I am ending this week, not by highlighting an agricultural story that dominated the news headlines – as it is typically the case — but some encouraging developments for the South African beef industry.

Not many agricultural subsectors are a testimony to the export-led growth ambition that the South African government is currently focusing on such as avocados.

There has been a revolution in the Kenyan avocado export market, characterized by enormous growth over the past three years. After remaining a relatively small exporter of avocado for a prolonged period, Kenya has now overtaken South Africa to be the leading exporter of avocado in the continent and the seventh largest in the world.

A stable, predictable and conducive policy environment is crucial for developing any sector and the economy at large. The expansion in South Africa's agricultural output, which since 1994 has now more than doubled in real terms, has mainly been achieved despite the lack of substantive support to commercial agriculture and various inconsistencies in policies. We have witnessed sustained output growth across South Africa's agricultural subsectors at a more micro level – horticulture, field crops and livestock. The improved production has been supported by technological innovation to improve seed yield and agrochemicals and post-harvest technologies. South Africa's open trade policy approach since 1995 has connected the country's value chains to the global economy, which subsequently boosted global demand for agricultural products and incentivized domestic farmers to increase production. 

 The start of every year presents an opportunity for business to review strategies, and some government departments to review policies. In 2020, the Department of Agriculture, Land Reform and Rural Development focused on four broad policy-guiding themes for driving agricultural expansion, inclusive growth, job creation, an integrated rural area and eradicating hunger, namely;

1.    Transformation and redistribution;

2.    Addressing inefficiencies;

3.    Growth and expansion; and

4.    Coordinating policies and investments for the integrated rural economy.

 First, the transformation and redistribution pillar encompassed the land reform programmes, with notable progress in 2020 being the announcement of 700 000 hectares of state-owned land available for use by the public. While this is not all new land, some already occupied by beneficiaries, the decision nevertheless shows progress in releasing the land on government hands using clear and transparent policies such as the recently adopted Beneficiary Selection and Land Allocation Policy. Our criticism of this has been that the government should have released the land with tradable leases or offer the beneficiaries an option to buy the land after a minimum of five years of working the land. Moreover, the land release should simultaneously go with a farmer support programme to ensure newly settled farmers have access to working capital.

 Another significant development on the land reform front was the new Expropriation Bill which was gazetted towards the end 2020, outlining a uniform process for all expropriations to take place and a uniform means to calculate just and equitable compensation. Moreover, the National Policy on Comprehensive Producer Development Support and Blended Finance programmes also saw some progress in 2020 and should be completed and launched early this year. Lastly, the development of the Land Donation Policy, which encourages private landowners to participate in the redistribution of land voluntarily, is one of the policy changes that could accelerate the transformation process and redistribution of agricultural land. The process will require incentives to be aligned appropriately as detailed in the Presidential Advisory Panel report on Land Reform and Agriculture.

This "transformation and redistribution" pillar is likely to gain momentum in 2021 as the majority of these land policies will be introduced to Parliament for endorsement. We are likely to see progress on the release of the land, and this will be an important area to watch as it promised transparency this time around and that there will be bias towards the youth, women and other vulnerable groups; unlike the past where a disproportionally higher number of older men benefited on land reform. Another critical area worth keeping an eye on is the broader discussion about the amendment of Section 25 of the Constitution to enable land expropriation without compensation. There was little discussion on this point in 2020 as the work of the committee that was tasked to "make explicit what is implicit" in the current wording of the Constitution was interrupted by the pandemic. This year there will likely be momentum on this discussion. Our view has always been that the concept of 'expropriation without compensation' is not the desired path for agricultural development because of various economic risks outlined in the past. As an organization, we are not in support of it.

Second, the government promised to address the inefficiencies that exist in both legislation and infrastructure. Addressing the legislative inefficiencies will mean increasing human capital within the Department of Agriculture, Land Reform and Rural Development, and working closely with the private sector and broader social partners. This will entail leveraging the social partners' networks, capital, know-how, and good will to bring about the sector's growth and transformation. The interventions to address the inefficiencies will differ from subsector to subsector. For example, some subsectors might require improvements on export-related and water-efficiency matters, while others might need increased efficiencies on the registration of certain input products to increase productivity. An essential requirement here will be for government to be proactive in engaging with the private sector and broader social partners about their specific needs. On the infrastructural matters, we are less optimistic that there will be notable progress in the near term given the fiscal constraints and continued pressure to contain the spread of the pandemic and secure the vaccines. Importantly, this is not a task carried out by the Department of Agriculture, Land Reform and Rural Development per se, but by other line departments. Perhaps, a better barometer on this will be through monitoring progress on the national infrastructure programme headed by the Infrastructure Office in the Presidency.

 Lastly, the government's growth and expansion policy focus is a positive step. While there were no tangible results on this point in 2020, the government and social partners' progress on the Agricultural Master Plan thus far is positive. We expect the Master Plan's launch in the first quarter of the year. After the launch, the material work on growth and expansion in the sector will begin. The two points mentioned above are also the key pillars of change in the industry. The general Master Plan theme will likely dominate and provide direction to the Department of Agriculture, Land Reform and Rural Development's approach on broader farmer development initiatives this year.

Trade will also continue to be a part of the policy discussions as the South African agricultural sector will seek access to additional markets and attempt to improve access to the new markets. Moreover, an increase in production will need to be anchored on increased export potential and domestic agro-processing capacity to replace food imports, where it is feasible. Aside from the recently launched African Continental Free Trade Area, other South African markets should seek increased access to India, China and others, including Eastern Europe.

Other essential points that did not dominate the policy discussion in 2020, but will likely be on the agenda in 2021 are; agricultural finance and commercialization of black farmers and the development of rural areas. The agricultural finance discussion will probably build from the Land Bank’s liquidity challenges and broaden in search of new and efficient financing methods. In terms of the commercialization of black farmers, this could gain momentum, but not necessarily at the expense of smallholder farmers’ support and initiatives. The government could support commercialization of the land released to various individuals as part of the 700 000 hectares announced in 2020. The microfinance, targeting the most vulnerable subsistence and household farmers, announced by the department at the end of 2020, is fresh thinking. This will build a group of new smallholder farmers that can later be financed by private financial institutions and agribusinesses. The progress or success in this point, however, will hinge on the improvement in the financing discussion and mechanisms put in place to distribute these funds in an efficient and corruption-free manner, especially at provincial and district levels. Perhaps the Land Reform Fund raised in the Presidential Advisory Panel for Land Reform and Agriculture could offer a solution in creating affordable blended finance instrument.

 In summary, South Africa's agricultural policy focus will likely not deviate much from the path set out in various speeches by the Minister of Agriculture, Land Reform and Rural Development, Ms Thoko Didiza, which is what we have outlined above. Financing, which is the lifeblood of any success in the policy priorities and programmes mentioned above, could become a prominent issue of the policy discussion, in a broader sense than the narrow focus of the blended finance instrument discussions of the past year.

