All of the plant material for South Africa’s banana industry comes from a single tissue culture laboratory, which also exports to 25 countries throughout Africa, the Middle East and the Indian Ocean islands.

Oudtshoorn farmers, who had their own Day Zero almost a year ago when their irrigation dams dried up, have suffered losses of hundreds of millions of rands in lost production.

Land reform remains one of South Africa’s most pressing unresolved issues. Attempts to address skewed ownership and economic participation patterns, the result of many years of exclusion and dispossession of black South Africans, have been unsuccessful since 1994. The present government has now turned to possible changes to the Constitution to deal with these failures. 

At the start of the 2017/18 apple season, European apple stocks were approximately 30% lower, creating a great pull for South African apples, but it’s expected that the start of the new season will be tougher, as Europe expects a slightly above average crop.

Mercedes-Benz last week unveiled the electric Actros heavy-duty truck.  The first eActros was delivered to German logistics company Hermes in September for use under real-life conditions. By the end of this year, Mercedes-Benz will have ten such vehicles on the road with customers. Series production is planned for 2021.

Port Elizabeth – The wool market traded lower at this week’s auction and the Cape Wools Merino Indicator decreased by 5.6% and by 1,362 points to close at a value of R229,28/kg (Clean). The Australian EMI lost 2,8% this week. The Cape Wools All Wool Indicator declined 5,6%.

It’s well known for its taste for international wines, but China’s domestic scene is growing too. In a different country, China’s wine industry might be a house of cards. But China’s government seems committed to it, and that makes all the difference. 

The latest RepTrak Pulse Survey for South Africa shows which local brands are most trusted and reputable among South African consumers.

The overseas citrus season is just about to end and there is a slow shift to products from Spain. A German importer of citrus fruit from overseas reviews the past season: "There are still stocks from South Africa, Argentina and Uruguay and sometimes Chile, but most supermarket supplies will be sold this or next week."

A strong Budget will come down to simple action and hard choices taken now for the long-term benefit of the country, says Citadel portfolio manager Mike van der Westhuizen.

Finance minister, Tito Mboweni will deliver the 2020 National Budget Speech on 26 February, to announce how the government plans to spend its budget, while also collecting money.

“The main thing to look at, given that the Moody’s is watching closely, is the need to rein in the budget deficit, which is starting to spiral even more out of control,” he said.

In the 2019 Medium Term Budget Policy Statement (MTBPS) the Treasury projected a consolidated Budget deficit of 5.9% of GDP, averaging 6.2% of GDP over the next three years.

A low growth, low inflation environment also affects the debt-to-GDP trajectory, the sustainability of which minister Mboweni has already warned about.

As a proportion of South Africa’s GDP, the MTBPS notes a hike in gross debt from 56.7% in 2018-19, to 60.8% in 2020-2021 and 71.3% in 2022-23 if the status quo does not change, something the rating agencies are understandably concerned about.

“These numbers show that the previous goal of fiscal consolidation is currently not on target,” said Van der Westhuizen. “Although it must be said that while Treasury appears to be doing everything in its power to stop the slow bleed, it’s a cooperation issue with the rest of government and other influential stakeholders.”

This disconnect between what needs to happen and the disinclination within government to act is likely to come through on Budget day.

Revenue under pressure

Distilling the multiple issues at play, Van der Westhuizen said that “government needs to find about R150 billion in savings over the medium-term expenditure framework, being the next three years. So that’s essentially R50 billion a year in savings that needs to come through.”

But how can this be achieved?

Treasury could look, once again, to the taxpayer. But, said Van der Westhuizen, “with the taxpayer already squeezed, options are increasingly limited. In prior years, we’ve seen personal income tax hikes and last year a VAT hike”.

“Easy wins are fuel levies and sin taxes that rise every year, as well as bracket creep, i.e. not adjusting the tax brackets for inflation. Other potential tax avenues could include a new upper tax bracket, wealth tax, estate duties or even changes to capital gains tax or dividend tax. Although helpful, these don’t really do the heavy lifting.”

There has been talk that the only really effective lever left to pull could be to raise VAT by one percentage point to 16%, which would inject between R20 billion and R35 billion in revenue. Although it would be a particularly unpopular move politically, it is increasingly possible, said Van der Westhuizen.

Expenditure in the crosshairs

Given the revenue constraints, Van der Westhuizen believes all the hard work should be done on the expenditure side. But, again, taking steps to contain and curb expenditure will come down to political will.

“The big line items here are public sector wages (about 34% of expenditure), debt service costs (10%) and social grants (10%). Interest payments and social grants are essentially fixed, leaving the wage bill as the main lever.

