We have in the past argued that the growth of South Africa’s agricultural fortunes and job creation will, in part, depend on the expansion of agricultural activities in the underutilised former homelands regions and farms that government acquired through the land reform process.
Hence, we viewed this past week’s announcement by the Minister of Agriculture, Land Reform and Rural Development, Ms Thoko Didiza, that government would be availing 700 000 hectares of agricultural land as broadly positive. The provinces with a specified large supply of land equating to 529 014 hectares are North West (300 000 hectares), Limpopo (121 567 hectares), Eastern Cape (43 000 hectares), Mpumalanga (40 206 hectares), Northern Cape (12 224 hectares), Free State (8 333 hectares) and KwaZulu-Natal (3 684 hectares).
Beneficiary selection
The government promises efficiency in availing the land to potential beneficiaries. The selection process, which will be through three broad structures -- district, provincial and national -- could take approximately two months. So far, it is unclear what criteria will the selection committees follow as no final version of the Beneficiary Selection and Land Allocation Policy has been published since the draft was gazetted early this year. We hope that the foundations of that policy have been retained as robust and transparent criteria is critical to bring confidence that there aren’t any corrupt activities in the process. This is an important area which was also emphasized in the Advisory Panel on Land Reform and Agriculture. Moreover, the Advisory Panel report had recommended that the government should have more bias towards the youth and women in the beneficiary selection criteria for land redistribution process was mirrored in the department's recent statement. This will likely be part of the important aspects to be considered when selecting beneficiaries for the available 700 000 hectares of land. In the 135 117 hectares of land that the government has released since February this year, women and youth were prioritized in beneficiary selection. What the current committees will, however, have to ensure is that this process is fair and transparent going forward.
Farm productivity
Availing government land is one step of contributing to the growth of agricultural fortunes and job creation. Other important aspects will be the (1) readiness of the beneficiaries to farm, which is their know-how of farming, as well as (2) resources such as finance and infrastructure of the farms.
Firstly, the government states that beneficiaries will be subjected to a compulsory training programme before gaining full access to the farm. We think this is an important step as there might be young people aspiring to join the sector but have minimal experience. There should be training programmes which broadly relates to financial and business management and yet also cater to specialized training for commodities that a beneficiary wishes to focus on. Also, there will need to be active extension officers or mentors to assist the new farmers. Another important avenue would be for the potential beneficiaries to work closely with various agribusinesses and commodity organizations, specifically the ones with development programmes that focus on grooming framers. These recommendations are broadly in line with the Policy on Comprehensive Producer Development Support currently before Nedlac.
Secondly, the state of the infrastructure on these farms is unclear at this point. Each farm might be in a different condition from the next as some might have been bought by the State a couple of years ago and the infrastructure might not all be in a suitable condition. A clear assessment of this, and an upgrade where necessary, will be key before the new beneficiaries take over the farms. In some cases, beneficiaries with large capital resources might be better placed to refurbish the farm infrastructure. This will be from irrigation, fencing, housing, amongst other aspects, all depending on the type of farming enterprise. To gain capital, it will be vital that the blended finance products being developed jointly between the government and the private sector is operationalized as soon as possible.
Importantly, these farms will be issued a non-tradable, 30-year lease, which means the potential beneficiaries might not be able to use the land as collateral to access production finance unless a stepping-in right is registered over the lease. We foresee this as a potential major challenge in ensuring that these farms are productive and contribute towards growing the South African agricultural fortunes and job creation. Once the process of contracting with beneficiaries commence, it will be interesting to take note of all restrictions placed on the lease to fully assess the degree to which the beneficiary, government and many private sector financiers can share the risk of the beneficiaries applying for private or blended finance.
If the lease is non-tradable as appears to be the case, we think the option to buy should be granted at an early stage of the lease, perhaps after five-years as this would provide the state with an ideal opportunity to assess the beneficiary's potential to become a fully-fledged landowner. The payments in the initial renting stage should also be calculated as a down payment on the purchase value. This process would ensure that the new entrant farmer has the flexibility to use the land as collateral and access capital to further develop the farm. This process also entails a non-monetary incentive of ensuring that the beneficiary takes good care of the land as it will be their property. This process would also perhaps assist the State to make a judgement after five years of whether the beneficiary was an appropriate person for the farm. This will, of course, have its downsides for farmers who aspire to focus on long-term crops such as fruit, as five years would be too short a period to make a judgement of whether they are succeeding or not. That said, such a farming venture is capital intensive and would thus benefit from the method we are proposing.
In a nutshell, the government’s action is a right step towards improving the growth of the agricultural sector. But the financing of the new farms could prove to be a challenge, as we have seen in the past land redistribution programmes where beneficiaries have no tradable leases on the land and the efficacy of the blended finance proposals are yet to be tested.
