We are likely in another week of positive news for South Africa's agricultural sector.
On Tuesday, Statistics South Africa (Stats SA) releases GDP data for the fourth quarter of 2020, which will give us a full-year view of the sector's economic performance. At an aggregate level, the first three quarters of 2020 were encouraging, with agriculture gross value-added expanding by double digits on an annualized quarter-on-quarter basis (see Exhibit 1 in the attached file). The generally good performance of the agricultural sector in 2020 is, in part, because most of the sector was classified as essential and continued to operate during the strict lockdown period. But more importantly, 2020 was a recovery year in agricultural output across all subsectors (field crops, horticulture and livestock). The year followed prolonged periods of drought and biosecurity challenges in 2018 and 2019, which led to a contraction in South Africa's agricultural gross value added of -4,8% y/y and -6,9% y/y, respectively.
We have, for a while, noted that South Africa's agricultural gross value-added probably grew by roughly 10-13% y/y in 2020, according to our and the Bureau for Food and Agricultural Policy's estimates. We believe that Stats SA data this week will most likely confirm this view. Unfortunately, however, the outperformance of the agricultural sector will do very little to change the overall GDP picture of South Africa as primary agriculture is a small share (about 2%) of the economy.
To recap, South Africa had its second-largest grains harvest in history in 2020. In horticulture, South Africa has generally had a good fruit harvest in 2020, with citrus exports reaching a record 146 million cartons. There was also a broad recovery in deciduous fruit production, with apple and pear production up slightly by 5% y/y and 1% y/y respectively in 2020. We also observed a general recovery in the livestock industry, although this particular subsector was not as robust as other agriculture subsectors. Nonetheless, the recovery in these subsectors is the basis of our optimistic view of the agricultural sector. Of course, some subsectors had a more challenging 2020. The agricultural industries such as wine, tobacco, and floriculture experienced a ban on sales at various stages of the lockdown; hence, the broader agriculture optimism is not the reality of these subsectors. But for the overall performance of the sector, the losses here will be more than offset by the recovery in field crops and horticulture.
The positive performance of South Africa's agricultural sector was also reflected in the exports data for 2020, which amounted to US$10,2 billion in 2020. This represents a 3% increase from the previous year. This is the second-largest level after the record exports of US$10,7 billion in 2018 (see Exhibit 2 in the attached file).
The favourable weather conditions that underpinned higher agricultural output in 2020 have continued into 2021. For example, the data recently released by the Crop Estimates Committee show that South Africa's 2020/21 summer grain and oilseed production could increase by 5% y/y to 18,5 million tonnes. While this is still the first production estimate for this season, with eight more to follow, this would be the largest on record if it materializes. Moreover, estimates from the South African Wine Industry Information and Systems and Vinpro suggest that South Africa's wine grape crop could be somewhat larger than in 2020. In the fruit industry, there is also optimism for continued growth in output in 2021. The United States Department of Agriculture analysts in Pretoria note that "the production of South African citrus, mainly soft citrus, new orange varieties, lemons and limes is forecast to continue its strong growth in the 2020/21 marketing year, based on the increase in area planted, improved yields, high level of new plantings coming into full production, and the minimal impact of Covid-19 on labour and input supply."
Essentially, this provides the basis for another year of substantial growth in South Africa's agriculture. We believe that South Africa's agriculture gross value-added could expand by 4% y/y in 2021. The base effects contribute to a slightly muted growth rate this year compared to 2020. We will most likely update this data as more production field crop, and horticulture production data become available.
Weekly highlights
SA's tractor sales remain on a positive footing
After a solid start of the year with tractor sales up by 28% year on year (y/y), with 445 units sold in January 2021, this positive momentum continued in February, with tractor sales up again 28% y/y, with 648 units sold (see Exhibit 3 in the attached file). These strong sales continue the 2020 positive activity where the tractor sales amounted to 5 738 units, up by 9% from 2019. The underpinning driver is the slightly improved farmers' finances following higher agricultural output in 2020, coupled with relatively higher commodity prices.
As a recap, in a year of higher agricultural output, commodity prices would soften. But in 2020 and into the beginning of 2021, the rising demand for grains in China provided support to global prices, which, in turn, influenced the domestic market. The increasing demand for South Africa's grains in Southern Africa and the Far East markets, coupled with the relatively weaker domestic currency, also supported domestic grain prices. Farmers were on the right side of having supplies in an environment with favourable prices, and thus the slight improvement in the finances that supported the increased machinery sales. The higher tractor sales also correspond with the increase in summer crop plantings and expected output in 2020/21. As previously stated, the data recently released by the Crop Estimates Committee show that South Africa's 2020/21 summer grain and oilseed production could increase by 5% y/y to 18,5 million tonnes. Nevertheless, combine harvester sales were not as robust as the previous month in February. The sales fell by 22% from February 2020, with 14 units sold.
Overall, we are still downbeat about the outlook for agricultural machinery sales in 2021. The expected large harvest in the 2020/21 production season might not lead to another year of higher agricultural machinery sales. Typically, a relatively good sales year is likely to be followed by a somewhat lower sales period as the replacement rate of machinery with new ones would usually be down from the previous years. Moreover, there will likely be pressure from weak exogenous macroeconomic fundamentals such as the weaker domestic currency, which will lead to higher prices for imported agricultural machinery.
Global food prices remain elevated
Global agricultural commodity prices remain elevated. The FAO Global Food Price Index reached 116 points in February 2021, which is the highest level since July 2014, and illustrates higher global agricultural commodity prices. This increase was primarily driven by more elevated sugar, dairy, grain and vegetable oil prices. China's rising demand is proving to be the primary driver of agricultural commodities. Simultaneously, the lower global stocks of palm oil have also contributed to the increase in vegetable oil prices. The expected lower palm oil production in Malaysia and Indonesia, coupled with dryness reports in parts of Argentina, is the major contributor to the more inadequate global palm oil supplies.
As indicated last month, South Africa is exposed to these shocks, both through palm oil and soybean oilcake imports, hence the global commodity price developments mirror what we have observed in the domestic market over the past couple of months. For grain producers, the generally higher global agricultural demand and prices bode well for incomes. The opposite is true for animal feed users – soybean and maize – mainly the poultry and livestock industry.
Data releases this week
This week, we have the World Agricultural Supply and Demand Estimates report from the United States Department of Agriculture (USDA) on Tuesday on the agricultural data calendar. The USDA will also release the US weekly export sales data on Thursday.
On the domestic front, aside from the GDP data that we have already discussed, on Wednesday, the South African Grain Information Service (SAGIS) will release the weekly grain producer deliveries data for the week of 05 March 2021. This data cover summer and winter crops, although the focus is still on winter crops whose harvest has recently been completed. On 26 February 2021, about 7 376 tonnes of winter wheat was delivered to commercial silos. This placed the 2020/21 wheat producer deliveries at 1,96 million tonnes, which equates to 93% of the expected harvest of 2,11 million tonnes.
On Thursday, SAGIS will release the weekly grain trade data for the week of 05 March 2021. In the previous week of 26 February 2021, South Africa's 2020/21 total maize exports were at 2,21 million tonnes, which equates to 82% of the revised seasonal export forecast (2,69 million tonnes). In terms of wheat, South Africa is a net importer. In the week of 26 February 2021, imports amounted to 573 754 tonnes, which equates to 36% of the revised seasonal import forecast of 1,58 million tonnes.