The above text benefited from discussions with Prof Johann Kirsten and Dr Sifiso Ntombela. Any errors, are however, exclusively my responsibility.

Weekly highlights

After a solid performance in 2020, SA agricultural machinery sales to cool off in 2021

Higher agricultural output gains in 2020, coupled with relatively higher commodity prices, improved farmers' finances, which subsequently benefited the allied industries. A case in point is South Africa's agricultural machinery market which registered a notable improvement from the previous year. Tractor sales amounted to 5 738 units, up by 9% from 2019, with combine harvester sales up by 23% from the same year, amounting to 184 units. These sales are nearly as high as in 2018, which was also supported by higher grains output in the 2016/17 production season.

As recorded in the 2020 fourth quarter results of the Agbiz/IDC Agribusiness Confidence Index (ACI), the agricultural market sentiment remained positive. The ACI rallied to 61 from 51 points in the third quarter, which is its highest level since the third quarter of 2014. A level above the neutral 50-point mark implies that agribusinesses are optimistic about business conditions in South Africa. The optimism is on the back of both the above-mentioned higher agricultural output in 2019/20 production season, coupled with higher commodity prices and optimism about the production conditions in 2020/21 production season.

Ordinarily, in a year of higher agricultural output, commodity prices would soften. But in 2020 and into the beginning of this year, the rising demand for grains in China provided support to global prices, which influenced the domestic market. Most recently, an added factor is the persistent dryness in parts of Argentina and Brazil, which has also supported the rally in grains prices. The rising 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 sales were also a sign of confidence about the 2020/21 production season's planting conditions. As early as October 2020, farmers already intended to increase the area plantings for summer crops by 5% year on year to 4.15 million hectares. These planting data comprise yellow and white maize, sunflower seed, soybeans, groundnuts and dry beans. There is an expected increase in area plantings of most of these crops, except for sunflower seed, where the area plantings were set to decline by 4% y/y to 480 500 hectares, which would be the smallest area planted in nine years. This likely decline in sunflower seed planting is mainly on the expected shift in some hectares to white maize, in part, due to attractive prices.

As best as we can tell, farmers have followed through with these planting intentions, and the crops are in good shape across South Africa. The preliminary indications suggest that the 2020/21 season might be better than the previous season, at least for certain crops such as maize. At the end of February, the Crop Estimates Committee will release its first production estimates which will provide insights to this view.

However, the large harvest in 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 ordinarily 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.

 In sum, while a sizeable agricultural output supported the allied industries such as farm machinery in 2020, another essential factor is that it followed a year of reasonably low sales, which meant that a need for replacement of some machinery was slightly higher. These fundamentals are different this year. We also think that stock of machinery imported at a weak exchange rate will be more available this year, pushing prices higher and discouraging buying by some farmers. We are therefore not optimistic about the near-term agricultural machinery sales. However, the agricultural output promises to be a good harvest, and the sentiment in the sector is generally positive as illustrated in the ACI results.

Recent developments in the global grains market

 The key feature of the global agricultural markets, particularly grains, at the end of 2020 and into the beginning of 2021 are the rising prices. The FAO Global Cereals Price Index reached 116 points in December 2020, which is the highest level since June 2014. The higher prices were evident across major commodities and underpinned by various factors. In the wheat case, the unfavourable weather conditions in parts of the US and Russia were the primary drivers. In sorghum and maize, China's rising demand was the main driver of prices, along with dryness that threatened growing conditions in Argentina and Brazil.  In the rice market, the tight supplies in Thailand and Vietnam led to higher prices which spilt over to January 2021.

 Nevertheless, while there are various regional specific production challenges, the global grains supplies are still in fairly good shape on aggregate. For example, the latest estimates from the United States Department of Agriculture (USDA) placed the 2020/21 global wheat production at 772 million tonnes, up by 1% from the previous season. The ending stocks are estimated at 313 million tonnes, up by 4% from the 2019/20 season in the same season. The relatively higher ending stocks suggest that increases in wheat prices could be temporary as there are sufficient supplies in the global market. The 2020/21 maize production estimate has been revised down notably from estimates released at the start of the marketing year, but the expected harvest is still sizable. The 2020/21 global maize harvest could amount to 1.13 billion tonnes, which is a 2% annual increase. An uptick has compensated for the expected decline in Argentina's maize production in supplies in other geographies. The growing demand, specifically from China, which boosts global maize consumption means that the stocks could be lower than in the previous seasons. The USDA estimates a 6% year-on-year decline in global maize stocks to 283 million tonnes in 2020/21. The relatively lower ending stocks mean that global maize prices could remain slightly elevated in the near term.

In rice, the 2020/21 production could amount to 501 million tonnes, up marginally by 1% from the previous season. The stocks are also set to lift by 1% from the 2020/21 season to 180 million tonnes, which means the recent price rally could be temporary, as there are expectations of large supplies. These developments are essential for South Africa, both as an importer of some products such as wheat and rice and exporter of maize. The global effects influence the domestic price trends.

DATA RELEASES THIS WEEK

We start the year with a fairly quite week on the agricultural calendar. On the global front, on Thursday, the USDA will release the US weekly export sales data. In recent weeks, China has been buying large volumes of both maize and soybeans, and the demand is expected to hold as the country continues to rebuild its pig herd which was devastated by African swine fever in 2019.

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 15 January 2021. This data cover both summer and winter crops. But the focus has shifted towards winter crops whose harvest is under way. In the week of 08 January 2021, about 9 042 tonnes of winter wheat were delivered to commercial silos. This placed the 2020/21 wheat producer deliveries at 1.83 million tonnes, which equates to 85% of the expected harvest of 2.15 million tonnes. Also, on Wednesday, Statistics South Africa will release the Consumer Price Index (CPI) data for December 2020. For background, South Africa’s food price inflation accelerated to 5.9% y/y in November 2020 from 5.6% in the previous month.

On Thursday, SAGIS will release the weekly grain trade data also for the week of 15 January 2021. In the previous week of 08 January 2021, South Africa’s 2020/21 total maize exports were at 1.92 million tonnes, which equates to 77% of the seasonal export forecast (2.50 million tonnes). In terms of wheat, South Africa is a net importer, and in the week of 08 January 2021, imports amounted to 429 964 tonnes. This equates to 28% of the seasonal import forecast of 1.54 million tonnes.

