This past week, the Economic Transformation Committee of the African National Congress (ANC) and Business for South Africa (B4SA), each released their discussion documents about the post-COVID-19 inclusive economy for South Africa.
On the priority sectors for growth and job creation, agriculture features prominently in both documents. On a positive note, both the ANC's and B4SA's agricultural development views are framed from chapter six of the National Development Plan (NDP), which highlights the need to expand irrigated agricultural land by one-third (by 2030), expand commercial agricultural production, the prioritisation of subsectors and regions that have high potential and are labour intensive. There is also a focus on the need for increased transformation in agriculture and its value chain.
Both plans recognise that poor infrastructure, both in the former homeland regions of South Africa and general logistics to move produce to the ports and processing plants for established agriculture, is an area that needs urgent attention. Another point of commonality that arises from both B4SA’s and the ANC’s economic recovery document is the need to improve agricultural finance through stabilising the Land Bank.
What these documents are perhaps silent on is a recognition that the aforementioned agricultural ideas have been touted since 2012, but accompanied by limited success on implementation over the past couple of years. This is not to suggest that there is a need for change in the framing of agricultural development, we certainly agree that there is no need for such. The focus, however, should be on understanding why the implementation has lagged over the past couple of years and what will make things different this time around.
In our view, the lack of implementation of agricultural government policy and infrastructure-related constraints are down to three broad reasons. Firstly, the limited government capacity to execute government programmes and misalignment of functions and priorities between the three spheres of government. Secondly, the misallocation of the budget by the national and provincial governments. Thirdly, the poor coordination and alignment of transformation programmes and general misalignment of incentives, and vision in some cases, between the government and the private sector.
To solve these challenges, the task largely lies on the government through its various Sector Master Plans to continue working with the private sector and civil society to address the aforementioned challenges. As we stressed in our note last month, agricultural growth and job creation will be through the development of under-utilised land, especially in former homeland areas and underperforming land reform farms (about 400K jobs); the expansion of export-led high growth areas (250K jobs); and investment in agro-processing with integrated up-and downstream linkages (350K jobs).
The ANC also notes that “the state should mobilise development partners, including the World Bank, the African Development Bank, the private sector and impact funders to contribute towards developing a thriving rural economy centred on agriculture.” We concur with this view. There is evidence that partnerships between the private sector and government have, in some cases, piloted successful programmes to drive transformation. Some of these, which we have previously highlighted, include projects of the Sernick Group, the Humansdorp Co-op and the Mohair Trust, amongst others.
Three common themes run throughout these programmes:(1) public-private-partnership structured finance, (2) market linkages and (3) farmer training and the adoption of technology in production practices. The task ahead, particularly the agriculture and agro-processing Master Plans, should be that of upscaling and replicating these strategic partnerships in various value chains across the country. As we have previously argued, incentives for agro-processing could be in a form of tax incentives for various agricultural hubs which will be determined by the type of agricultural activity. For agricultural production, the selection of the value chains to prioritise should follow the NDP’s view of higher growth and labour-intensive value chains, such as horticulture. In regions where this is not possible, livestock and field crops remain key subsectors for agriculture expansion.
The one important point of deviation between the ANC and B4SA is land reform, which is crucial to fully realise the aforementioned vision of agricultural expansion. On this point, B4SA argued for strengthened property rights and the extension of secure tenure or tradable leases in government land as part of means to attract investment, which in the long run leads to growth. Meanwhile, the ANC argues that the state should release land to individuals but is not clear on whether on tradable leases or another form of tenure rights will be afforded to the holders and occupiers of these land parcels.
Moreover, the ANC argued that “to acquire land for redistribution, the programme to expropriate land in line with the existing legal and constitutional prescripts should be continued. To further accelerate land redistribution consideration should also be given to the taxation of unused land.” A position which was not shared by B4SA.
Overall, the ANC and B4SA agricultural development plans have more in common than opposites. The broader land reform question needs urgent attention, as does water (infrastructure and policy) since this will hold the key to development in the areas that have the potential to deliver the envisaged million jobs. Given the current fiscal constraints, development in the sector will be private-sector driven as acknowledged by both the ANC and B4SA, but the private sector involvement will require clear policy guidance on land reform. And increased investment will need assurance on property rights. The release of the land the ANC argued for, will need to be on long-term tradable leases so that investment could flow, particularly in areas with better infrastructure.
