The South African agriculture sector has the potential to be amongst the sectors that will drive economic growth and job creation during the post-COVID-19 recovery phrase.
The path to realising this growth does not need new policies. The South African government should rather, recast its vision of agricultural development using chapter six of the National Development Plan (NDP) as a point of departure. The NDP proposed a three-tier approach for agriculture and agro-processing to reach its fullest potential of creating one million jobs by 2030, namely the development of under-utilized land especially in former homeland areas and underperforming land reform farms (approximately 400 thousand jobs), the expansion of export-led high growth areas (approx. 250 thousand jobs) and the investment on agro-processing with integrated up-and downstream linkages (approx. 350 thousand jobs). But what will need to be done differently post the pandemic is the realization that the broad vision should be followed up with detailed operational plans to guide the officials and various stakeholders at the local level.
The Department of Agriculture, Land Reform and Rural Development is currently drafting the sector Master Plan, with input from private sector players. Such a plan should prioritise high-value job-creating subsectors, and not only focus on areas where the agriculture sector is well established at the commercial level, but rather on new areas that still have untapped potential. Such areas involve the former homeland regions of South Africa, government land and underperforming land reform farms. The Master Plan should map these areas, along with potential agricultural activities which could be promoted. Another crucial step will be to understand why agricultural development has lagged over the past two decades in such regions, while in the commercial agriculture areas the output has more than doubled since 1994.
There are several reasons which explain this disparity in fortunes, the major ones being lower levels of investment in agriculture and lack of infrastructure. With respect to investment, poor land governance, both in the former homelands and some underutilized land reform farms, have been the key impediments. With regard to the lack of infrastructure, the problem has been compounded by poor service delivery in various local municipalities, especially those in former homelands towns of South Africa.
Given these structural challenges, the Master Plan will have to lucidly articulate ways and means to increase investment, as well as the improvement or capacitation of local governance. In the case of investment, agriculture is a long-term economic activity with relatively modest returns. Given this reality, the South African government will have to clarify its long-term view on land reform policy, not only for areas that are already farming commercially but also for the former homelands, where investment and commercial agriculture is set to make the most impact.
A renewed drive on the prioritization of joint venture models between the private sector and the government is now critical in bringing about development. The private sector will not only bring a “know-how” to the state but also a capital investment. South Africa already has examples of such development programme from which to build on. These include, but not limited to, Sernick Group in the beef sector in the Free State and the Humansdorp Co-op in the Eastern Cape, which focuses on field crops and horticulture. Both companies have partnered with government and communities for the development of black farming businesses.
The Master Plans should reflect on such examples of successful programmes and further innovate and develop institutions which effectively drive and sustain development. Moreover, this post-COVID-19 agriculture development plan should also encompass the agro-processing side as that will add to job creation and development in various rural towns. On this particular point, private sector investment should also be encouraged. Therefore, the agriculture and agro-processing Mast Plan should also reflect on strategic incentives for firms to expand agro-processing in various towns which were not predominantly agricultural. This might be in the form of tax incentives for various agricultural hubs which will be determined by the type of agricultural activity. In areas where weather conditions permit, the government should encourage the expansion of horticulture production as this subsector has higher labour absorption multipliers than other subsectors of agriculture, in addition to also having a higher value.
All these ideas aren’t new. There is no need to re-invent the wheel. Rather, the focus should be on understanding why there have been low levels of policy implementation over the past two decades. Addressing the stumbling blocks to development (i.e. investment and infrastructure) and focusing on effective implementation are the key ingredients of a successful post-COVID19 agricultural sector.
Given that the private sector’s role might have been less pronounced in the past, the tight fiscal position that the South African government is currently in demands a need for external funding to drive development in agriculture. This means for the better part, agricultural development in a post-COVID19 will require deeper and greater participation of the private sector. However, effective private sector participation demands that government provides greater levels of policy certainty, especially land reform. The government will have to take an investment friendlier approach, which is still anchored in development.
WEEKLY HIGHLIGHTS
The USDA lifts its forecasts for 2020/21 grains production
This past week the United States Department of Agriculture (USDA) released an update of its World Agricultural Supply and Demand Estimates report. Our interest in it is primarily maize, wheat, rice and soybeans, specifically the 2020/21 production season estimate. The agency followed a similar path as the International Grains Council (IGC) and lifted the production estimates of all the aforementioned commodities from levels reported last month, placing maize, wheat and rice at record levels. This suggests that the reports of dryness in parts of Europe and the US might not have been as severe as previously feared. These data also reinforce a point we made in the previous notes, which is that the world is awash with grains supplies. Therefore, countries who had feared for possible shortages at the early stages of the pandemic, and placed export restrictions which were later reversed, should not attempt such policy option again.