 The Department of Agriculture, Land Reform and Rural Development (DALRRD), agribusinesses and various social partners have been hard at work for months crafting the Agricultural and Agro-processing Master Plan and separately blended finance instruments. These aim to ignite growth and expansion in South Africa's agricultural sector as part of the government's broader Economic Reconstruction and Recovery Plan. Both these initiatives are set to be launched in the coming months whilst the first phase of the blended finance instrument has already started, as evidenced by the launch of the joint Agri-Industrial Fund of R1 billion by the Industrial Development Corporation (IDC), in partnership with the DALRRD. These are constructive programmes with the potential to ignite growth and transformation in the sector. As such, industry bodies such as Agbiz allocate most of their time and resources to pursue these goals. Sadly, much of this good work takes place behind the scenes whilst other significant policy developments that might deter the progress grabs social partners' attention and the media.

 A case in point is the renewed debate about Section 25 of the Constitution and the Expropriation Bill. Last week, the Portfolio Committee on Public Works hosted public hearings on the Expropriation Bill whilst the committee tasked to "make explicit what is implicit" in Section 25 of the Constitution continued with their public hearings. The outcome will have implications on public sentiment. We hope that it will not detract from the two initiatives above to drive growth and expansion in South Africa's agriculture. The success of any of these programmes depends on the private sector and other social partners jointly implementing the government's proposals. As such, policy actions that might be perceived as not aligned with the broader stakeholders' interests present a risk and could lead to a lack of participation and stalling the Master Plan and the blended finance implementation.

Admittedly, the discussion of the potential amendment of Section 25 of the Constitution has gone beyond the realm of agriculture as various stakeholders are engaged with the national debate led by Parliament. Yet, its outcomes will likely have direct implications on the success of the DALRRD work programme. 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. Likewise, Parliament must finalize the Expropriation Bill. It provides the procedural guarantees required to bring the government and an expropriated owner or bondholder onto an equal footing if expropriation occurs. Unlike the Section 25 amendment, Agbiz is broadly supportive of the need for legislation to regulate expropriation but opposes the provisions relating to 'nil' compensation. Expropriation should always be used as a last resort and cannot substitute for well-formulated and well-implemented programmes to effect transformation in the sector. There are various private-public partnerships (p-p-p) for land reform, some of which were highlighted in the Presidential Advisory Panel on Land Reform and Agriculture and also chapter six of the National Development Plan, which the government could utilize to accelerate land reform. Importantly, there is also an ample land supply that the government has not efficiently distributed or transferred to potential beneficiaries, with estimates placing such land at over 2 million hectares.

 We are also bombarded daily with news headlines of corruption and inefficiencies at local government levels, some of which threaten the same black farmers government intends to support. Hence, the p-p-p approaches have been the desired approach to us for land reform. The ongoing Master Plan is designed in the spirit of the joint-venture or p-p-p. A continuation of this approach to policy implementation would potentially yield positive results for expansion in agricultural production and, after that, job creation in the sector.

 In sum, there is some level of unity in agriculture and agribusiness at the moment, and all stakeholders are working towards ensuring the success of the Master Plan implementation, anchored by blended finance and various regulatory support that DALRRD and multiple departments such as Water Affairs, DTIC, etc. would provide. However, the approach that will be taken in Parliament in as far as the discussions of Section 25 of the Constitution can sway the stakeholder's minds off these necessary economic reconstruction plans.

Weekly highlights

SA's 2020/21 summer grain and oilseeds harvest lifted from February estimates

 Last week, the South African Crop Estimates Committee (CEC) mildly lifted its forecast for 2020/21 summer grain and oilseeds production from the previous month by 1% to 18,7 million tonnes (this compared with 17,6 million tonnes in 2019/20 production season). The upward adjustments were on maize, soybeans and sorghum, whereas sunflower seed, dry bean and groundnut production estimates were revised. If we zoom into significant crops, the 2020/21 maize, soybean and sunflower seed harvests are forecast at 15,9 million tonnes (up 4% y/y, and second-largest harvest on record), 1,9 million tonnes (up 39% y/y, a record harvest), and 712 940 tonnes (down 12% y/y), as illustrated in Exhibit 1 (in the attached file).

The maize production estimate is slightly below our estimated 16,7 million tonnes, and the Bureau for Food and Agricultural Policy's estimated 17,0 million tonnes. Considering the optimistic yield estimates we received from farmers and observations in places we have been in, we are inclined to think that there is still room for the CEC to lift further its maize production estimates in the coming months. Hence, we are not adjusting our view for now from an assessment of 16,7 million tonnes.

The current maize production data essentially mean that South Africa would remain a net exporter in the 2021/22 marketing year, starting in May 2021 (corresponds with the 2020/21 production season). South Africa's annual maize consumption is roughly 11,4 million tonnes, which means there will likely be over 2,0 million tonnes of maize available for export markets, all else being equal.

The expected large harvest could also add downward pressure on maize prices, although marginal as the global maize market remains supportive of prices. This is particularly the case as we forecast an excellent crop in South Africa and across the Southern and East Africa regions, a major importer in the previous year. For example, estimates from the United States Department of Agriculture show that Zambia's maize production could reach 3,4 million tonnes (up 69% y/y). In comparison, Malawi's maize harvest is estimated at 3,8 million tonnes (up 25% y/y), Mozambique's maize crop is estimated at 2,1 million tonnes (up 8% y/y), Kenya's maize is forecast at 4,0 million tonnes (up 5% y/y). There is optimism about the crop in other countries, including Zimbabwe.

Over the past few months, the weaker domestic currency, growing demand for South Africa's maize in the Southern Africa region and the Far East, coupled with generally higher global grain prices, provided support to the domestic maize prices. But we believe that the domestic crop conditions will matter more for price movements in the future than has been the case over the past few months. On 25 March 2021, South Africa's yellow and white maize spot prices were down 18% y/y and 3% y/y, trading at R3 220 per tonnes and R3 123 per tonne, respectively.

 In the soybean case, the price drivers are somewhat similar to maize. Nevertheless, an increase in the soybean harvest will still not change much because South Africa imports around half a million tonnes of soybean meal (although this volume will fall notably this year on the back of the large domestic harvest). The country will most likely continue being dependent on imports, even at these harvest levels, to meet the growing demand for soybean meal by the poultry sector. Hence, global soybean market dynamics will continue to influence local prices. On 25 March 2021, the domestic soybean spot price was up 17% y/y, trading around R7 670 per tonne.

In sum, the broadly large summer grain and oilseeds production estimate this season is on the back of increased area plantings for summer crops and favourable rainfall since the start of the season. We expect the maize production estimate to be adjusted somewhat in the coming month as farmers on the ground continue to express optimism about yield prospects. This will likely add downward pressure on maize prices, which bodes well for South Africa's consumer food price inflation for 2021.

SA consumer food price inflation decelerates further in February 2021

 After softening from 6,2% y/y in December 2020 to 5,6 % y/y in January 2021, South Africa's consumer food price inflation decelerated further to 5,4% y/y in February. The primary products underpinning this deceleration in price inflation are meat, fruit, vegetables, and bread and cereals. Importantly, this is in line with the price trends in agricultural commodity prices, which, while still elevated, are at lower levels than the corresponding period in 2020.