WEEKLY HIGHLIGHTS
SA agricultural jobs decline by 5% y/y in Q2, 2020
The Quarterly Labour Force Survey data for the second quarter of 2020 showed that South Africa’s primary agricultural employment declined by 5% (or 43 029 jobs) from the corresponding period last year to 799 033. This is unsurprising as the social-distancing regulations introduced at the end of March 2020, to prevent the spread of the coronavirus, meant that farmers and agribusiness were not able to increase employment, especially of seasonal labour in the same way they would have in the absence of the pandemic, in years of an agricultural bumper harvest as in 2019/20 season. Also, the mild decline in employment confirms our anticipation that farmers might have kept most of the labour force that was already on farms in the first quarter to assist with the harvesting process of horticulture and field crops.
To zoom into the figures, the decline in employment was in most provinces except for the Western Cape, Mpumalanga and Limpopo. We find the job gains in the Western Cape surprising as the province’s agriculture sector has probably been one of the most affected by the lockdown regulations, particularly the ban on the sale of alcohol during various stages of the lockdown. Perhaps, the sharp impact of these regulations will show in the third-quarter numbers. For Mpumalanga and Limpopo, the job gains might have been linked with increased activity during harvesting. With that said, we still think the job gains could have been much larger during a normal year as there were a large horticulture and field crop harvest during the second quarter in both provinces.
The decline in employment is spread mainly across all subsectors; primarily in the livestock, mixed farming, game and hunting industry, forestry and fisheries. Meanwhile, the animal husbandry, field crop and horticulture subsectors showed a mild improvement in jobs. Nevertheless, these were overshadowed by the decline in other sectors, hence net basis agricultural jobs declined. Importantly, Statistics South Africa noted that these numbers need to be handled with a caution against making strict comparisons to previous quarters because of data collection limitations during the pandemic.
SA set to have the largest wheat harvest in a decade, and largest canola and barley harvest on record
This past week the Crop Estimates Committee (CEC) reaffirmed its view that South Africa’s 2020/21 wheat crop could be the largest in a decade, while the canola and barley harvest could be the largest on record. The CEC lifted all the production forecasts of all the aforementioned crops by 3% each from last month’s levels as favourable rainfall suggests that there could be good yields in several regions. The current estimates suggest that South Africa’s 2020/21 wheat, barley and canola production could increase by 32% y/y, 51% y/y and 33%, respectively, to 2.02 million tonnes, 520 106 tonnes and 126 520 tonnes.
The winter crop planting was delayed which means that the crop will require moisture for a longer period than the usual months. We think for the current expected large harvest to materialize, the Western Cape and other winter crop-producing provinces will need sufficient moisture until the end of October, which is plausible according to the weather forecasts.
On July 24, in its Seasonal Climate Watch report, the South African Weather Service highlighted prospects for “increased chances of above-normal rainfall over the south-western and southern parts of the country between August and October 2020”. We have already received good moisture in August and September, which gives us optimism that rains could continue in the coming month and support the crop. Of course, the Western Cape is not the only province that has contributed to these expected fortunes, specifically in the case of wheat, the Northern Cape, Free State, Limpopo, North West and Eastern Cape are amongst the contributors.
What does this all mean? To start with wheat, which South Africa over the past 10 years imported on average about 51% per annum of its consumption, there will be a decline in imports. We think that a harvest of 2.02 million tonnes would see South Africa’s wheat imports falling by, at least 11% y/y, in 2020/21 to levels around 1.6 million tonnes. In terms of barley, South Africa will remain a net exporter, and the country is actively looking for export markets as the expected volume might not all be utilized in the domestic market this season. Meanwhile, for canola, the harvest will probably be utilized in the domestic market.
SA food price inflation slows
South Africa’s food price inflation slowed to 4.3% y/y in August 2020 from 4.6% in the previous month. This was primarily on the back of a deceleration in meat and fish products price inflation, which overshadowed the uptick in other products prices such as oils, fats and fruit.
While we expect South Africa’s food price inflation to remain subdued for the rest of the year, the rising grains prices have introduced additional upside risks. Hence, we now think South Africa’s food price inflation could average around 4.5% y/y in 2020. Already, in the first eight months of the year, food price inflation has averaged around 4.4% y/y. This is slightly higher than our initial expectations of about 4.0% y/y at the start of the year.
Going forward, South Africa’s food price inflation will remain contained into 2021 as we expect a good agricultural season on the back of a La Nina weather event which should help contain grain prices while supporting all forms of agriculture output.
DATA RELEASES THIS WEEK
From a global calendar, today we have the US weekly crop progress data which will be released by the USDA. On Thursday, the USDA will release the US weekly export sales data, which also help in tracking the agricultural trade activity between the US and China. On Friday, the USDA will release the World Agricultural Supply and Demand Estimates report, which will provide an update of the 2020/21 global grains and oilseeds production forecasts.
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 02 October 2020. This data covers both summer and winter crops. But the focus is on summer crops where the harvesting process has recently been completed.
On Thursday, SAGIS will release the weekly grain trade data also for the week of 02 October 2020. In the previous week of 25 September 2020, South Africa’s 2020/21 total maize exports were at 1.48 million tonnes, which equates to 59% of the seasonal export forecast (2.50 million tonnes). In terms of wheat, South Africa is a net importer, and in the week of 25 September 2020, about 1.86 million tonnes of imports in the 2019/20 marketing year, which ended in September were imported. This is slightly above our expectations of 1.80 million tonnes.
