Drought, not policy uncertainty, blamed for agriculture crash- South Africa

The alarming agriculture figures that dragged SA into recession were not the result of policy uncertainty about land reform.

Instead, the sector has been weighed down by drought and delayed harvests, with statistician-general Risenga Maluleke saying last week that the decrease "was mainly because of a drop in the production of field crops and horticultural products".

SA’s agriculture output shrank by a huge 29.2% in the second quarter of 2018, after a 24.2% contraction in the first quarter. This dragged growth down for the second consecutive quarter. The GDP figures showed that the economy is in a recession for the first time since the global financial crisis.

In February, the National Assembly adopted a resolution brought by the EFF to begin a process to amend the constitution allowing land expropriation without compensation. But there has been persistent uncertainty about how this will be carried out. A joint constitutional review committee is holding public hearings on the possibility of amending section 25 of the constitution to make it clear how land could be expropriated without compensation.

While there is concern that land reform could affect agricultural production adversely if handled badly, analysts say the weather is largely behind the dismal recent performance of the sector. "The deterioration in confidence could lead to a decline in investment in the sector if uncertainty continues for longer around the proposed land reform policy. This will then affect growth, but in the coming year or so," says agricultural economist Wandile Sihlobo.

The agricultural sector is not a heavy hitter at just 2% of GDP. However, it gave SA a much-needed boost in 2017.

"We knew this momentum couldn’t last forever," says Citadel’s chief economist, Maarten Ackerman. "However, with time this base effect will fall away and the agricultural industry will start to contribute positively again."

If the drag from the agricultural sector was excluded from the GDP figures, weak contributions from other industries would still see GDP growth at a mere 0.1%, Ackerman estimates. SA would have escaped plunging into recession, but only barely.

Agriculture is coming off a high base in 2017, while the drought in the Western Cape, which makes up 20% of the sector, has also constrained production. The maize harvest will only be partially factored in to the second quarter, which makes up about 20% of the harvest, says Sihlobo. This is because the harvest has been delayed due to a late start to the season on the back of unfavourable weather earlier in the year – particularly in the western parts of SA. Sugar harvest activity also started late.

Agricultural economists

Though agricultural economists are adamant policy uncertainty has not weighed on the sector yet, some economists say it has. "We attribute part of the sector’s demise to policy uncertainty and, more specifically, the ANC’s decision to change the constitution to allow land expropriation without compensation," says BNP Paribas economist Jeff Schultz.

He echoes industry body AgriSA, which told parliament last week uncertainty about land reform, particularly the issue of expropriation without compensation, had already had a negative effect on the agricultural sector and the economy. Evidence on the ground suggested talk of expropriation without compensation had caused a significant lag in capital investment in the agricultural sector and farmers who wanted to sell their properties were struggling to find buyers, it said.

The GDP figures do not reflect this, but the uncertainty has led to a general lack of confidence in the country’s direction and therefore an unwillingness to consume and invest, says Peter Kent, co-head of fixed income at Investec Asset Management.  BDLIVE

Merrill Lynch also warned on the continued uncertainty about land reform, stressing that "current uncertainty will continue to deter investment". But it does not expect explicit damage to property rights from land reform. Any changes to the constitution will likely be specifically applicable to land and only under explicit circumstances, it said.

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