To zoom into the details, the USDA forecasts 2020/21 global maize production at 1.2 billion tonnes, which is up 7% y/y. This is underpinned by an expected larger harvest in the US, Brazil, China and the EU, amongst other regions. The planting of this crop has advanced in the northern hemisphere and some countries; the crop has emerged and is in good condition. In the southern hemisphere, however, the 2020/21 season maize planting will only begin around October. The long-term weather forecasts generally look favourable which supports the view of a possible good crop even in southern hemisphere countries that are yet to plant the 2020/21 crop.
In terms of wheat, the USDA forecasts the 2020/21 global wheat harvest at a record 773 million tonnes, which is up 1% y/y. This is underpinned by expected large harvests in various countries which include Canada, Australia, Argentina, China, India and Kazakhstan, amongst others. This will mean that the 2020/21 global wheat stocks could increase by 7% y/y to 316 million tonnes. As previously stated, the wheat-importing countries such as South Africa stands to benefit from large global supplies, assuming there are no further restrictions on exports that will be imposed, as the data shows that there should not be global supply worries.
South Africa’s 2020/21 wheat production season is underway, with plantings having largely been completed in the major producing province, the Western Cape. While the recent rains and weather outlook for the coming months paint a favourable picture for wheat production in that province, overall wheat plantings for the country are set to fall by 8% y/y to 495 000 hectares, mainly in the Free State. This means that South Africa will continue to have a large dependence on imports, about 50% of annual consumption.
In the case of rice, the USDA has maintained its production forecast at a record 502 million tonnes, up 2% y/y. Under this production estimate, global rice stocks could also lift by 2% y/y to 185 million tonnes. This would add bearish pressure on prices and, in turn, be beneficial to import countries like South Africa.
In a nutshell, as we stated when the IGC had released its production forecasts, the weather remains a major risk that requires constant monitoring in the global grains market over the coming months. With that said, the available weather-related and production data suggest that this could be a good season. We, therefore, think there is no need for major grain-producing countries to re-consider the restrictive trade policy they had intended to implement at the start of the pandemic when they feared for grain shortages. There are currently large supplies in the market from the 2019/20 season, and the 2020/21 production season promises to be even much better.
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, and also crop conditions in areas that have already planted. This is particularly the case as plantings are almost completed. In the week of 7 June 2020, about 97% of the intended area for maize in the 2020/21 season had already been planted. This compares to 78% in the corresponding week the previous year and a five-year average of 94%. Moreover, about 89% of the planted crop had already emerged, compared to 57% on 7 June 2019.
In the same day, about 86% of the intended area for soybeans had already been planted, compared to 54% on the 7 June 2019 and a five-year average of 79%. What’s more, about 67% of the planted crop had already emerged on 7 June 2020. Also, worth noting is that the planting activity in the US in 2019 was far behind schedule because of excessive rains at the start of the season. Hence there is a huge difference in this season’s planting progress and the 2019/20 season.
On Thursday, the USDA 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 and the impact of the COVID-19 pandemic on trade.
On the domestic front, on Wednesday, the South African Grain Information Service (SAGIS) will release the weekly grain producer deliveries data for the week of 12 June 2020. This covers both summer and winter crops. But the focus is on summer crops which are currently being harvested. The winter crops are still at planting stages for 2020/21 season.
In the sixth week of the 2020/21 maize marketing year, which was on 05 June 2020, about 1.9 million tonnes of maize had already been delivered to commercial silos. About 59% was yellow maize, with 41% being white maize. This, however, is a small fraction of the expected harvest of 15.6 million tonnes in the 2019/20 production season (which corresponds with the 2020/21 marketing year).
Unlike maize, where the harvest season is still at its very early stages, there has been progress in the soybean harvest. In the week of 05 June 2020, about 1.1 million tonnes had been delivered to commercial silos. This equates to 82% of the expected harvest in the 2019/20 season. Also, on 05 June 2020, about 412 677 tonnes of sunflower seed, which accounts for 54% of the expected harvest in 2020/21 marketing year had already been delivered to commercial silos.
On Thursday, SAGIS will release the weekly grain trade data. In the fifth week of the 2020/21 marketing year, which was on 05 June 2020, about 198 934 tonnes of maize had already been exported, all to neighbouring countries, as well as Taiwan and South Korea. This is a small fraction of the 2.7 million tonnes of South Africa’s 2020/21 maize exports we currently forecast, which is up by 89% y/y. In terms of wheat, South Africa is a net importer. In the week of the 05 June 2020, the country’s 2019/20 wheat imports amounted to 1.4 million tonnes, which equates to 78% of the seasonal import forecast.