“This is a bit tricky at this stage since multi-year wage negotiations are still in process and will only conclude around March 2021, so we will watch this carefully,” said Van der Westhuizen.

“The government tried a voluntary resignation and natural attrition approach to reduce the wage bill, but that hasn’t been effective. Maybe the lower inflation outlook from the Reserve Bank and pinning of inflation expectations might help in negotiating lower wage hikes, but that is unlikely to be enough.”

“Even if government took a firm stance of CPI less 2%, which would have the trade unions baying at its feet, it would only save about R105 billion over three years, leaving us some R45 billion short. The point is that even a drastic decline in wage growth doesn’t result in sufficient scaling back in spending,” Van der Westhuizen said.

The SOE drag continues

Despite this constrained picture, there is still bound to be more budgetary support doled out for state-owned enterprises (SOEs) and this issue will loom large over Mboweni’s speech, said Citadel.

“In late-January we saw the Development Bank of South Africa (DBSA) grant a loan to South African Airways (SAA) as part of its restructuring,” said Van der Westhuizen.

“That represents a red flag in terms of the cross contamination of SOEs, with a well-performing SOE such as the DBSA bailing out a poor-performing one. Government cannot afford to use its balance sheet to rescue these SOEs, so it is rearranging the deck chairs.

“Our concern is the strain this might put on the better-performing SOEs. For now it might not be a big issue given that the DBSA does have rules governing its lending, but the trend isn’t pleasing.”

And Eskom is likely to remain both a concern and a drain. Clearly there is much in-fighting at the parastatal and disagreement about its turnaround direction coupled with bouts of load shedding, which indicates that South Africa is certainly not out of the woods. “Eskom will, again, be a massive issue to watch for in the Budget,” said Van der Westhuizen.

“For at least the next few years, support will have to be pencilled in for the utility. If that number were to rise significantly or if there were further talk of taking Eskom debt on the government balance sheet, then we would be in deep trouble.”

What could prove a fillip for the country would be positive developments around key issues such as power generation.

“There has been much talk about mining companies, and other businesses, being permitted to generate their own electricity and for independent power producers to come onto the gird, but we are yet to see formal communication in this regard.

“If something concrete is announced, even some compromise around public-private partnerships, then that would be very positive,” said Van der Westhuizen.

The D-Day downgrade

While the state fiddles, and South Africa’s economy burns, a downgrade in the country’s sovereign credit rating continues to hang over South Africa’s head. While the markets have long priced this in, the continued expectation that the axe will fall is, in itself, creating uncertainty and tension.

On 28 January 2020 Moody’s Investors Service analysts noted that it was “a bit early” to judge the impact of both policy and structural reforms. Lucie Villa, Moody’s lead sovereign analyst for South Africa, told Bloomberg that while the data was not pointing to either a particularly positive or negative direction, that “there is nothing really to flag for the time being”.

This indicates that Moody’s may well be prepared to give SA more leeway, but obviously, the credit rating agency will be keeping a close eye on Mboweni’s Budget.

“Certainly, everyone expects this Budget to be poor,” said Van der Westhuizen, “but they might manage to demonstrate the will to cut expenditure and show just enough fiscal consolidation and, in that case, Moody’s might delay any decision until November, after the next MTBPS.”

That said, while government might do enough to keep Moody’s at bay for the first half of this year, it remains Citadel’s view that the agency will downgrade South Africa in 2020. While this would put South Africa out of the World Government Bond Index, Van der Westhuizen believes it is time for the country to take its medicine.

“Foreigners would come in and sell some of our bonds on index exclusion but, with some of the most attractive yields available, there would definitely be buyers stepping in,” he said.

Reading the mood

Citadel noted that anyone who follows Mboweni on Twitter will be keenly aware that the finance minister is getting significant pushback, making him increasingly despondent with the lack of progress. There appears to be considerable opposition to his plans, as laid out in the economic strategy document released in August 2019.

Funding constraints have hobbled Agriculture Research Council plans to manufacture a vaccine for foot and mouth disease, leaving SA reliant on costly imports from Botswana.

The tough economic conditions in recent months have impacted on the daily lives of all South Africans and have been of great concern to government. The rise in the oil price, change in sentiment towards emerging markets and deteriorating international trade relations have been among the contributing factors. 

The South African Berry Producers’ Association, a voluntary organisation, was brought into being seven years ago to act as a collective body representing the nascent industry, and specifically in addressing the registration of chemicals for use in blueberry production.

