South Africa agricultural machinery industry performed relatively better in April 2020, but the outlook remains uncertain

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As many parts of the economy remain closed due to lockdown restrictions, we are seeing some evidence that South Africa’s agriculture and allied industries have thus far not been as hard hit by the coronavirus pandemic as other sectors of the economy.

The case in point is the agricultural machinery sales monthly data, which show that South Africa’s tractor and combine harvester sales were down by just 4% y/y and 13% y/y in April 2020, with 416 units and 20 units sold, respectively. The classification of the agricultural sector and its value chains to operate during the lockdown period as part of essential services was a key catalyst to sustaining the sales last month. By comparison, some sectors that have remained in full lockdown such as the automobile industry saw new vehicle sales plummet by 98.4% y/y in April.

 

Another catalyst of tractor sales has been the fact that South Africa’s winter crop planting season began this month. This refers specifically to the wheat, barley, canola and oat producing regions, namely the Western Cape, Northern Cape, Free State and Limpopo. In the case of combine harvester sales, the supporting factors include the fact that South Africa is expecting the second-largest grain harvest on record. The harvesting process for this bumper crop recently started and it is set to gain momentum towards the end of this month. To zoom into major summer grains and oilseeds, the 2019/20 maize, soybeans and sunflower seed harvests are forecast at 15.2 million tonnes, 1.3 million tonnes, and 731 210 tonnes; which are up by 35%, 10% and 8%, respectively, from the 2018/19 production season. The increases are mainly attributable to an expansion in area planted in the case of maize and expected improvements in yields on the back of favourable growing conditions.

 

Nonetheless, the long-term trend of agricultural machinery sales, particularly tractor sales, has been subdued over the past couple of months (Exhibit 1 in the attached file). This trend has continued from 2019 when farmers’ finances were constrained because of drought-induced poor harvests. Another key point to highlight is that the lower tractor sales of the past couple of months were preceded by robust sales in 2018.  That year, South Africa’s total tractor and combine harvester sales amounted to 6 687 units and 200 units, up by 4% y/y and 2% y/y, respectively. As a result, the rate of replacement in 2019 was expected to be lower, but the 2020 sales were pressured by the aforementioned financial constraints of farmers. While the classification of agriculture and its value chain as essential during the lockdown period has sustained activity in the sector, the weaker domestic currency will lead to higher prices of the imported agricultural machinery in the coming months. This, in turn, could weigh on the tractor and combine harvester sales.

 

 Moreover, the recent further downgrade of South Africa’s sovereign credit rating to the sub-investment grade could negatively influence the financing of the agricultural equipment. In ordinary times, the SARB would probably have responded by raising interest rates in anticipation of possible exchange rate depreciation and associated inflation risks, which would have increased the cost of capital. However, this time the situation is different. The COVID-19 pandemic has disrupted global supply chains, which subsequently led to deteriorating economic conditions. Several central banks, including the SARB, have responded by reducing interest rates as a way to ease financial conditions. This means the transmission of a sub-investment grade could now be felt through the scarcity of capital, rather than the cost of capital. Moreover, it is plausible to assume that some financial institutions could become more risk-averse to lending, especially to already highly geared farmers.

 

South Africa’s farming sector is highly geared. As of 2018, the total farm debt was at a 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, and the financial pressure brought by frequent droughts, which have limited agricultural output on various farms over the recent past.

 

In a nutshell, the classification of agriculture and its value chain as part of essential services during the lockdown period has enabled the agricultural machinery industry to operate and record relatively better than expected sales compared to other sectors of the economy. However, the fundamental macroeconomic exogenous factors could weigh on the sector in the coming months, irrespective of the expected robust agricultural output in the 2019/20 production year. One silver lining on this cloud is that of higher commodity prices as a result of a weaker rand.