 From now on, we still expect South Africa's consumer food price inflation to remain at slightly elevated levels in the first quarter of the year, partly, because of generally higher grain and imported vegetable oils and fats prices. But from the second quarter of the year, grain prices could soften further and filter through, with a lag, on the "bread and cereals" products prices. The anticipated decline in prices is on the back of the large forecast harvest of 16,7 million tonnes mentioned in the previous section of this note. This product category also has a higher weighting of 21% in the food basket, and changes in its price inflation will be noticeable. In terms of meat, we expect a sideways price movement for the coming months. The cattle slaughtering could slightly improve in 2021, and the base effects on poultry meat, which increased in 2020 partly as a result of an import tariff hike, could also bode well for food price inflation.

Overall, it is still our view that South Africa's consumer food price inflation could remain relatively higher in the first quarter of 2021, primarily underpinned by bread and cereals products (the pass-through of current higher grain prices will persist for the first quarter). But from the second quarter, we could see food price inflation decelerating somewhat. We maintain our baseline view for South Africa's consumer food price inflation to average around 5,0% y/y in 2021. The only upside risk that we continue to monitor and assess inflation's impact is the rising petrol prices. South Africa's agricultural commodities and processed food are primarily transported by road, and the increased transport costs could impact the final product prices. For example, South Africa is transporting roughly 81% of maize, 76% of wheat, and 69% of soybeans. On average, 75% of national grains and oilseeds are transported by road. This is an area worth monitoring over the coming months.

Data releases this week

 This is a quiet week on the agricultural calendar. On Wednesday, the South African Grain Information Service (SAGIS) will release the weekly grain producer deliveries data for 26 March. This data cover summer and winter crops, although the focus is still on winter crops whose harvest has recently been completed. On 19 March, 6 327 tonnes of winter wheat were delivered by farmers to commercial silos. This placed the 2020/21 wheat producer deliveries at 1,99 million tonnes, which equates to 94% of the expected harvest of 2,11 million tonnes. From April onwards, the focus will shift to summer crops as the harvest process will soon be gaining momentum. We already see momentum in 2021/22 soybean producer deliveries. On 19 March, about 31 395 tonnes were delivered to commercial silos. This placed the deliveries for the first three weeks of the new marketing year at 42 090 tonnes. Similarly, about 17 095 tonnes of sunflower seed have already been delivered in the 2021/22 season.

On Thursday, SAGIS will release the weekly grain trade data for the week of 26 March. In the previous week of 19 March, South Africa's 2020/21 total maize exports were at 2,31 million tonnes, which equates to 86% of the seasonal export forecast of 2,69 million tonnes. In terms of wheat, South Africa is a net importer. On 19 March, imports amounted to 705 027 tonnes, which equates to 45% of the seasonal import forecast of 1,58 million tonnes.

 Globally, the notable data release will be the US weekly export sales data released by the United States Department of Agriculture on Thursday. Here, we will continue to monitor China's buying activity of US maize and soybeans.

The Western Cape is the leading producer of South Africa’s winter crops, which are wheat, barley and canola. It is also in this province where plantings typically begin at the end of April, while in other provinces it’s around midyear.

The South Africa-China wool trade story is back in the headlines, but this time around in a good way. Nearly two months since the Chinese authorities temporarily suspended wool imports from South Africa because of the foot-and-mouth disease outbreak earlier in the year, the country’s authorities issued a notification on May 8 stating that the ban will be lifted that same day.

I just read an insightful, recently published paper from the International Monetary Fund titled: Is the African Continental Free Trade Area a Game Changer for the Continent?

South African agribusinesses aiming to expand their operations into the rest of the continent in the coming years will face different environments compared to realities in South Africa. This includes the commonly cited factor of poor infrastructure, and also a much less talked about problem, which is low levels of agricultural productivity. With respect to the latter, a recent study by agricultural economists Thomas Jayne and Pedro Sanchez argued that sub-Saharan Africa’s agricultural output growth in the recent past has been through area expansion rather than improvement in productivity or yield per hectare.   A case in point is maize, which shows a striking difference in yield levels between South Africa and the rest of sub-Saharan Africa. Consider maize yields between 2015 and 2020 in Zimbabwe, Nigeria, Kenya, Malawi and Tanzania, which averaged 2 tonnes per hectares for most of these countries with the exception of Zimbabwe, where the yields averaged one tonne per hectare over the observed period. By contrast, South Africa’s maize yields averaged 5 tonnes per hectare over the observed period as illustrated in Exhibit 1 (in the attached file).

One of the reasons for this difference in yield levels is the difference in input use between South Africa and most countries in the continent. South Africa has an advanced and highly mechanized largescale commercial farming sector, which has easy access to fertilizers, improved seed varieties, agrochemicals. By contrast, most sub-Saharan African countries are dominated by micro, small and medium-scale farmers – a majority of whom are resource poor and lack access to fertilizers and hybrid seeds.  Intensive maize production systems typically require relatively higher input costs, which, with a lack of access to credit and finance, limits small-scale farmers’ uptake of these technologies. Another point to consider is that in countries such as Zimbabwe, smallholder farmers tend to limit the area planted to food crops in favour of tobacco and other lucrative crops in various seasons. Still, the point of lower productivity in food crops in sub-Saharan Africa remains. A 2019 study by McKinsey researchers made a similar point that Africa’s potential lies in improving the crop yields, and not land expansion, which has been the dominant practice in the recent past.

 Improving productivity should not be the only focus for sustained improvement in Africa’s agriculture. When farmers have improved their productivity, there must be a place to safely store their maize crop and reach the markets to ensure a decent return on investment. This once again is a dominant feature of the South African agricultural sector, where the value chains are mature and well-integrated, with access to markets that operated within a liberalized environment. Meanwhile, in much of the sub-Saharan African countries, the agricultural value chains are fragmented, and maize markets are subject to ad-hoc government interventions that distort market signals. Poor storage infrastructure has seen high post-harvest losses (ranging anywhere between 17% and 30% of total national maize output). Under conditions of such systemic market flaws, improved yields would not make a significant impact on markets. To some extent, Zimbabwean farmers tend to substitute maize for tobacco in certain seasons because the latter has a well-functioning marketing system than maize.

 In essence, sub-Saharan Africa’s agriculture sector remains underdeveloped and has various challenges. But these could also be viewed as opportunities for expansion by agribusinesses in countries that have fairly developed agricultural sectors, notwithstanding the infrastructure constraints already mentioned. If South African agribusinesses intend to expand their activities beyond the border in the continent, their strategies and approaches have to be markedly different. Productivity improving techniques are one part of the solution, but this will need a “ground-up” approach. This means working with farmers to understand value chains region by region within each country because of their fragmentation. This will enable various agro-dealers to be closer to their customers – farmers – and also aware of the off-takers or large buyers of the produce so that farming could be sustainable.