 The fears about the potential disruptions that the novel coronavirus (COVID-19) could cause global supply chains have raised questions of whether South Africa could experience food shortages in the near-to-medium term. From a national perspective, we doubt this would be the case, at least for most food products. South Africa is an agriculturally endowed country, generally a net exporter of agricultural and food products, as illustrated in Exhibit 1 (in the attached file). What’s more, there are prospects for an abundant harvest of staple grains and fruit this year, which will increase the local supplies.

There are, nonetheless, essential imported food products that South Africa is dependent on such as; rice, wheat, and palm oil. Key palm oil suppliers are Indonesia and Malaysia. The typical suppliers of rice are Asia and the Far East, namely Thailand, India, Pakistan, China and Vietnam, some of which are hard hit by the pandemic. In the case of wheat, the suppliers are usually Germany, Russia, Lithuania, USA and the Czech Republic, some of which are also hard hit by the pandemic. Some of the countries which have reported cases of COVID-19 have not taken drastic measures of limiting business activity (apart from Italy and China) to reduce the spread of the virus. This means the importation of some agriculture products mentioned above into South Africa could continue unabated, barring any unforeseen eventuality. Aside from the major products, South Africa also imports poultry products and sunflower oil; but these are products that can be replaced by local supplies, should there be disruptions in global supply chains.

 In the unlikely event of potential shortages, it will be due to glitches in the logistics of shipping imports rather than a decline in global essential grains supplies. For example, the 2019/20 global wheat production could amount to 764 million tonnes, up by 5% y/y, according to data from the United States Department of Agriculture. Moreover, the estimated 2019/20 global rice production is 499 million tonnes, which is roughly unchanged from the previous season.  The global palm oil market is also well supplied, with about 8.0 million tonnes, according to data from SUNSEEDMAN.

Therefore, the readiness of the domestic food supply chains will perhaps be the ones to be tested in the coming weeks and months if panic-buying arising from fears of the spread of COVID-19 were to peak to levels seen in the UK and USA, amongst other countries. So far, however, there is relative calm in local food markets at retail levels, except for the rising demand for sanitizers.  As set out in our note last week, the implications of COVID-19 on food price inflation remains unclear in the near term. We continue to monitor the consumer buying behaviour for signals of rising demand. Suffice to say, South Africa has ample food supplies for 2020, and therefore, there is no need for panic buying. Hence, we have placed our forecast for food price inflation this year at about 4% y/y compared to 3.1% y/y in 2019. The uptick in food price inflation compared to the previous year is associated with a potential increase in meat prices, rather than the COVID-19 pandemic.

 Where negative pressures of the virus are likely to hit are on farmers and agribusinesses through the potential slowdown of export demand, and a likely subsequent decline in agricultural commodity prices. As we consistently pointed out in the previous notes, South Africa’s agricultural sector is export-orientated and heavily reliant on global markets. Nearly half of the value of what the country produces, is exported. Asia and Europe, which accounted for half of the US$10 billion of South Africa’s agricultural exports in 2019, are the hardest hit areas by COVID-19 thus far. There is likely to be disruptions in supply chains in these regions as governments strive to limit the spread of the virus.

WEEKLY HIGHLIGHTS

 A mixed bag of grains

 Last week the United States Department of Agriculture (USDA) released a monthly update of its World Agricultural Supply and Demand Estimates report. The commodities we typically study in this report are wheat, maize and soybeans, for various reasons, however.

Wheat

 As South Africa is a generally net importer of wheat; hence we must monitor global wheat supplies and other market developments. As previously stated, in the 2019/20 season, South Africa’s 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 late 2019.

  Fortunately, there are large supplies in the global market. The USDA forecasts 2019/20 global wheat production at 764 million tonnes, up 5% y/y, as previously stated. What's more, the 2019/20 global wheat stocks are estimated at 288 million tonnes, which is also 4% higher than the previous season. This means there are sufficient supplies for importing countries such as South Africa in the global market. The main challenge for trade in the near-term, however, is likely to be COVID-19 due to potential disruptions in supply chains. With that said, we haven’t noticed any major hiccups thus far.

Maize

  What’s more, South Africa is a net exporter of maize, so one looks into the USDA data for two reasons; (1) to get a sense of their estimate for South Africa’s maize production at a particular season, (2) and for a view of global maize supplies, which partially influences domestic maize prices. With that said, the correlations between the global and South African maize prices tend to be weak in years of maize abundance in the domestic market.

