Contained cost pressures are a welcome relief in a difficult trading environment in South African agriculture

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Over the past few weeks, we noted that South African farmers have had one of the toughest years because of the combined effects of drought and animal disease that affected production and trade. But this is only one side of the story. Another side of the story relates to agricultural input costs, which positively, have been relatively contained compared to this time last year.

 To recap, in September 2018, South African farmers faced an average 20% year-on-year (y/y) increase in fertiliser prices and over R1 per litre increase in diesel price. This year, however, the local fertiliser prices were down by 9% y/y on average in August 2019, according to data from Grain SA. Admittedly, this does not put absolute fertiliser prices at levels prior August 2018, but it is a much welcome relief given that farmers are financially constrained after a drought season. The herbicides and insecticides prices are also down compared to levels seen in August 2018.

 Given that South Africa imports about 80% of its annual fertiliser consumption and is a small player in the global market, accounting for a mere 0.5%, local prices tend to be influenced by developments in the major producing and consuming countries, such as India, Russia, the US and Canada. Last month, global fertiliser prices fell notably, partly due to a supply glut. The same is true for insecticides and herbicides the decline in global prices has been an underpinning driver of slowing domestic prices.

The only diverging input price is fuel. After some increases at the start of September, daily data from the Central Energy Fund suggest further potential mild increases of 8 cents/litre for petrol and 19 cents/litre for diesel on 02 October 2019. This is on the back of an uptick in Brent crude oil prices, which were exacerbated by the recent attacks on a Saudi Arabian oil facility. Although this will not offset the benefits that South African farmers gained from declining fertiliser, herbicides and pesticides prices, it will add slight pressure. The impact will also extend to the agribusinesses that operate in the transport and logistics industries. On average, 75% of SA’s national grain and oilseed crops are transported by road.

 Also, worth noting is that global fertiliser prices tend to follow the Brent crude price trend with a few weeks delay. Therefore, if the prices of Brent crude remain relatively higher for some time because of the Saudi Arabia oil facility attack, then fertiliser prices could follow a similar trend over the coming months. We will monitor the developments closely, but communication from Saudi Arabia suggests that oil production could normalise as early as the end of September 2019. If this materialises, then fertiliser prices could remain at softer levels for some time, which will be beneficial for the farming community, not only in South Africa but globally.

Aside from the Southern Africa maize story; this week might not bring what is needed in the Western Cape winter crop growing areas – rainfall. The precipitation forecasts for the next two weeks show clear skies across the province with the exception of the coastal areas which could receive light showers. This is a troubling outlook which could undermine the positive development set by higher rainfall over the past few weeks.

 This comes at an opportune time as the 2019/20 summer crop production season will be commencing in a few weeks’ time. Much of the fertiliser imported by South Africa is utilised in maize production, which accounts for 41% of total fertiliser consumption in the country, the second-largest consumer being sugar cane at 18%. Fertiliser constitutes about 35% of grain farmers’ input costs and a notable share in other agricultural commodities and crops.

On balance, the 2019/20 summer crop production season is starting on better footing than the previous one. The expected better weather conditions and the aforementioned price movements of key agricultural inputs will help ease pressure on farmers financials following a difficult season that saw a double-digit decline in production of summer grains and oilseeds.

South Africa’s food price inflation accelerates

South Africa’s food price inflation accelerated to 3.8% y/y in August 2019, from 3.0% y/y in the previous month. While food product prices were mixed within the basket, the uptick in headline food price inflation was primarily underpinned by meat, bread and cereal product prices. The increase in prices of these products reflected the dynamics at farm level.

 First, since the start of the year, maize prices have largely traded at higher levels compared to 2018 because of the anticipated poor harvest on the back of drier weather conditions in the central and western parts of South Africa. The production data corroborates this point, with 2018/19 maize, soybeans and sunflower seed production 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.

Second, the increases in meat prices comprise pork, beef and other meats. In the case of pork, the increases are in line with the developments in the global pork market where prices have been supported by increasing demand in Asia. The Asian demand comes after the region’s pig industry, specifically in China and Vietnam, declined notably because of the spread of African swine fever. Domestic beef prices have also recovered following a period of suppressed prices when there was a ban on South African exports because of an outbreak of foot-and-mouth disease at the start of 2019. South African beef exports have since resumed, and with that came an uptick in demand which supported prices.

These price dynamics of meat, bread and cereals were driving the headline food price inflation number, amongst other products, in August 2019. We generally expect food price inflation to remain slightly elevated over the next few months in line with an increase in farm-level prices.

South Africa’s Agribusiness Confidence Index improves marginally in Q3, 2019

 After falling to 44 points in the second quarter of this year, the Agbiz/IDC Agribusiness Confidence Index (ACI) marginally improved to 46 points in the third quarter. Despite the small uptick, a level below the neutral 50-point mark implies that agribusinesses are still downbeat about business conditions in South Africa, which is precisely the case with third-quarter results. The survey was conducted between 30 August and 10 September 2019 and comprised agribusinesses operating in all agricultural subsectors across South Africa.

More information and data on the South African Agribusiness Confidence Index can be accessed here.

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.

 On Thursday, SAGIS will release the weekly grain producer deliveries data. While the data will present producer deliveries data for the week of 20 September 2019, it essentially gives us an indication of the volume of summer grains and oilseeds that have been delivered to commercial silos after the harvest process.

 Also, on Thursday, Stats SA will release the Producer Price Index (PPI) data for August 2019. In July, South Africa’s food producer price inflation was 6.1% y/y, the highest pace this year.

 More on Thursday, the Crop Estimates Committee (CEC) will release its eighth production forecast for summer field crops for 2018/19 production season. South Africa’s 2018/19 major grains production was lower, as illustrated by maize, soybeans and sunflower seed production whose harvest is 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. We don’t expect any adjustments from this data, as nothing fundamentally has changed since the last assessment and harvest has been completed across the country. In fact, the focus on summer crops is now shifting to the 2019/20 production season which commences mid-October.

The CEC is, however, likely to slash its 2019/20 wheat, canola and barley production estimates because of drier weather conditions in the Western Cape over the past few weeks. This Thursday, we will see the release of the second production estimates after the first one painted an optimistic picture, with wheat then set to be the largest harvest in a decade, estimated at 1.92 million tonnes. Barley and canola harvests were estimated at 401 640 tonnes and 103 600 tonnes, down by 5% and 1%, respectively.

On Friday, we will get the weekly grain trade data (wheat and maize) for the week of 20 September 2019. Briefly, in terms of maize, the exports of the 2019/20 marketing year have thus far amounted to 407 802 tonnes. Looking ahead, we expect South Africa to remain a net exporter of maize this year, although the volume will most likely fall by half from the previous year to about 1.1 million tonnes. In terms of wheat, South Africa remains a net importer, although the recovery in the country’s 2018/19 domestic wheat production will lead to a decline in imports this season. South Africa’s 2018/19 wheat imports could fall by 36% from the previous season to about 1.4 million tonnes. So far, the country has imported about 81% of the seasonal forecast.