South Africa’s farming sector is heavily in debt. As of 2018, the total farm debt was at record R168 billion. About 60% of the debt is with the commercial banks, 29% is with the Land Bank, with the rest spread between agricultural cooperatives, private persons and other institutions.
The escalation of debt, particularly in more recent years, was because of both the expansion in area farmed, specifically in horticulture and to some extent, the financial pressure brought by frequent droughts, which have limited agricultural output on various farms over the recent past.
The 2019/20 production season follows two seasons which were hampered by drought in some areas, negatively affecting farmers’ finances. In ordinary times, the expected large output in both field crops and horticulture this season would be part of the recovery phase. But we doubt if that will be the case in the face of COVID-19, which has disrupted supply chains and thereby leading to lower global demand. South Africa’s agricultural sector is export-oriented. In value terms, roughly half of the products the country produces are destined for export markets.
Locally, some agricultural industries’ performance is interlinked to some sectors, which are hard hit by COVID-19. A case in point is the wine industry, whose performance is somewhat influenced by tourism. The decline in tourism will hurt this sector. The COVID-19 pandemic comes at a time when wine grapes production had started to recover following seasons of drought. This essentially means the South African wine industry could be hampered by both the potential decline in demand locally and the global market, specifically in Europe, which is now the epicentre of the COVID-19 pandemic.
Through export earnings and domestic sales, farmers can generate the revenue necessary for servicing their debt, amongst other things. Hence, as policymakers and private financial institutions try to find ways to ease the possible financial pressures from COVID-19, it might be helpful to also consider the farm debt issue.
Global agricultural commodity prices have already taken a knock because of fears of slowing demand due to COVID-19. If we consider maize, soybean, and wheat prices, there has been a 10%, 8%, and 6% decline over the past month, respectively. However, global price shifts have thus far not spilt over to the South African market, which is currently supported by growing demand for the above-mentioned commodities from the Southern Africa region countries and the relatively weaker domestic currency. But over time, the South African agricultural market could experience a similar trend, particularly given that there are already expected large supplies.
The financial impact of COVID-19 will vary across agricultural subsectors, depending on the debt overhang from the previous seasons and also the stage of production. For example, the deciduous fruit and table grapes exports might not be badly hit as most exports have already been processed by this time of the year. Meanwhile, in the case of citrus, the harvest and exports have recently started. While so far there haven’t been glitches, a lot depends on the measures the European countries place in terms of commerce amid COVID-19 intensification in that region. From a local market perspective, as long as food retailers are operating, there should be a flow of products to market.
The wool industry has just returned to the market following a ban placed by China, where 70% of wool is exported in a normal season, because of foot-and-mouth disease. This year was set to be a recovery phase from this event, and also the drought that hit parts of the Northern Cape, Western Cape and Eastern Cape. Any major disruptions on trade could negatively affect this industry and thereby farmers’ financial positions. Already, wool prices have declined notably over the past week, in part, due to fears of potential slowing global demand.
The red meat industry is somewhat in a similar situation, the foot-and-mouth disease outbreak towards the end of 2019 led to a ban on exports which negatively affected the financial conditions of farmers. With limitations in restaurants, we could see a decline in demand for beef which some often consume away from home and which is more expensive than other protein foods. This too will negatively affect the beef farmers’ finances.
Overall, while lower agricultural commodity prices, which we anticipate, are favourable for consumers, the opposite is true for farmers. Under such a scenario, the question is whether farmers will be able to have sufficient revenue to service their debts. Admittedly, there are still a lot of unknowns about how the COVID-19 pandemic will play out and the various levels of indebtedness amongst farmers, but a proactive policy response could help prevent financial ruin for farmers, particularly those of a small to medium-sized scale.
Policy considerations
So far, the recent 100bp cut in interest rate by the South African Reserve Bank helps to reduce the cost of debt. What we have observed in countries such as the United Kingdom, the financial institutions have set mortgage payment holidays of up to three months. However, the unpaid interest will still be recovered later. It is unclear if such a policy response would be plausible for South Africa, but in these extraordinary times, it might be something worth considering and drawing lessons from. Perhaps, the measures taken to support SMEs should be extended to the farming sector given its significance to food security.
WEEKLY HIGHLIGHTS
Slight uptick in SA food price inflation in February 2020
The data released this past week by Statistics South Africa shows that the country’s food price inflation accelerated to 4.2% in February 2020, from 3.7% y/y in the previous month. This uptick was mainly underpinned by relative price rises of meat; milk, eggs and cheese; oils and fats; and vegetables. Still, this doesn’t change our view that what will matter the most for the direction of food price inflation this year are developments in the grains, meat markets and fruit. These three food categories account for nearly two-thirds of South Africa’s food price inflation basket.
Firstly, the outlook for South Africa’s grain production is positive. Maize production could increase by 35% y/y to 16.0 million tonnes, according to the latest forecasts from the United States Department of Agriculture (USDA). This could be the second-largest maize harvest on record after the 2016/17 season (which was 16.8 million tonnes for total maize). What’s more, global wheat production, which South Africa is a net importer of, is set to be up 5% y/y to 764.0 million tonnes. This means grain-related product prices could be under pressure in the coming months. The only key risk which we continue to monitor is COVID-19, specifically on wheat shipments. So far, however, we haven’t noticed glitches.
Secondly, meat price inflation was subdued in 2019 because of the ban on red meat exports on the back of a foot-and-mouth disease outbreak at the start of that year. We are seeing a repeat of a similar situation this year following another foot-and-mouth disease outbreak at the end of 2019. This means South Africa’s meat prices could remain at relatively lower levels for the greater part of this year. But the lower base effect of 2019 will mean that meat will not suppress the overall food price inflation in 2020 as much as in the previous year. Thirdly, there are prospects of good fruit harvests this year, with the citrus industry recently noting a 13% y/y increase in available supplies for export markets. Amid the COVID-19, especially within the EU and Asia region, which are key markets for South African fruit exports; any glitches in supply chains would result in an increased supply for the local market, thereby lowering prices. This would be good for a consumer, but the inverse can be said for farmers.
Against this backdrop, we are convinced that South Africa’s food price inflation should hover around 4.0% in 2020 (food price inflation averaged 3.1% y/y in 2019). Under this scenario, the upside pressure will largely come from meat; and importantly, it will mainly be base effects in the case of red meat, and a possible slight uptick in poultry products prices on the back of a recent tariff adjustment.
DATA RELEASES THIS WEEK
On Tuesday, Stats SA will release the Census of Agricultural Statistics for 2017. This is an important dataset for understanding the changes in the structure of the South African agricultural economy over the past decade.
On Wednesday, the South African Grain Information Service (SAGIS) will release the weekly grain producer deliveries data for the week of 20 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 13 March 2020, about 4 680 tonnes of wheat were delivered to commercial silos. This placed total wheat deliveries at about 1.43 tonnes, which equates to 95% 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 20 March 2020. In brief, maize exports for the 2019/20 marketing year have thus far amounted to 1.20 million tonnes, which equates to 90% 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 13 March 2020, South Africa’s 2019/20 season amounted to 717 834 tonnes, which equates to 40% of the seasonal import forecast (1.8 million tonnes).
Also, on Thursday, Stats SA will release the Producer Price Index data for February 2020. South Africa’s food producer price inflation accelerated to 4.3% y/y in January 2020 from 3.5% y/y in the previous month.
On the same day, 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.