 The USDA has lifted its estimate for South Africa’s 2019/20 maize production by 10% from last month to 16.0 million tonnes. This is up by 35% from the previous season. This data comprises both commercial and non-commercial production and therefore not comparable to South Africa’s Crop Estimates Committee’s number of 14.6 million tonnes released last month, which accounts for only commercial production. Nonetheless, this doesn’t change the view we expressed last month, which is; if it materialises, this could be the second-largest summer maize harvest on record after the 2016/17 season (which was 16.8 million tonnes for total maize).

Aside from a favourable food price inflation outlook, this data essentially means that South Africa would remain a net exporter in the 2020/21 marketing year which starts in May 2020 (the 2020/21 marketing year corresponds with 2019/20 production season). This is at a time where Southern African maize import needs could outpace the previous year, with Zimbabwe in need of maize supplies to an extent that the country lifted a ban on the importation of genetically modified maize, which eases access for South African maize exporters.

 Moreover, a maize harvest of 16.0 million tonnes would enable South Africa to export maize beyond the continent to other typical markets such as Japan, Taiwan, Vietnam and South Korea who are not prominent in the current marketing year. With that said, the coronavirus remains a key threat to global agricultural trade and may disrupt South Africa’s agricultural exports in various markets.

Globally though, maize production is set to fall by 1% y/y to 1.1 billion tonnes in 2019/20. This will subsequently lead to a 7% y/y decline in stocks to 297 million tonnes. While this will be supportive of global maize prices, its influence on the South African maize market is likely to remain minimal.

Soybeans 

As stated in our note last week, South Africa imports, on average, 550 000 tonnes of soybeans oilcake (meal) a year. About 97% from Argentina. Hence, we are compelled to pay close attention to global soybean market dynamics. The USDA forecasts 2019/20 global soybean production at 342 million tonnes, down 5% y/y. As a result, the 2019/20 global soybean stocks are down 8% y/y, estimated at 102 million tonnes. China, which is heavily affected by COVID-19 is the leading importer of soybeans, accounting for 58% of the global soybean import forecast for 2019/20 season. The disruptions caused by the virus there could have implications on soybean imports activity.

Concluding remarks 

Overall, this is a “mixed bag of grain market dynamics”; global wheat prices could be favourable in the near term for importing countries (and South African consumers), assuming minimal disruptions from the coronavirus. The same is true for maize but the benefit will be from the anticipated improvement in domestic supplies. Meanwhile, soybeans could be the opposit

DATA RELEASES THIS WEEK 

On Wednesday, Stats SA will release the Consumer Price Index data for February 2020. To recap, South Africa’s food price inflation was at 3.7% y/y in January 2020, while the previous month was 3.8% y/y. This deceleration, however, was not across the food basket. Only price inflation of bread and cereals; fish; and vegetables decelerated. But this was enough to overshadow the increases in meat; milk, eggs and cheese; oil and fats; fruit; sugar, sweets and desserts.

Also, on Wednesday, the South African Grain Information Service (SAGIS) will release the weekly grain producer deliveries data for the week of 13 March 2020. This covers both summer and winter crops. With summer crops still at growing stages, the focus remains on winter wheat data, whose harvest was completed in January 2020. In the week of 06 March 2020, about 4 052 tonnes of wheat were delivered to commercial silos. This placed total wheat deliveries at about 1.42 tonnes, which equates to 95% of the expected harvest in the 2019/20 season.

 On Thursday, SAGIS will release the weekly grain trade data (wheat and maize), also for the week of 13 March 2020. In brief, maize exports for the 2019/20 marketing year have thus far amounted to 1.15 million tonnes, which equates to 87% of the export forecast for this season (1.32 million tonnes).

 At the same time, we expect maize imports of about 525 000 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 477 671 tonnes of yellow maize.

 Also, on Thursday, the United States Department of Agriculture 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.

Our recent interaction with winter wheat farmers in various parts of the country has been quite encouraging. In the major producing province, Western Cape, the crop has matured and generally in good shape with expectations of good yields in most regions – all thanks to rainfall received in the past couple of weeks.

Poachers poisoned five lions and brutally mutilated one at a South African predator park this week. The horrific incident occurred on Monday night at Akwaaba Predator Park near Rustenburg, some 80 miles west of Johannesburg in the northeast of the country. 

A mushroom extract fed to honeybees can greatly reduce virus levels, according to a new paper from Washington State University scientists, the USDA and colleagues at Fungi Perfecti, a business based in Olympia, Washington.

Over the past few days, the complex nature of South Africa’s food supply chains has come under the spotlight.

