Constraints to faster and more inclusive growth in South Africa's agriculture

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The current growth momentum in South Africa's agricultural sector, which we have written about several times over the past few weeks, is not just a development of the past two seasons.

If one casts an eye back to 2010, just two years before the official publication of the National Development Plan, the agriculture sector's aggregate volume of production in 2020 was 19% higher compared with that year. This was spread across all subsectors, i.e., horticulture, animal products and field crops – although at varying levels, with field crops having shown more modest growth. If there is one thing the sector could be faulted on over the past decade, it is that focus on the inclusion of new black farmers into the commercial level has taken somewhat of a backseat. Still, while this may be true at an overall level, some partnership programmes between government, farmers and agribusiness have yielded positive results in integrating black farmers into the commercial farming level, as we have previously demonstrated. From a policy perspective, inclusion (in addition to growth) is an underlying theme to the government's programme, such as the Agriculture and Agro-processing Master Plan.

  Still, we believe that the agricultural sector could have expanded more than what we observed in the past decade had it not been hindered by the following challenges, (1) inefficiencies in state administration, (2) infrastructure challenges, (3) lack of security in rural areas and (4) prevailing uncertainty.

First, on the issue of inefficiencies in state administration, we have recently discussed the problems facing local governments, but this extends to biosecurity challenges, such as the need to strengthen animal health, meat hygiene, and state veterinary service at the national and provincial levels, among others. The spreading of Foot and Mouth Disease and African Swine Fever Disease show the importance of having an efficient and agile response mechanism to animal disease. Fortunately, this matter has reached policymakers, and thus, industry leaders and government are working together to establish mechanisms to respond more efficiently. The enforcement of Agricultural Products Standards and inefficient staff complement are some of the issues that should be addressed to strengthen the state effectiveness.

Second, the South African farming sector's infrastructure challenges include poorly maintained road networks in the central regions of the country and almost non-existent road networks in the areas of the former homelands. These challenges have implications on market access for new entrant farmers and increases transaction costs for the commercial farmers. Inadequate water infrastructure in some regions of South Africa is another challenge for agriculture, along with a need for more agile management of water rights allocation.

 Of equal importance is the need for cost-effective and reliable electricity. The recent reforms in the energy space with the government increasing the threshold for the exemption of licences for self-generation by companies to 100 MW should help ease the energy constraints over the medium to long term.  The infrastructure discussion would be incomplete without revisiting a theme we have raised in the past: logistics. South Africa's agricultural sector is export-orientated. Therefore, efficient and cost-effective shipping ports and trail lines are critical to the expansion of the industry. The current government and industry strategy is to expand agricultural output and reach broader export markets, but such will only succeed if the logistics are efficient. Industry leaders, including Agbiz and rail industry leadership, are in constant discussions to address the logistical challenges. To our mind, there is a need for increased investment in this area to support agriculture and other sectors of the economy that are geared towards exports.


Third, South Africa is experiencing an increase in rural crime. These crimes include stock theft, farm attacks, theft of cables, pumps, fences, and other vital equipment needed in food production and farming more broadly. While there has not been a noticeable impact of this increasing crime on agricultural activity and investment, we fear that a worsening in this problem without decisive government intervention to ensure farm safety could have long term implications on the sector. The Minister of Agriculture, Land Reform and Rural Development should use the stakeholder engagement forums that were established to draft a collaborative Sector Master Plan to mitigate the increasing crime in conjunction with the South African Police Service. This should enhance the National Rural Safety Strategy.


Lastly, the uncertainty about the long-term policy certainty is another ongoing factor that needs to be addressed urgently. The parliamentary committee with the task to "make explicit what is implicit" in Section 25 of the Constitution has until the end of August 2021. Hence, it is prudent that Parliament decides on the Section 25 matter, mindful of the broader impact on the agricultural sector and other sectors of the economy when South Africa is at an economic reconstruction phase. We have long argued at Agbiz that land reform is an important policy imperative, and we are in full support of it. Yet, we do not believe that an amendment of the Constitution will lead to the country's desired outcome of prosperity.

 In sum, South Africa's agricultural sector has expanded notably over the past decade and is currently having another strong season. However, there is still potential for further expansion in the future through the scaling up of underutilized land and the strengthening of various partnerships that could be formulated between new entrant farmers and existing commercial ones. This approach will help foster inclusion, which has been minuscule in the past decade. This could attain some level of success if the government addresses the constraints above.


Weekly highlights


Agbiz/IDC Agribusiness Confidence Index shoots to record high in Q2, 2021


South Africa's agricultural sector has not, in the recent past, had a season as good as the current one. This is evident from the Agbiz/IDC Agribusiness Confidence Index (ACI), which in the second quarter of this year reached a record high (since its inception in 2001) of 75, from 64 in the first quarter of 2021. These results reflect favourable conditions for all subsectors of agriculture, with various crops set to reach record output levels.


Importantly, this comes at a time when commodity prices – domestically and globally -- are at relatively higher levels, mainly supported by growing demand from China, combined with dryness in parts of South America. Such an environment of large yields and higher prices is not a usual occurrence in South Africa and has boosted farmers' incomes and sentiments about business conditions. This second-quarter survey was conducted in the first two weeks of June 2021 and covered agribusinesses operating in all agricultural subsectors across South Africa.


