With only a week after the first case of the novel coronavirus (COVID-19) was confirmed in South Africa (and two more cases since then), the fear of a spread of the virus is changing consumer behaviour and demand patterns.
Anecdotally, over the weekend we noticed a surging demand for sanitizers to an extent that several retailers had run out of supplies. In other countries such as the United States, consumers are on “panic-buying” mode, clearing shelves of everything from cleaning wipes, hand sanitizers to pasta, rice and bottled water. The United Kingdom is experiencing similar behaviour with retailers reporting a spike in demand for essential products and foods.
Will South Africa experience similar behaviour? It is too early to tell, but we find the growing demand for sanitizers, spooked by fear of the virus spreading, similar to consumer behaviour in the United States and the United Kingdom when the first cases were reported. If a similar shift in consumer behaviour were to happen in South Africa, in the very short run, an increase in demand would be a positive for retailers, especially food and other essentials. In the medium term, however, depending on whether the virus continues to spread, there might be a decline in demand possibly due to quarantine restrictions, business and school closures and fear of exposure to public spaces with large numbers of people.
Businesses at the forefront of such an adverse shock would include restaurants (and subsequently agricultural suppliers), public transport, hairdressers and similar personal services providers, to name a few. So far, we haven’t observed much changes in consumer patterns in such establishments, at least from anecdotal observations over the past few days. The traffic in most restaurants around Pretoria and Johannesburg seemed normal. In the United States, restaurants and fast food stores have increased their in-store cleanliness efforts as a way to ease consumer fears. We will be monitoring if such efforts and consumer behaviour become prevalent in South Africa in the coming weeks, and what would that mean for the food retailers and thereafter demand for agricultural products and prices.
Another area we are monitoring and highlighted last week is global agricultural value chains. The potential decline in Asia’s agriculture demand and falling prices could see the value of South Africa’s agriculture exports to Asia also declining in 2020. As highlighted in our note on 02 March 2020, South Africa’s agriculture is export-orientated, with exports of roughly US$10 billion in 2019, the potential disruptions the coronavirus could cause on global value chains is a key concern. This is specifically the case for Asia, as the epicentre of the outbreak, and also an area that accounts for a quarter of South Africa’s agriculture exports. The commodities most exposed to the Asian market are wool, fruit, grains, beverages, vegetables and red meat.
Globally, what we have learned over the past few weeks is that fear changes consumer behaviour and subsequently changing demand patterns for products. South Africa appears to be experiencing early signs of this through spiking demand for sanitizers. If this extends to food and other essentials as is the case in other countries affected by the virus, the agribusinesses will fundamentally experience the shocks in the domestic market (possibly through spiking demand first and softening in the medium term). The implications of this on food price inflation are unclear in the near term. Suffice to say, South Africa has large food supplies for 2020. Hence, we have placed our forecast for food price inflation this year at about 4% y/y.
Of course, COVID-19 is a world-wide shock and it remains too early to make any definitive assessment of the potential economic effect. There is still a lot of unknowns, including how far the virus could still spread, particularly in Africa, how swift global efforts to contain the spread will be effective and how quickly consumer behaviour normalizes after the virus is overcome. These are some of the issues that we will be paying close attention to going forward.
WEEKLY HIGHLIGHTS
SA’s tractor sales remained subdued in February 2020
After falling to the lowest monthly level in six years in January 2020, South Africa’s tractor sales recovered by 46% m/m in February 2020 to 485 units. While encouraging, this is still 8% lower than the corresponding period in 2019 –
As it was the case in January 2020, the subdued tractor sales data was unsurprising as it is a continuation of the 2019 trend. That year, farmers’ incomes were constrained because of poor harvests on the back of drought and biosecurity issues, amongst other aspects. With that said, the drought which led to lower agricultural output in 2019 is not the full story. It’s worth remembering that in 2018 South Africa’s agricultural machinery sales were relatively robust, which implies that the rate of replacement in 2019 was going to be low.