 Importantly, there is a need to lobby sub-Saharan African governments to prioritize network industries investments such as roads, electricity, water, and investment on agriculture infrastructure such as silos. With that said, this is unlikely in the near term because of fiscal constraints in a number of countries. Perhaps, a workable approach would be for African governments to be open to partnerships with private sector players. An important pre-requisite for creating public-private partnerships is a strict adherence to the rule of law so that private sector firms can be assured that their investment is protected, and that corruption is reduced. Notably, the African governments will also have to relax regulations that hinder the adoption of improved seed varieties which are crucial for productivity enhancement.

In sum, the sub-Saharan Africa region holds potential for expansion for South African agribusinesses, but the approach to doing business will have to adapt to country-specific practices at the start. The South African model cannot be copied as is because of differences in farming and market structures, seed and food regulations, and network industries underdevelopment. This also means that the returns to investments in agriculture in the continent will likely be long term, and at the start, lower than what could be achieved in well-functioning agriculture markets. With that said, given the expected increase in population in the coming decade, rising urbanization, large, underutilised land in sub-Saharan Africa, and the increased connectedness through the African Continental Free Trade Area, collaboration and long-term investment in the continent will be key. The African governments should also improve infrastructure and land governance and the aforementioned regulatory matters to attract private sector investments into the content’s agricultural sector.         

Weekly highlights

SA’s summer crop production forecasts were left roughly unchanged in June 2021’s assessment

Last week, the South African Crop Estimates Committee (CEC) released its fifth production estimates for the 2020/21 season, which left most crop estimates roughly unchanged from the previous assessment in May. This is with the exception of commercial maize, whose forecast was lifted marginally by 0,3% from the previous month to 16,2 million tonnes. Meanwhile, the non-commercial maize saw a much larger revision of an 8% increase from the previous month to 586 650 tonnes. This placed South Africa’s overall maize production for the 2020/21 season at 16,8 million tonnes. This is up by 6% from the 2019/20 production season, and the second-largest harvest on record. Moreover, the groundnuts production estimate was also lifted by 2% from May to 58 900 tonnes (up 18% y/y).

Soybean’s production estimate was left unchanged at a record 1,9 million tonnes (up 54% y/y), sorghum at 195 035 tonnes (up 23% y/y) and dry beans at 56 577 tonnes (down 13% y/y). Whereas the sunflower seed is the only crop that was lowered from the May assessment, down by 5%, and currently estimated at 677 240 tonnes. This is down by 14% from the 2019/20 production season.

The broadly large summer grain and oilseeds production estimate this season is on the back of increased area plantings for summer crops and favourable rainfall since the start of the season. The harvesting process is at completion stages for oilseeds, with maize in full swing. We continue to receive reports of generally higher yields across the country from farmers.

If we focus on the major grains, the current maize production data essentially means South Africa would remain a net exporter in the 2021/22 marketing year. South Africa's annual maize consumption is roughly 11,5 million tonnes, which means there will likely be over 2,8 million tonnes of maize available for export markets, all else being equal (the official estimates, however, are that exports could amount to 2,6 million tonnes in 2021/22 marketing year, down 10% y/y because of expected weak demand in the Southern Africa region). Importantly, the increased soybeans production also means there could be a decline in soybean oilcake imports, which in a typical year is just under half a million tonnes a year.

These developments, however, will have minimal impact on prices. South Africa’s maize prices are at relatively higher levels compared to the previous year, not because of supply constraints in the domestic market, but the surge in global maize prices. South Africa has its second-largest grains harvest on record, and maize prices are at export parity levels. The second-largest maize harvest on record in the 2020/21 production season has not led to a decline in domestic maize prices. This is mainly because of the 56% increase in export parity prices in the 2020/21 production season. Export parity prices are derived from the global maize price multiplied by the exchange rate minus transaction costs and can be regarded as a "floor price" for domestic maize prices. As domestic prices trade closer to export parity levels, South African maize becomes more competitive in international export markets, triggering an increase in volumes of exports or demand by foreign buyers.

An important point to emphasize is that the global grains prices have rallied, reaching multi-year highs in the past few months because of supply concerns. Such concerns include the consistent downward revision of Brazil and Argentina's maize and soybean harvest because of dryness there and the drier weather conditions in Russia, Ukraine, and the United States at the start of the 2021/22 production season. The production conditions have since improved in Russia, Ukraine, and the United States, pointing to a reasonably good crop this season.

 Perhaps, the central point to make here is that while production conditions for the 2021/22 global harvest are promising for all major crops, there are generally lower stocks. The lower stocks are a catalyst for the knee-jack reactions we have observed on prices whenever there is news of unfavourable weather conditions in major grains and oilseeds production countries. Such price fluctuations happen even if the weather-related news has minimal impact on actual crop conditions. These fluctuations tend to influence also the South African market; hence the prices haven’t softened in the face of a large domestic harvest.

A similar phenomenon is true for soybeans regardless of the recent uptick in domestic production. A key point on the global soybeans market is also the rising demand by China and also a potential increase in renewables energy users, which too is contributing to an increase in global prices. In sum, the domestic market is awash with grains supplies, but the prices are unlikely to ease notably. The guiding point for local prices is not what is happening in the fields domestically, instead it is the global events.

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 United States Department of Agriculture (USDA) on Tuesday. The previous report of 27 June 2021 showed that 73% of the US maize crop was rated good/excellent, well above the corresponding period last year where roughly 65% of the crop had such a rating. In soybeans, planting was also completed, with 96% of the crop having emerged. Importantly, 71% of the crop that has emerged was rated good/excellent, compared with 60% in the corresponding period last season. The US Weekly Export Sales data is due for release, also by the USDA, on Friday.

On the domestic front, on Wednesday, SAGIS will release the Weekly Grain Producer Deliveries data for 2 July 2021. This data cover summer and winter crops, although we only focus on summer crops for now where harvesting is at completion. To recap, on 25 June, about 4 490 tonnes of soybeans were delivered to commercial silos. This placed the soybean producer deliveries for seventeen weeks of the 2021/22 marketing year at 1,79 million tonnes, which equals 93% of the expected harvest of 1,92 million tonnes. Moreover, 525 911 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 677 240 tonnes. In maize, the marketing year is different from oilseeds; we are still in the seventh week of the 2021/22 marketing year, which began at the start of May. The producer deliveries currently amount to 8,6 million tonnes, which equates to 53% of the expected crop of 16,2 million tonnes.

 On Thursday, SAGIS will release the Weekly Grain Trade data for the week of 2 July 2021. In the week of 25 June, which was the eighth week of South Africa's 2021/22 maize marketing year, total maize exports amounted to 605 023 tonnes. The seasonal export forecast is 2,6 million tonnes, slightly below the previous season because of an anticipated decline in regional demand. In terms of wheat, South Africa is a net importer. On 25 June, imports amounted to 1,2 million tonnes, equating to 75% of the seasonal import forecast of 1,6 million tonnes.