 

 WEEKLY HIGHLIGHTS

 

Disruptions in the global meat market continue

 

 The US, Canada, Brazil and Ireland continued to report closures of meat processing plants because of COVID-19 infections amongst employees in various meat processing plants. In the US, Ireland and Canada, mainly beef and pork processing plants are affected, while in Brazil, the closures are influencing poultry-related processing plants. Given the significant share of these countries to global meat trade (33%), if the processing plants closures spread and remain for a prolonged period, there could be fears of a global meat shortage and potentially an uptick on prices. The US, Canada and Ireland are amongst the top ten of the world’s exporters of beef (and pork for Canada and the US). In the case of poultry, Brazil is a leading exporter, followed by the US, Poland, the Netherlands and Germany.

 

 As outlined in our note on the 28th of April 2020, from a beef perspective, South Africa is, fortunately, a net exporter as shown in Exhibit 2 (in the attached file). Therefore, the closures of certain plants in key exporting countries present minimal risks from a food security perspective. In terms of pork meat, however, South Africa remains a net importer of ribs from Europe. Imported pork accounted for roughly 6% in domestic consumption in 2019. Similarly, with poultry, about 20% of the domestic consumption is imported, mainly from Brazil, the US and the EU, amongst other suppliers.

 

This essentially means that if the disruptions in various meat plants persist for some time and spillover to the global market, South Africa wouldn’t be spared from the price impact, particularly on poultry products. With that said, we don’t see reasons to panic at this point but rather a need to monitor and strengthen domestic production where possible.

 

Overall, the disruptions in the meat supply chains in the US, Brazil, Canada and Ireland are key to monitor but we don’t foresee an immediate threat to South Africa’s supplies in the near term because of the country’s relatively low dependency on meat imports, specifically beef.

 

DATA RELEASES THIS WEEK

 

From a global perspective, on Monday, the United States Department of Agriculture (USDA) will release the weekly crop progress data. This is important data to monitor grains and oilseeds planting activity across the US for the 2020/21 production season, which promises to be a good one, despite the pandemic.

 

 On Tuesday, the USDA will release its monthly World Agricultural Supply and Demand Estimates report. The commodities we typically follow in this report are wheat, maize, rice and soybeans, and the focus will be on initial estimates for the 2020/21 production season. The International Grains Council (IGC) has recently released its estimates pointing to a notable increase in all major grains and oilseeds production in 2020/21 production season. We viewed this as a signal that there is no need for export restrictions in key exporting countries as there are large supplies in the market and estimates point to further improvement in grains and oilseeds supplies. We will be watching this week to see if the USDA numbers will concur with the IGC or if there will be any deviations, and what factors will be driving such.

 

On the domestic front, the dates we present could change if there are any interruptions caused by the COVID-19 pandemic. We tentatively expect that on Wednesday, the South African Grain Information Service (SAGIS) will release the weekly grain producer deliveries data for the week of 08 May 2020. This covers both summer and winter crops.

 

With summer grains, specifically, maize, not fully at harvest period, the focus remains on winter wheat data whose harvest was completed in January 2020. We will also monitor the early deliveries of oilseeds, mainly soybeans and sunflower seeds, whose harvest has recently started in a few regions of the country. In the week of 01 May 2020, about 772 tonnes of wheat were delivered to commercial silos. This placed total wheat deliveries at about 1.5 tonnes, which equates to 97% of the expected harvest in the 2019/20 season.

 

There are still relatively small volumes delivered thus far in the oilseeds market (soybeans and sunflower seed). About 363 462 tonnes of soybean had already been delivered to commercial silos on 01 May 2020. This equates to 28% of the expected harvest of 1.3 million tonnes in the 2019/20 season. In the same day, about 67 552 tonnes of sunflower seed, which accounts for 9% of the expected harvest in 2019/20 season, had already been delivered to commercial silos.

 

On Thursday, SAGIS will release the weekly grain trade data (maize) for the second week of 2020/21 marketing year. In the first week of this new marketing year, about 15 804 tonnes of maize were delivered to commercial silos. South Africa’s 2020/21 maize exports could amount to 2.7 million tonnes, up by 90% y/y. This is supported by the expected large harvest, which is set to be the second largest in the history of South Africa, at 15.2 million tonnes.

 

·         In terms of wheat, in the week of 01 May 2020, South Africa’s 2019/20 wheat imports amounted to 1.01 million tonnes, which equates to 56% of the seasonal import forecast. This week, we will get a sense of the volume of imports in the second week of May.