In this year’s State of the Nation Address (SONA), President Ramaphosa reaffirmed the government’s commitment to ensuring that agriculture is amongst the key sectors that will drive growth and job creation in South Africa.
The president’s agricultural message was centred around three areas. Firstly, the commitment to various master plans that are currently being developed, with specific mention of the sugar and poultry master plans. These are industries that have been under pressure in the recent past, in part, because of rising input costs (grains in the case of poultry) and stiff competition from imported products. Trade policy has a role in stabilising both industries. Moreover, the public-private sector approach that the master pans take is key to ensuring that plans are not only drafted but that there are commitments to execute them in the interest of developing the agricultural sector.
Secondly, the president noted that the government will implement key recommendations from the Presidential Advisory Panel on Land Reform and Agriculture to accelerate land redistribution, expand agricultural production and transform the industry. Not all proposals in this particular report require legislative amendments, but those that do will have to follow the usual route of public consultation, in which case Agbiz and other affected stakeholders will make use of all available avenues to provide inputs (Agbiz formal response following the release of the report is here).
In brief, the following recommendations do not require legislative amendments but merely political will and stakeholder commitment to initiate;
o Create innovative financing mechanisms;
o Create a 'land register' to house donations;
o Identify and release state land;
o Conduct a land audit;
o Subdivide land already acquired by the state;
o Providing tenure grants for certain occupiers;
o Root out corruption;
o Reallocating water rights in conjunction with land allocation;
o Finalise outstanding restitution and labour tenant claims.
The ongoing debate about Section 25 of the Constitution, however, is the most contentious issue in South Africa’s agricultural policy at the moment. Policy clarity in this regard is critical in determining the long-term prospects of the country’s agricultural sector. We hope that such a final policy view will be clear in the coming months when the Ad Hoc Committee on Section 25 finalises its work and reports to the National Assembly.
Thirdly, and perhaps most interestingly, the president noted that “this year we will open up and regulate the commercial use of hemp products, providing opportunities for small-scale farmers; and formulate policy on the use of cannabis products for medicinal purposes, to build this industry in line with global trends. The regulatory steps will soon be announced by the relevant ministers.” This is already part of the sectoral master plans that are being developed, specifically the Department of Agriculture, Land Reform and Rural Development, as well as at the Department of Trade, Industry and Competition.
On this particular point, it is worth noting that a number of countries in Africa have in the recent past reformed their cannabis regulations – moving away from it being a prohibited drug to a source of income as an exportable commodity. This is motivated by the promise of riches, with many policymakers viewing the burgeoning cannabis industry as offering prospects for boosting rural economic growth and job creation. This seems to be particularly the case for South Africa, although it is still unclear how much revenue the country can derive from this plant.
Countries that have regulated cannabis include Lesotho, which was the was the first African country to decriminalise cannabis, in 2017, and the first licence for production was issued in 2018. Zimbabwe issued its first cannabis licence in March 2019. Export markets and foreign exchange earnings are the key drivers for cannabis regulatory reforms in this country. Other countries, like Eswatini, have also put in place a draft bill regulating cannabis. Similarly, to Zimbabwe, cannabis production in Eswatini is restricted to medicinal purposes and scientific research. Malawi has also moved glacially in putting in place its own licensing regime.
In short, many African countries are gradually considering legalising the cultivation of cannabis for medical and scientific purposes. Those countries where reforms are in motion are using the Canadian code as a guide for developing their licensing regimes. For many of them, the major motivating factors are boosting exports to earn hard currency, reducing unemployment, rural development and increasing agricultural productivity. Broadening their tax base is another important consideration, which in the South African case has been noted by the Finance Minister, Mr Tito Mboweni (see here).
Data from New Frontier suggests South Africa has a market for US$1,2 billion for cannabis and its products as of 2018. Apart from low-income consumers, South Africa has a potential market at the high end for products such as edibles, cannabis-infused beverages, nutritional foods, textiles, topical lotions, essential oils, animal feed and medical cannabis. South Africa can draw important lessons from the nascent cannabis regulatory regime on the continent. The first is that the country should take a value chain approach and emphasise economic inclusion. This means that the licencing needs to strike a balance between ensuring that cannabis production is well regulated and monitored but that it is also not excessively expensive as this would be prohibitive to smallholder farmers.
In addition to this, South Africa should have a clear and sound licensing regime with a single authority that can make a determination between the various types of licences, such as for scientific and medicinal use, dispensary, and industrial hemp production. This would mean the recognition of hemp as an agricultural crop through rescheduling, as well as a key ingredient for medical uses. The licensing process should take less than three months since longer periods undermine the ease of doing business. Strict compliance standards should be set and enforced, particularly for medical cannabis, to ensure global credibility for exports as the sector develops.
South Africa should avoid being trapped in only primary production. The cannabis policy should also aim to enrich the value chain, including R&D, seed breeding, and biotechnology on the medicinal side; as well as supporting the production of high-value products on the industrial hemp side to improve niche-based competitiveness in the clothing and textiles sector in line with the country’s industrial policy. This could lead to positive spill-overs in knowledge upgrading, and help stimulate job creation across the value chain.