Under a dysfunctional government, every state function eventually has to be outsourced if it is to keep working. In South Africa, security, health, electricity, water, road and rail, and even criminal prosecutions have, to a significant degree, become the responsibility of private, non-traditional actors.

Southern Africa’s maize supply; this is one of the themes we have been consistently revisiting since the beginning of the year when it became clear that the region would need to import a large volume in the 2019/20 marketing year.

In economics, natural experiments are hard to come by, but once in a while, you hit a jackpot without even paying a lottery ticket.

 At a time of an abundant harvest, the high agricultural commodity prices have been a windfall for South African farmers, particularly the grain and oilseed growers. But farmers shouldn't celebrate and spend too quickly. The rising input costs – oil, herbicides, and fertilizer – could erode these gains when farmers embark on the 2021/22 production season, starting in October this year. 

 At the end of the first week of July 2021, Brent crude oil price was up 72% y/y, trading around US$74 per barrel. The oil price has a close correlation with fertilizer prices and various agrochemicals inputs. As such, herbicides prices show similar increases in US dollar terms, with glyphosate up 144% y/y in June 2021. Importantly, South Africa imports all of its annual agrochemicals’ consumption. This means that not only the rise in prices should be a concern but also the logistics on the back of disruption in supply chains and continuous reports of container shortages. The same is true with fertilizer, with potash, urea, monoammonium phosphate (MAP), and diammonium phosphate (DAP) prices, for example, up by 32% y/y, 52% y/y, 67% y/y, and 69% y/y, respectively, in the first week of July 2021.

 The tight global supplies, strong demand and geopolitical uncertainties in crucial producing countries have been the primary driver of prices in all these commodities. Recently, OPEC's failure to reach a deal to increase global oil production is one example of factors causing tight oil supplies in the global market and ultimately driving up prices. The expectations from various analysts globally are that fertilizer prices could remain elevated for some time.   Now, South Africa is just three months away from the new season's planting period, which means that the country's farmers are unlikely to be spared the higher input costs.

 Consider grain and oilseed farmers, who are the main subject of our discussion; fuel generally accounts for between 11% and 13% of production costs. The consumption is generally throughout the year, with the highest periods being during planting and harvesting. In terms of annual fuel usage, it is worth noting that South Africa transports by road roughly 81% of maize, 76% of wheat, and 69% of soybeans. On average, 75% of national grains and oilseeds are transported by road. This means farm managers and agribusinesses will have to plan for an environment different from last year, when input costs were relatively low, increasing cost this time around. 

South Africa imports about 80% of its annual fertilizer consumption and is a minor player globally, accounting for a mere 0.5%. Local prices tend to be influenced by developments in the major producing and consuming countries, such as India, Russia, the USA and Canada. Hence, the higher global fertilizer prices will be a reality here in South Africa as well. Much of the fertilizer imported by South Africa is utilized in maize production, accounting for 41% of total fertilizer consumption in the country, the second-largest consumer being sugar cane at 18%. Fertilizer constitutes about 35% of grain farmers' input costs and a substantial share in other agricultural commodities and crops.

In essence, the higher grain prices and harvest might look good on the financial books in the near term, but farmers and agribusinesses will have to plan for a slightly challenging environment of rising costs in the coming months. Even worse, if the grain prices could soften somewhat from the current higher levels, which is all too likely on the back of an expected sizeable global harvest in the 2021/22 season, then the farmers' finances could be in an even slightly tighter environment in the coming months. Another critical factor for the domestic farmers will be the performance of the Rand to the US dollar, which is key in determining the ultimate prices that farmers will pay to their various suppliers of production inputs when planting begins in October. So, the current higher grain prices are a welcome development from a farmers' perspective, but more trouble lies ahead from potentially higher input costs.         

Weekly highlights

Farmers high spending on machinery a vote of confidence in the 2021/22 season 

In a normal summer season, where there are favourable weather conditions, South African farmers plough roughly four million hectares for summer grains and oilseeds. This comprises maize, sunflower seed, soybeans groundnuts, sorghum and dry beans. While there remains some level of uncertainty about the weather conditions for the upcoming summer crop production season which begins in October, it is fair to say farmers are optimistic and are gearing up for it. The earlier indicator we have thus far is tractor sales which have remained robust since mid-2020. 

Just last week, the data from the South African Agricultural Machinery Association showed that tractor sales were up by 43% y/y in June, with 633 units sold. If we consider the total tractor sales for the first half of this year, we are already 27% ahead of the corresponding period in 2020, with 3 385 units. However, it is worth noting that sales in the first half of last year were negatively affected by lockdown restrictions, so the base is slightly distorted. Still, 2020 was also a good year in South Africa's tractors sales, and so surpassing it means that we are witnessing some good momentum this year. In 2020, the tractor sales amounted to 5 738 units, up by 9% from 2019. 

The large summer grains and oilseeds harvest in 2019/20, and yet another good agricultural season in 2020/21, both of which coincided with higher commodities prices boosted farmers finances and subsequently, the tractor sales. The relatively stronger exchange rate has also been a positive buffer for the imported agricultural machinery, particularly this year. 

 Earlier in the year, we were somewhat pessimistic that the robust 2020 tractor sales’ momentum would extend into 2021. We viewed the large grains and oilseeds harvest of the 2020/21 season as not a sufficient condition to support the sales. This train of thought was that; typically, a relatively good sales year, such as 2020, would likely be followed by a somewhat lower sales period. This was in anticipation that the replacement rate of machinery with new ones would usually be down from the previous years. Another factor to keep a close eye on was the exchange rate. Although the current firmer levels supported the sales, we felt that any changes into a weaker domestic currency would likely lead to higher prices for imported agricultural machinery and discourage sales. 

 Still, while there is always uncertainty about the exchange rate due to numerous domestic and global factors influencing it, farmers improved finances seem to be continuously supporting the exuberance in tractor sales. We are now inclined to revise our view and take a more optimistic one that the tractor sales could maintain a generally positive path this year compared to levels of last year. 

In fact, we see a similar pattern with combine harvester sales, which in June 2021 were up by 76% y/y with 30 units sold. In the first half of the year, we have seen 154 units of combine harvesters sold, which is a third higher than a corresponding period last year. The previous year was also as favourable as in the tractor sales, with combine harvester sales up by 23% from 2019. The tractor and combine harvester sales tend to go in tandem in times of optimism – large area plantings typically lead to a large harvest. Hence, we hold a similarly optimistic view about the harvesters’ sales this year. 