WEEKLY HIGHLIGHTS
The global grains market is well supplied despite the USDA’s downward revision of some crop production forecasts
This past week the United States Department of Agriculture (USDA) released an update of its World Agricultural Supply and Demand Estimates report for July 2020. Our interest in it is primarily maize, wheat, rice and soybeans, specifically the 2020/21 production season estimate. There were broadly minor adjustments in production estimates of many countries, aside from the US, whose maize and wheat production estimates were revised down, notably. In the case of wheat, the EU’s 2020/21 production prospects were also revised down from June 2020. This was in part on the back of a reduction in area plantings and expectation on lower yields in some regions of the US and EU, specifically wheat-growing region. The drier weather conditions over the past couple of weeks also proved to be a challenge in the EU region and will continue to be the case in the US on the back of expected heatwave this week. Meanwhile, rice and soybean production estimates were left roughly unchanged from June.
· To zoom into the details, the downward revision of US maize production resulted in a 2% decline in 2020/21 global maize production from June estimates to 1.16 billion tonnes. Nevertheless, this is still 4% higher than the previous season, supported by expected large supplies in South America, Europe and parts of Asia. The crop is in its growing stages in the northern hemisphere, which means the weather is an important feature to monitor in the coming weeks and months as it will influence crop conditions. 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 761 million tonnes, which is marginally lower than the previous month’s estimate because of the aforementioned weather challenges in parts of EU and the US. This, however, is still 1% higher than the previous season. As we have consistently pointed out in our previous notes, the wheat-importing countries such as South Africa stands to benefit from large global supplies. South Africa imports roughly 50% of its annual wheat consumption. In the 2019/20 marketing year which ends in September, imports are estimated at 1.8 million tonnes. About 85% of this has already landed in the South African shores.
In the case of rice, the USDA has maintained its production forecast at a record 502 million tonnes, up 1% y/y on the back of expected large crop in Asia. 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, which is set to import 1.1 million tonnes in 2020 (up 10% y/y). The 2020/21 global soybean production was also left roughly unchanged from last month at 363 million tonnes, which is up 8% y/y. This is on the back of an expected recovery in production in the US, Argentina, Brazil and Paraguay, amongst others.
These large global grains supplies are reflected on global grains prices which have somewhat softened over the past couple of weeks compared to last year. This is also illustrated on the FAO global grains index which averaged 86.6 points in June, down by 2% y/y (Exhibit 1 in the attached file).
DATA RELEASES THIS WEEK
From a global perspective, today the USDA will release the weekly crop progress data. This data provides insight into the US 2020/21 grains and oilseeds growing conditions in the wake of reported dryness in parts of the US, which influenced the aforementioned downward revision on wheat and maize production prospects. On Thursday, the USDA will release the weekly export sales data, which also helps in tracking the agricultural trade activity between the US and China.
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 10 July 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 early growing stages for the 2020/21 season.
On 03 July 2020, about 5.6 million tonnes, which equates to 36% of the expected maize harvest in the 2019/20 production season had already been delivered to commercial silos. About 56% was yellow maize, with 44% being white maize. Unlike maize, where the harvest season is still at its early stages, there has been progress in the soybean harvest. In the week of 03 July 2020, about 1.2 million tonnes had been delivered to commercial silos. This equates to 93% of the expected harvest in the 2019/20 season. On the same day, about 663 129 tonnes of sunflower seed, which accounts for 87% of the expected harvest in 2020/21 marketing year, had already been delivered to commercial silos.
Also, on Wednesday, Stats SA will release the Consumer Price Index data for May 2020. Our focus will be on food price inflation component of the inflation basket, where we generally expect food price inflation to decelerate from April 2020 level of 4.6% y/y. The easing will most likely to underpinned by lower bread and cereals products, fruits and vegetables, amongst other products. This is on the back of large agricultural supplies, which have started to weigh on prices.
On Thursday, SAGIS will release the weekly grain trade data. In the week of 03 July 2020, about 636 307 tonnes of maize had already been exported, all to neighbouring countries, as well as, Ethiopia, Japan, Taiwan and South Korea. This equates to 24% of the seasonal export forecast of 2.7 million tonnes, which is up by 89% from the 2019/20 marketing year because of an expected large harvest. In terms of wheat, South Africa is a net importer. In the week of 03 July 2020, the country’s 2019/20 wheat imports amounted to 1.5 million tonnes, which equates to 85% of the seasonal import forecast.