What’s more, there have been questions about whether agricultural policy, which has dominated the headlines in the past few years (certainly between 2017 and 2019), has influenced farmers’ attitudes on investments. To this end, we continue to monitor, through the Agbiz/IDC Agribusiness Confidence Index (ACI), the influence of policy discussions on agricultural investment. Certainly, sentiment in the farming sector has generally been subdued for the past six quarters (counting from Q4, 2019). This is the longest period the ACI has trended below the neutral 50-point mark points since 2010, which implies that agribusinesses are downbeat about business conditions in South Africa.
However, we are yet to have a full picture of the sector’s fixed investment numbers for 2019. What we found rather comforting thus far is that fixed investments in the sector did not decline notably in 2018. Be that as it may, the subdued confidence levels suggest a need for urgency in moving the policy levers to ensure that, at least matters that are in the South African policymakers’ reach are well addressed in the interest of sustainable growth of the agricultural and agribusiness sector.
SA farm economy to recover in 2020
South Africa’s farming economy was not in good shape in 2019. This is clear from the agricultural GDP data released last week by Statistics South Africa. The data show a 6.9% year-on-year contraction for 2019, which is a second consecutive year of contraction in South Africa’s farm economy. While worse than our initial expectations of a 4.0% y/y contraction, this is unsurprising. The output of various crops and horticulture produce declined notably in 2019 because of the drought, while the livestock was negatively affected by the foot-and-mouth disease outbreak.
This year, however, could be different. The improved weather conditions have led to an increase in summer crops area plantings and prospects of higher yields. The data recently released by the Crop Estimates Committee showed that South Africa’s 2019/20 summer crops production could increase by 26% y/y to 16.8 million tonnes, which could be the second-largest summer crops harvest on record after the 2016/17 crop. What’s more, the South African wine grapes production is also set to increase in 2020. There is also general optimism about 2020 harvest in the fruit industry, which supports our view of possible improvement in farming economy this year.
Against this backdrop, we are convinced that South Africa’s farm economy could recover by at least 5% y/y in 2020. The two factors that we are concerned about and monitoring are (1) the spreading coronavirus and (2) the foot-and-mouth disease in the domestic market. The coronavirus could negatively impact the global demand for agriculture products, and subsequently prices. Whereas, the foot-and-mouth disease has led to a ban on South Africa’s livestock products exports since the end of 2019.
Moreover, the Agbiz/IDC agribusiness confidence, which in the past proved to be a good indicator of the growth path of the South African agricultural economy sector has been rather wobbly in the most recent quarters because of policy uncertainty. It remains in the contractionary territory, having eased at 44 points in the last quarter of 2019. This is below the neutral 50-point mark and implied that agribusinesses are downbeat about business conditions in South Africa. Overall, we think the expected improvement in summer crop and horticulture harvest could add some optimism in the sector in the coming quarters. With that said, developments on the agricultural policy environment, depending on how they are perceived by agribusinesses, could always influence the confidence levels much faster than one can observe changes in farm economy which is guided by the seasonal output.
DATA RELEASES THIS WEEK
On Tuesday, the United States Department of Agriculture will release an update of its World Agricultural Supply and Demand Estimates report (WASDE). This report will give us a sense of the world’s grain and oilseed supplies in the 2019/20 marketing year.
On Wednesday, the South African Grain Information Service (SAGIS) will release the weekly grain producer deliveries data for the week of 06 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 28 February 2020, about 3 466 tonnes of wheat were delivered to commercial silos. This placed total wheat deliveries at about 1.40 tonnes, which equates to 94% 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 06 March 2020. In brief, maize exports for the 2019/20 marketing year have thus far amounted to 1.09 million tonnes, which equates to 83% 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.
In terms of wheat, South Africa’s 2019/20 wheat imports could increase by 28% y/y to 1.80 million tonnes, as noted in the aforementioned section. In the week of 28 February 2020, South Africa’s 2019/20 season amounted to 698 542 tonnes, which equates to 39% of the seasonal import forecast (1.8 million tonnes).
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.