Overall, the SONA touched on all key policy areas that are currently in the midst of discussions in agriculture and agribusiness community. The master plans are building on the work and industries identified in Chapter six of the NDP as key for driving growth and job creation in agriculture. Land reform is another area which should be carefully monitored over the next three months. The cannabis discussion is also relevant as the plant and its value chain promises job creation and boosting rural economies. Going forward, swiftly moving implementation will be critical, and we will be closely monitoring progress in this regard.
WEEKLY HIGHLIGHTS
SA agriculture jobs up marginally in Q4, 2019
The Quarterly Labour Force Survey data for the fourth quarter of 2019 show that South Africa’s primary agricultural employment increased by 4.2% (or 36 000 jobs) from the corresponding period last year to 885 000 (see Exhibit 1 in the attached file).
The notable job gains were mainly in the Western Cape, KwaZulu-Natal, Free State and Limpopo. This was largely in the horticulture, field crops and livestock subsectors. These activities, however, were not evenly spread across all provinces. We believe that the Western Cape, Limpopo and KwaZulu-Natal job gains were mainly in horticulture and field crops (specifically winter crops). While the slight improvement in the livestock subsector employment could be in the Free State. Other provinces, namely the Eastern Cape, Northern Cape, North West, Gauteng and Mpumalanga experienced a reduction in agricultural employment over the observed period (see Exhibit 2 in the attached file). But this was overshadowed by the improvement in the aforementioned provinces, hence, on balance, South Africa’s primary agriculture sector registered employment net gains from the corresponding period in 2018.
Overall, we are generally optimistic about the near-term agricultural jobs outlook. The potential improvement in summer crop production, following an 8% expansion in area plantings, coupled with the expected increase in wine grape production and other fruits could lead to an increase in employment, albeit some of this is likely to be seasonal. We doubt the livestock sector could contribute notably to employment in the near term. The recent outbreak of another foot-and-mouth disease which has resulted in a ban on the export of livestock products has added negative pressure on farmers' finances.
A mixed bag of grains
The United States Department of Agriculture (USDA) has recently released a monthly update of its World Agricultural Supply and Demand Estimates report. The commodities we typically in this report are wheat, maize and soybeans, for various reasons, however.
Wheat
South Africa is a generally net importer of wheat, so its key that one has a sense of global wheat supplies and other market developments. 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 4% y/y. 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 global wheat prices could remain somewhat subdued this year, which will be beneficial for importing countries such as South Africa. The existing wheat import tariff in South Africa could, however, slightly reduce these gains that domestic buyers would have enjoyed. Meanwhile, somewhat cushioning local farmers (this is a discussion for another day).
Maize
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 forecast South Africa’s 2019/20 maize production at 14.0 million tonnes, which is up 19% from the previous season. This data comprises of both commercial and non-commercial production. Hence, it is slightly higher than the estimates we have recently released (our commercial maize production estimate for the 2019/20 season is 12.5 million tonnes, which is the lower end of market expectations).
If such harvest materializes, South Africa could have over 1.5 million tonnes of maize for the export market. This will benefit maize importing countries such as Zimbabwe, Mozambique, Japan, Taiwan, and SACU market, amongst others. These are all typical markets for South African maize.
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.
Soybean
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 soybeans production at 339 million tonnes, down 5% y/y. As a result, the 2019/20 global soybean stocks are down 11% y/y, estimates at 99 million tonnes. With China now back in the market, this means soybeans and its product prices could be slightly elevated in the coming months, which is not good for importing countries such as South Africa.
Concluding remark
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 consumer). The same is true for maize but the benefit will be from the anticipated improvement in domestic supplies. Meanwhile, soybeans could be the opposite.
DATA RELEASES THIS WEEK
On Wednesday, the South African Grain Information Service (SAGIS) will release the weekly grain producer deliveries data for the week of 14 February 2020. This covers both summer and winter crops. But for now, we particularly monitor winter wheat data, whose harvest has recently been completed in most regions of South Africa. In the week of 07 February 2020, about 5 463 tonnes were delivered to commercial silos. This placed total wheat deliveries at about 1.38 tonnes, which equates to 92% of the expected harvest in the 2019/20 season.
Also, on Wednesday, Stats SA will release the Consumer Price Index data for January 2020. South Africa’s food price inflation averaged 3.1% y/y in 2019, which is well below market expectations. We expect South Africa’s food price inflation to hover around 4.0% in 2020.
On Thursday, SAGIS will release the weekly grain trade data (wheat and maize), also for the week of 14 February 2020. In brief, maize exports for the 2019/20 marketing year have thus far amounted to 976 279 tonnes, which equates to 74% of the export forecast for this season (newly revised 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 463 859 tonnes of yellow maize.
In terms of wheat, South Africa’s 2019/20 wheat imports could increase by 28% y/y to 1.8 million tonnes because of expected lower domestic harvest on the back of unfavourable weather conditions in the Western Cape. In the week of 31 January 2020, South Africa’s 2019/20 season amounted to 537 812 tonnes, which equates to 26% of the aforementioned seasonal import forecast (now revised to 1.8 million tonnes).
On Friday, 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 (see A Q&A around the US-China ‘phase one’ trade agreement, 20 January 2020).