These supply chains are a web of formal and informal interactions between agricultural inputs, logistics, farmers, spazas, bakkie traders, processing plants, shipping, retailing, biosecurity and more. Despite the reference to essential goods and services that need to continue to operate, the announcement by President Ramaphosa of a 21-day lockdown triggered a sharp rise in purchases of food that, according to various retailers, exceeded the volumes that are typically sold over Christmas. Furthermore, the lockdown has caused significant confusion at various nodes in the value chain with regards to what is classified as an essential service and what is not. Initially informal traders were excluded from the list of essential services, which caused a major bottleneck in access to food in many poor neighbourhoods, especially in rural areas. This was rectified in the second amendment to the Regulations on 2 April, when the relevant definition of essential services was changed to include “grocery stores and wholesale produce markets, including spaza shops and informal food traders, with written permission from a municipal authority to operate being required in respect of informal food traders”. This is an important amendment, which allows informal traders such as street hawkers to operate again, but requires a coordinated implementation plan with regard to the issuing of permits and the enforcement of health and safety requirements within essential but informal food trading. On-going cooperation between government and private sector is required to efficiently and effectively remove bottlenecks and enable the continuous operation of all essential goods and service delivery within the food value chain to ensure food security during COVID-19 lockdown.

In its first two briefs on the impact of COVID-19, BFAP provided an overview of the South African food system and food expenditure patterns by consumers respectively. This brief sheds light on the complex nature of the food supply chain and the extent of the essential goods and services required for its effective operation. In his initial speech, the President referred to some of the broader sectors that are exempt from restrictions, but did not provide a comprehensive list of all included sectors at the time. Essential goods or services can generally be defined as those that: • May be bought or acquired primarily for personal, family or household purposes, including but not limited to medicines, food, water or fuel; and • Are necessary for the health, safety, or welfare of consumers. Essential goods and services as defined in Section 213 of the Labour Relations Act (Act No 66 of 1995), and designated in terms of section 71(8) of the Act, are specified as power, health, transport, water and sanitation. For the purpose of the COVID-19 lockdown, an amendment of regulations to the Disaster Management Act (2002) provided increased clarity of food related ‘essential goods’ and these were outlined as: • Any food product, including non-alcoholic beverages; • Animal food; and • Chemicals, packaging and ancillary products used in the production of any food product. April 3, 2020 Bureau for Food and Agricultural Policy (BFAP) 477 Witherite road, Agri hub office park Die Wilgers, 0186 Pretoria www.bfap.co.za This email address is being protected from spambots. You need JavaScript enabled to view it. This email address is being protected from spambots. You need JavaScript enabled to view it. Although the food and related products stated above were included in the amended list of essential goods, the list of “essential services” related to food and food production was less comprehensive.

The essential services classification needs to extend across agriculture and not just food, as agricultural value chains are intertwined and if not managed carefully, will have a direct and negative impact on food security. For instance, cotton and wool are not included as essential products, but they provide cashflow to farmers, and are critical in the sustainability of livelihoods and food security, as, without cash flow, field crops cannot be planted. Both sectors are also critical components of the animal feed industry. It is therefore important that cotton and wool (export) trade be opened in order to support farm incomes. The export of cotton and wool also requires port services in order to facilitate the country’s exports. The foregoing underlines the fact that the “food industry” in South Africa is complex and includes a number of support services which, directly and indirectly, enable the efficient and effective operations of the holistic food value chain, and therefore fits the fundamental definition of essential services. By implication, such services must also be authorised to function normally for the food value chain to continue functioning in an effective manner. From a food supply chain perspective, essential goods and services entail all activities and processes which support the production, processing, distribution, consumption, and waste disposal of food in the system.

The following essential food-related supply chains remain operational: • Agricultural and food-related operations, and all agricultural input suppliers and support services; • Fish operations; • Manufacturing facilities for the processing of food, beverages and essential products; • Warehousing, transport and logistics for food, essential products, and health-related goods; • Ports, roads and rail networks, which will remain open to facilitate the import and export of essential products. It is critical that related inspection and regulatory/ documentation control systems and processes operate efficiently and effectively; • Food outlets – including retail, wholesale, spaza shops, malls for food, and essential products. Figure 1 outlines the broad framework of South Africa’s food supply chain and its various components, including the essential services that ensure the smooth functioning of the country’s food system. It includes multiple cross-cutting services such as electricity, banking, telecommunications, water, security, logistics, sanitary and phyto-sanitary (SPS) functions, and waste disposal, among others. Such services are required across the various components of the food supply chain. Transport, as well as health and safety, are pre-requisites that are essential at each node of the food supply chain; critical additional services at ports include administrative functions that ensure documentation and procedures are adhered to for exported and imported essential goods.

FULL REPORT on the LINK ABOVE