 These numbers show us a picture of optimism about the following season and general agricultural conditions from farmers’ part. After all, we cannot doubt the optimistic picture as this was clear also from agribusiness confidence levels in the second quarter of the year. The Agbiz/IDC Agribusiness Confidence Index, which measures the sentiment amongst agribusinesses and major farming entities, reached a record high (since its inception in 2001) of 75 in the second quarter of this year, from 64 in the first quarter of 2021. These results were reflective of favourable conditions for all subsectors of agriculture, with various crops set to reach record output levels in the 2020/21 season.

The planting season begins in three months for summer grains and oilseeds, as such the sales for the next two or three months will be worth watching. Where we are somewhat pessimistic about the sales in the last quarter of the year. We fear that the rising input costs, such as fertilizers, herbicides and fuel could add pressure on farmers finances and thus lead to a change in machinery-buying decisions. Also, the planting will be in full swing and there would be limited incentive to bring more new machinery. Still, the pace of sales in the first half of the year convinces us that in aggregate, the annual sales for 2021 could still be larger than the previous year.

 Importantly, we believe that the 2021/22 season with the optimism of a possible slight increase in planting. The current season of 2020/21 was 4,2 million hectares to be exact, a 5% increase from the previous year. We will likely remain at such higher levels or even see a slight inch up in the area. The one factor that we all look forward to right now is the weather outlook. To this end, a positive note is that there aren’t prospects of an El Niño or La Niña. The data from the Australian Bureau of Meteorology paints prospects of a neutral season. This is a view also held by the local weather authorities, who noted on the 28th of June 2021 that “the El Niño-Southern Oscillation is currently in a neutral state and the forecast indicates that it will most likely remain in a neutral state for the remainder of winter and most of the spring.”

In sum, farmers are spending more on agricultural machinery and we view this, not merely as the result of improved finances, but also confidence in the coming production seasons.

Global food price index declined for the first time in 12-month 

 The improved weather conditions in the US and parts of Europe, along with harvest pressure in South America has led to a slight cooling of global grains and vegetable oil prices. This is evident in the FAO Global Food Price Index which fell by 3% in June 2021 from the previous month to 125 points; the first drop in 12 consecutive monthly increases. The decline in grains and oilseeds was a major driver of this development. With that said, the index is still 34% higher than the corresponding period last year. 

 While grains and oilseeds price direction going forward will be influenced by the stock levels, which are fairly tight and leading to a continued knee-reaction on prices whenever there is news of unfavourable weather conditions, the production prospects are positive. For example, on 24 June 2021, the International Grains Council (IGC) released its monthly update of the global grains and oilseeds production forecasts for the 2021/22 season. The Council’s view is broadly optimistic pointing to an annual uptick in production of all major grains and oilseeds. The drier weather conditions in parts of the US and Canada, along with extreme cold in parts of Europe, which had slowed the planting and threatened the 2021/22 season have all subsided. 

 As such, the IGC forecasts the 2021/22 global maize production at a new peak of 1,2 billion tonnes, up by 6% y/y. This is on the back of an expected large crop in the US, Brazil, Argentina, Ukraine, China, EU, and Russia. Similarly, the global wheat production conditions have improved. The IGC now forecasts the 2021/22 global wheat production at a record 789 million tonnes, up 2% y/y. This is boosted by expected large crops in the EU, the US, Ukraine, Argentina, China, India, and the UK. 

Also, worth noting is that the global rice supplies and stocks are also at comfortable positions, well above the 2020/21 production season. The IGC forecasts the 2021/22 global rice production at a record 512 million tonnes, up 2% y/y. This is on the back of possible expansions in area plantings in Asia, combined with expected better yields as a result of favourable weather conditions. The observations are similar in the global soybeans production prospects, with the 2021/22 harvest estimated at 383 million tonnes, up by 6% y/y. The beneficial weather conditions will likely boost the yields in the US, Brazil, Argentina, India, Paraguay, Russia, Ukraine, and Uruguay. 

These production forecasts suggest that global crop prices from the second half of the year could continue softening, slightly, from the recent months' levels. If such transpires, the South African grain prices could follow a similar path, which bodes well for consumer food price inflation. The only major upside risk on grain prices, as we have noted in various writings are the lower grains stocks, and progressively also the growing consumption from the renewable energy industry. With that said, the data so far points to a positive direction for a consumer than much of the first half of the year.

Data releases this week

 We start the week with a global focus, as the United States Department of Agriculture (USDA) will release the US Crop Progress Report and the World Agricultural Supply and Demand Estimates report today. Our interest in these reports will be to view the crop growing conditions in the US, and also a broader view of the global grains and oilseeds production estimates. We know from the aforementioned IGC estimates (discussed above) that the global grains and oilseeds production prospects are generally positive. We look to see if the USDA will confirm such a view.  The US Weekly Export Sales data is due for release, also by the USDA, on Thursday.

 On the domestic front, on Wednesday, SAGIS will release the Weekly Grain Producer Deliveries data for 9 July 2021. This data cover summer and winter crops, although we only focus on summer crops for now where harvesting is at completion. To recap, on 2 July, about 2 759 tonnes of soybeans were delivered to commercial silos. This placed the soybean producer deliveries for seventeen weeks of the 2021/22 marketing year at 1,79 million tonnes, which equals 93% of the expected harvest of 1,92 million tonnes. Moreover, 563 310 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 677 240 tonnes. In maize, the marketing year is different from oilseeds; we are still in the ninth week of the 2021/22 marketing year, which began at the start of May. The producer deliveries currently amount to 9,6 million tonnes, which equates to 59% of the expected crop of 16,2 million tonnes.

 On Thursday, SAGIS will release the Weekly Grain Trade data for the week of 9 July 2021. In the week of 2 July, which was the ninth week of South Africa's 2021/22 maize marketing year, total maize exports amounted to 712 488 tonnes. The seasonal export forecast is 2,6 million tonnes, roughly 10% below the previous season because of an anticipated decline in Southern African demand, a region that is typically a key importer of maize from South Africa. In terms of wheat, South Africa is a net importer. On 2 July, imports amounted to 1,3 million tonnes, equating to 81% of the seasonal import forecast of 1,6 million tonnes.  

My comments on the spreading of African Swine Fever in Asian countries have largely been on the market perspective – what the virus means for the global pork supply, consumer prices, etc.

Budding blueberry sector offers fruitful job prospects- South Africa .

South Africa's 2019 maize output expected to shrink by 13%-

Since the start of the Russia-Ukraine war there have been rising concerns about global food security. Both Ukraine and Russia are major agricultural producers and exporters. In 2021, these countries together accounted for nearly 30% of global wheat exports, about 14% of global maize exports, roughly 32% of global barley exports, almost 60% of global sunflower oil exports, and about 14% of global fertilizer exports.[2]

The destruction of economic infrastructure within Ukraine, combined with various shipping lines avoiding the Black Sea region and the extensive sanctions that Western countries have imposed on Moscow, mean there will be limitations on the movement of the agricultural products from these countries. This will be exacerbated by other factors, such as the agreement to exclude some Russian banks from global payment systems such as SWIFT.

