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VERSEKERING

South Africa agriculture trade balance narrowed in Q2, 2019

While having improved from the first quarter of the year, South Africa’s agricultural trade surplus narrowed by 30% in the second quarter of this year compared to the corresponding period in 2018, recorded at US$789 million.

The narrowing of the trade balance was underpinned by lower export volumes of wool, edible fruits, wine and grains. This can be explained by two factors, which are animal health and the changing climate. First, the foot-and-mouth disease outbreak that occurred in Limpopo earlier this year resulted in a temporary ban of South Africa’s beef and other livestock products exports. This continued for months while the authorities were still doing inspections and applying control measures, and thus, its impact is reflected in the trade data for the first half of this year. The beef industry is now back in export markets, but the wool industry continues to struggle to access the Chinese market as negotiations to resume exports are still underway.

 Second, the drought that started in October 2018 and continued into early 2019 in some parts of South Africa led to a poor summer crop and horticulture harvest. For example, the major summer crops, which performed poorly during the 2018/19 production season – maize, soybeans and sunflower seed production are down by 12% y/y, 21% y/y and 24% y/y, to 11.02 million tonnes, 1.17 million tonnes and 680 940 tonnes, respectively. Moreover, the wine grapes harvest was down by 2% from 2018. All this subsequently led to lower export volumes in the second quarter of this year compared to a corresponding period in 2018.

 From a destination point of view, the African continent and Europe continued to be the largest markets for South Africa’s agricultural exports, respectively accounting for 40% and 26% in value terms. Asia was the third-largest market, taking up 24% of South Africa’s agricultural exports in the second quarter of 2019. The balance of 10% value was spread across other regions of the world.

 Overall, while South Africa’s agricultural trade balance could narrow this year because of the aforementioned animal health and unfavourable weather impact, we expect it to remain in positive territory.

In terms of national policy, in his 2019 State of the Nation Address, President Ramaphosa signalled that potential expansion in agricultural production would mainly be on export-oriented products. There is already a clear pathway for this initiative as South Africa is well-positioned in terms of export markets, and there is clarity about products that show a growing demand in the world market, such as horticulture products, and livestock, to a certain extent, to mention a few categories.

SA agricultural economy is in recession

Although South Africa’s economy has recovered from the previous quarter’s economic performance with a 3.1% quarter-on-quarter seasonally adjusted growth rate (q/q saar), agriculture did not contribute to the improvement. After a strong contraction (16.8% -- revised numbers) during the first quarter of 2019, we were optimistic that things would turn around for South African agriculture. We hoped that base effects coupled with improved citrus production would trigger a recovery for the sector. However, we were wrong.

Data shows that the sector is in recession -- having contracted a further 4.2% q/q/ saar in the second quarter of 2019, largely owing to poor field crop harvest, as a result of droughts earlier this year. Given both the data and our observations of broader agricultural activity, we believe that South Africa’s agricultural sector will underperform in 2019. We predict that the sector will contract by approximately 2% y/y this year, because of generally poor summer grains and oilseed harvest in the 2018/19 production season.

A potential turning point for SA poor tractor sales might be close

The effects of poor summer crop harvest which in turn influence farmers' financial position have spilt over to the agricultural machinery market which has been subdued all year. The figures for August 2019 present no joy. Tractors’ sales were down by 10% compared to August 2018, with about 437 units sold.

 Admittedly, we cannot attribute the poor tractor sales performance solely on the lower harvest on the back of unfavourable weather condition. This is a year that follows 2018 where sales were relatively robust, which implies that the rate of replacement will likely be down in 2019. To illustrate this point; South Africa’s total tractor sales for 2018 amounted to 6 680 units, up by 4% from the previous year.

In addition, there have been questions about whether agricultural policy, which has dominated the headlines in the past few months, has influenced farmers’ attitudes on investments. To this end, we continue to monitor, through the Agbiz/IDC Agribusiness Confidence Index, the influence of policy discussions on agricultural investment. Certainly, sentiment in the farming sector has generally been subdued since the second quarter of 2018. But what I found rather comforting is that fixed investments in the sector did not decline notably in 2018.

Be that as it may, the subdued confidence levels in the second quarter of 2019 suggest some urgency in moving the policy levers to ensure that, at least matters that are in the South African policymakers’ reach are well addressed for the interest of sustainable growth of the agricultural and agribusiness sector.

 In closing, while South Africa’s tractor sales have been generally subdued throughout the year, there could potentially be a turning point around next month or so when the 2019/20 summer grains and oilseed production season start. The weather outlook is generally positive which signals a potential recovery in production and activity on the fields. As previously noted, the South African Weather Service recently indicated that the central and eastern parts of South Africa could receive above-normal rainfall between November 2019 and January 2020.

From a data front

On Monday, the U.S. Department of Agriculture will release the US crop conditions data. This will give us a sense of the US crop-growing conditions ahead of the supply and demand estimates report which will be released later this week.

On Wednesday, SAGIS will release the grain producer deliveries data. While the data will present producer deliveries data for the week of 06 September 2019, it will essentially give us an indication of the volume of summer grains and oilseeds that have been delivered to commercial silos after the harvest process.

On Thursday, we will get the weekly grain trade data (wheat and maize) for the week of 06 September 2019.

Also, on Thursday, the US Department of Agriculture will its World Agricultural Supply and Demand Estimates report, which will present the status of global grains and oilseeds supplies for the 2019/20 season.


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