The ACI comprises ten subindices, and most of these are behind the notable jump in the composite index in the second quarter of 2021. The ACI's second-quarter results suggest South Africa's agricultural sector is set for another year of robust performance. We are at the lower end of consensus in our forecast of 5,0% y/y expansion in the agricultural gross value added in 2021, while other organizations are slightly more upbeat with the Bureau for Food and Agricultural Policy (BFAP), for instance, forecasting growth of 7,6% y/y for the year. This follows a growth of 13,1% y/y in 2020.


Zimbabwe to harvest the largest maize crop since 1984/85


This past week, the United States Department of Agriculture (USDA) reaffirmed its view that Zimbabwe's 2020/21 maize crop could amount to 2,7 million tonnes, which is almost 200% from the 907 628 tonnes produced in the previous season. Notably, this is the largest harvest since the 1984/85 season. This improvement in crop prospects is underpinned by the expansion in the area planted, a historical high of 2,0 million hectares, combined with favourable weather conditions. This expected large harvest prompted the Zimbabwean Agricultural Marketing Authority on May 21, 2021, to announce that it stopped issuing import permits for maize and maize meal to local grain millers. All import permits issued before the announcement automatically expired on May 31 to allow for goods in transit.


 As we highlighted in the Viewpoint on May 24, South Africa, which benefited from the Zimbabwean maize demand in the recent past, could have over 2,8 million tonnes of maize surplus available for export markets. This would be the largest volume since 1994/95, when South Africa exported 4,7 million tonnes of maize, according to data from the South African Grain Information Services (SAGIS). These available maize export volumes are on the back of a large forecast harvest, which we at Agbiz currently forecast to be 16,7 million tonnes. This would be the second-largest maize harvest on record. With Zimbabwe as a potential export market out of the picture and various regional maize-producing and consuming countries in the Southern Africa region, such as Malawi, Zambia, Tanzania, and Mozambique, expecting large harvests, regional demand for maize will be weaker than usual. The consistent markets that South Africa will likely have are the Far East markets, including Taiwan, South Korea, Vietnam and Japan.


Importantly, Zimbabwe's decision to ban imports of maize will inconvenience the South African exporters that had established relations with importers in Zimbabwe. Yet, the policy action on its own will likely have a limited lasting impact on South African maize prices. Prices are already at export parity prices and underpinned by broader global developments rather than regional policy changes. Moreover, it has been long known that Zimbabwe's maize harvest this year is in good shape, and market participants already anticipated the possible decline in maize demand from the country.


Data releases this week


 We start the week with the US Crop Progress Report on the global agricultural data calendar, which will be released by the USDA today. The previous report of June 14 showed that US maize plantings were completed, and about 96% of the planted area or crop had emerged, which is slightly above the previous year's pace in the same week. In soybeans, planting was near completion, with 94% of the intended area for the season already planted, and 86% of that emerged. This, too, surpasses the previous year's pace. The US Weekly Export Sales data is due for release also on Thursday.


 On the domestic front, on Wednesday, SAGIS will release the Weekly Grain Producer Deliveries data for June 18. This data cover summer and winter crops, although we only focus on summer crops for now as the harvesting process gains momentum, particularly on oilseeds. To recap, on June 11, about 3 297 tonnes of soybeans were delivered to commercial silos. This placed the soybean producer deliveries for the first fifteen weeks of the 2021/22 marketing year at 1,78 million tonnes, which equals 93% of the expected harvest of 1,92 million tonnes. Moreover, 474 675 tonnes of sunflower seed for the 2021/22 season had already been delivered to commercial silos in the same week, out of the expected crop of 716 240 tonnes. In maize, the marketing year is different from oilseeds; we are still in the sixth week of the 2021/22 marketing year, which began at the start of May. The producer deliveries currently amount to 6,1 million tonnes, out of the Crop Estimates Committee's expected harvest of 16,2 million tonnes (compared to our estimated 16,7 million tonnes).


 Still, on Wednesday, Statistics South Africa will release the Consumer Price Index data for May 2021. To recap, In April 2021, the country's consumer food prices were at 6,7% year-on-year, the highest level since July 2017 because of higher grain product prices, along with meat, and fats and oils. We expect to see some easing on price pressures in the second half of the year.


On Thursday, SAGIS will release the Weekly Grain Trade data for the week of June 18. In the week of June 11, which was the sixth week of South Africa's 2021/22 maize marketing year, total maize exports amounted to 467 141 tonnes. The seasonal export forecast is 2,8 million tonnes (up 10% y/y) because of the expected sizeable domestic harvest. In terms of wheat, South Africa is a net importer. On June 4, imports amounted to 1,1 million tonnes, equating to 69% of the seasonal import forecast of 1,6 million tonnes. Still, on Thursday, Statistics South Africa will release the Producer Price Index (PPI) for May 2021. To recap, the PPI for food eased at 7,9% y/y in April from 8,1% y/y in the previous month.