Plan, a social compact development plan, which should help drive long-term inclusive growth and unlock barriers that constrain performance, if implemented fully. Some barriers require collaboration with various line departments and state-owned companies, specifically concerning the efficiency of municipalities and the network industries (mainly roads, rail, ports, water, and electricity). Aspects of agricultural finance such as Blended Finance are also key ingredients of the growth agenda of this important sector of the South African economy.
Weekly highlights
South Africa’s consumer food price inflation accelerated further in August 2022
South Africa’s consumer food price inflation accelerated further to 11,5% year-on-year (y/y) in August 2022, from 10,1% y/y in the previous month. This is the fastest pace since January 2017, which was a drought period in agriculture where costs were driven by higher agricultural commodity prices. The higher agricultural commodity prices we’ve observed in the months since Russia invaded Ukraine continue to filter into the consumer food price inflation data. Moreover, the higher fuel price inflation since the start of the war is an additional cost driver of food prices.
More specifically, the higher global grain and oilseed prices for much of this year have been the drivers of the costs of “bread and cereals” and “oils and fats” in the consumer food price inflation basket. These were also amongst the key drivers of the price inflation in August, alongside vegetables, sugar, sweets and desserts. Notably, these are also products with a relatively higher weighting within the food basket. For example, within the food basket, the key products are meat (35%); bread and cereals (21%); milk, cheese and eggs (17%); vegetables (8%); sugar, sweets and desserts (4%); oils and fats (3%); and fruit (2%).
In the case of fruits and vegetables, the uptick registered in August was a monthly blip caused by a temporary decline in volumes in the fresh produce markets across the country. Generally, South Africa has a sizable harvest, and the disruption in fruit exports within the Black Sea and the EU could add downward pressure on domestic prices. This bodes well for the consumer in the near term (and the opposite is true for the farmers).
The one essential product whose price trend remains uncertain is meat, although its prices moderated somewhat in August. The outbreaks of foot-and-mouth disease have led to the temporary closure of some key export markets for the red meat industry. Ordinarily, this would add downward pressure on prices as it implies that we would see an increase in domestic meat supplies. But this time around, the spread of the outbreak is vast, to the extent that we might see a decline in slaughtering in major feedlots, which would ultimately keep red meat prices at relatively higher levels; the opposite of what we initially anticipated.
This remains uncertain, and we will closely monitor the monthly slaughtering activity. Positively, the suspension of the anti-dumping duties for poultry products could help contain the potential price increases in this product, at least in the near term. Still, the broad meat price trend will depend on the developments in the beef market.
In sum, the global grain and oilseed prices, which have been the major drivers of the surge in inflation, are starting to soften, which shows in the global indices. The FAO’s Global Food Price Index was 138 points in August 2022, down by 2% from July and registering its fifth consecutive monthly decline led by a price drop in all products. These global developments are also showing in South Africa, and this could also reflect on the consumer food price inflation data in the coming months. Therefore, we continue to expect the domestic consumer food price inflation to start moderating towards the end of 2022.
Agbiz/IDC Agribusiness Confidence Index deteriorates further in Q3, 2022
The Agbiz/IDC Agribusiness Confidence Index (ACI) deteriorated further by 7 points to 53 in the third quarter following a 2-point decline in the second quarter of the year. Higher input costs, friction in some export markets, persistent animal disease challenges, rising interest rates, intensified geopolitical risks which disrupted supply chains, and ongoing weaknesses in municipal service delivery and network industries remained the key factors that survey respondents cited as the key concerns. Still, a level of the ACI above the neutral 50-point mark implies that agribusinesses remain cautiously optimistic about operating conditions in South Africa. Therefore, the third quarter results still reflect broadly favourable agricultural conditions, albeit not as strong as the previous seven quarters. This survey was conducted in the first two weeks of September 2022 and covered agribusinesses operating in all agricultural subsectors across South Africa.
Broadly, the Agbiz/IDC ACI's third-quarter results present a picture of a sector that remains on a sound footing, but one that is also confronted with a range of challenges. This moderation in sentiment suggests that 2022 could show a contraction in South Africa’s agriculture gross value added, as we stated in the opening section. Still, this does not mean the sector is in terrible shape. The base in 2021 is high and we see slightly lower harvests in some field crops this year.
Looking ahead, the prospects of a weak La Niña provide a good foundation for an excellent rainy season. This is notwithstanding the lingering challenges of higher prices of critical farm inputs such as fertilizer, agrochemicals, and fuel, which will put pressure on farmers’ and agribusinesses' finances when the summer crop season starts in October.
For the long-term growth of this sector, the need to improve the efficiency of ports, electricity supply and water, quality of roads, curbing crime that devastates the rail network, and improve biosecurity should be prioritised by both government and the private sector.
Data releases this week
As always, we start with a global focus. Today, the United States Department of Agriculture (USDA) will publish its Weekly US Crop Progress data. In these data, our focus is on the US crop-growing conditions as the season progresses, and some regions have started with the harvest process. In the previous release, in the week of 18 September 2022, about 52% of the maize crop was rated good/excellent, which is down by 7% from the same week a year ago. This decline is mainly explained by the drier weather conditions over a few couple of weeks. Meanwhile, about 55% of the soybean crop was rated good/excellent, which was down by 3% from the previous year's rating in the same week. Moreover, the USDA will release the US Weekly Export Sales data on Thursday.
On the domestic front, on Wednesday, SAGIS will release the Weekly Producer Deliveries data for 23 September 2022. This data will help us get insight into the size of the crop as harvesting has been recently completed in most regions of the country. In the previous release of the week of 16 September, about 13,4 million tonnes of maize had already been delivered to commercial silos, out of the expected harvest of 15,0 million tonnes. The soybean and sunflower seed harvests have also advanced.
Also on Wednesday, the Crop Estimates Committee will release the eighth production forecast for summer field crops for 2022. On the same day, the CEC will release the second production forecast for winter cereals for 2022. We don’t expect major adjustments on summer crops. However, the winter crops could show mild upward revision as the weather conditions in the winter-producing regions of the Western Cape have generally been favourable over the past couple of weeks.
On Thursday, SAGIS will publish the Weekly Grain Trade data for 23 September 2022. In the previous release on 16 September 2022, which was the 20th week of South Africa's 2022/23 maize marketing year, the weekly exports amounted to 28 166 tonnes. About 53% of this went to Japan, and the rest to the Southern Africa region. This brought the total 2022/23 exports to 1,6 million tonnes out of the seasonal export forecast of 3,4 million. This is slightly down from 4,1 million tonnes in the past season due to an expected reduction in the harvest.
South Africa is a net wheat importer, and 16 September was the 51st week of the 2021/22 marketing year. The total imports are now 1,58 million tonnes, far surpassing the seasonal import forecast of 1,48 million tonnes (and the 2020/21 marketing year imports of 1,51 million tonnes). We will likely see additional imports before the end of this marketing year this month. The major wheat suppliers are Argentina, Lithuania, Brazil, Australia, Poland, Latvia and the US.
As we stated in our previous notes, if one looks into South Africa's wheat imports data for the past five years, Russia was one of the major wheat suppliers, accounting for an average share of 26% yearly. The suppliers mentioned above have now replaced this.
Also, on Thursday, Statistics South Africa will release the Producer Price Index (PPI) data for August 2022. Our focus on these data will be on the food category. The higher agricultural commodity prices we have observed in the months since Russia invaded Ukraine continue to filter into the food producer price inflation data.