Notably, the Russia-Ukraine war occurs at a time when the global agricultural commodity prices were already elevated as a result of relatively lower grains and vegetables oils stocks.[3] The drought in South America, specifically Brazil and Argentina, which together account for 14% of global maize and 50% soybean production, has already pushed up global prices for much of the past two years.

Additionally, the rising demand in China and India for soybeans and other vegetables oil, combined with poor palm oil produce in Indonesia, has added upside pressures to global vegetables oils prices. As the Russia-Ukraine war began, the Food and Agricultural Organization of the United Nations (FAO) Global Food Price Index averaged 141 points in February 2022, which is an all-time high, exceeding the previous peak in February 2011.[4] On a year-on-year basis, the FAO reflected an increase of 21% in February 2022.

Given these realities, it is important that we understand South Africa’s linkages to Russia and Ukraine agricultural trade, and how the unfolding war could potentially impact domestic food supplies.

SA’s agricultural trade with Russia-Ukraine

South Africa has relatively weak agricultural import ties with both Russia and Ukraine. Russia is the 17^th-largest agricultural products supplier to South Africa, and Ukraine the 44^th. In value terms, agricultural imports from these two countries accounted for just 2.4% of South Africa’s total agricultural imports of US$5.9 billion in 2020.The major products both countries export to South Africa are wheat and sunflower oil. Over the past five years (2016-2020), South Africa imported an average of 1,8 million tonnes of wheat per calendar year, roughly half the annual wheat consumption needs. Of this, wheat imports from Russia and Ukraine averaged 34% and 4%, respectively.

The significance of Russia in South Africa’s wheat imports basket may raise concerns about the near-term supplies. And from this perspective, in the current wheat marketing year of 2021/22 that ends in September, South Africa has already imported 40% of its estimated imports of 1,5 million tonnes. However, it will likely be able close the import gap for the remaining balance for the year from various countries such as Germany, Canada, Australia, Latvia, Argentina, and the Czech Republic, amongst others. But this will probably be at higher cost than the volumes already imported because of the upside pressure the war has added in the commodities market.

Moreover, South Africa imported an average 174 138 tonnes[5] of sunflower oil per year from the world market between 2016 and 2020. During this period, imports from Ukraine averaged 4% of the total. Bulgaria supplied 40% of South Africa’s imported sunflower oil, Romania about 22%, and Argentina 15%.

That said, these data do not minimize the importance of these countries for South Africa’s food basket. Russia and Ukraine may not be major supplies of agricultural products to South Africa, but they have strong ties with the global grains and oilseeds market given their large export share contribution and this has an important bearing on commodity prices.

This means the impact of the disruption in trade will, in the near term, be felt through prices rather than through a shortage of products. The FAO Global Food Price Index, which was already at all-time high in February, could register a new high when March 2022 results are released on 07 April 2022, and remain elevated for the months thereafter, depending on the length of the conflict and market uncertainty.

Conversely, from an export perspective, Russia is a notable market – the 13th largest. South Africa's products to Russia and Ukraine are mainly citrus, nuts, vegetables, and tobacco. Importantly, in 2020 Russia accounted for 7% of South Africa’s citrus exports in value terms, and for 12% of apples and pears exports in the same year – the country’s second largest market.

Aside from the Black Sea region, South Africa generally has stronger agricultural export ties with the African continent, Asia, the United Kingdom, and the European Union. In the third quarter of 2021, the African continent and Asia were the largest markets for South Africa's agricultural exports, accounting for 35% and 33% in value terms, respectively. The European Union was the third-largest market, taking up 23% of South Africa's agricultural exports. The balance of 9% value constitutes the Americas and other regions of the world.[6]

Dependence on imported agricultural inputs

Russia is also integrated in global agriculture through inputs market, and here lies a major risk for import dependent countries such as South Africa. Russia is the world's leading exporter of fertilizer materials in value terms, followed by China, Canada, the US, Morocco, and Belarus (see Figure 1). These fertilizer mixtures include a variety of complex minerals and chemicals, including nitrogenous fertilizers, phosphoric fertilizers, and potassic fertilizers.

Figure 1: Share ranking of the world's top fertilizer exporters by value (2016 and 2020)   

Source: Trade Map and Agbiz Research

 Fertilizer prices increased sharply throughout 2021 and have remained elevated since the beginning of this year. For instance, in January 2022, international ammonia, urea, di-ammonium phosphate, and potassium chloride prices were up by 220%, 148%, 90%, and 198% from January 2021, respectively.[7] There are many factors behind these sharp input cost increases, such as the supply constraints in critical fertilizer-producing countries, mainly China, India, the US, Russia, and Canada. Rising shipping costs, and oil and gas prices are also contributing factors to the price increases, along with firmer global demand from growing global agriculture.

The Russia-Ukraine conflict will add upside pressure to these already higher fertilizer prices, particularly if Russia's exports suffer as a result of sanctions. The primary markets for Russia's fertilizer material are Brazil, Estonia, China, India, the US, Finland, Mexico, Poland, Romania, and Latvia, among others (see Figure 2). Still, even countries that have minimal direct fertilizer imports from Russia, such as South Africa, which is the 36th largest fertilizer materials market for Russia, will experience the price pressures from the international market.

Figure 2: Russia's top fertilizer materials markets by share between 2016 to 2020 (value)     

Source: Trade Map and Agbiz Research

 Unlike the US and Canada, with notable domestic fertilizer production capability, South Africa's domestic fertilizer production capacity is weak, in part, because of the lack of some input minerals. South Africa imports about 80% of its annual fertilizer needs and is a minor player globally, accounting for 0.5% of total global consumption. Therefore, local prices tend to be influenced by developments in the major producing and consuming countries, such as Russia and the other major fertilizer players mentioned above.

Much of the fertilizer imported by South Africa is utilized in maize production, accounting for roughly 41% of total consumption. The second-largest consumer is sugar-cane farming, at 18%. Fertilizer constitutes about 35% of grain farmers' input costs and a substantial share in other agricultural commodities and crops.[8] Farmers have already planted the 2021/22 summer crops with these higher input costs. They will not be procuring fertilizers until around mid-year and into the third quarter of the year when they prepare for the next season (i.e the 2022/23 production season).

Depending on the how long the Russia-Ukraine conflict continues, and the extent of the response measures such as sanctions by other countries, fertilizer prices could still be elevated when the next planting season starts.

In the near term, the winter-crop producing areas such as wheat, barley, canola and oats, among others, which have to start the new planting season at the end of April, are most exposed to higher fertilizer prices, along with a range of horticulture (vegetables and fruit) products.

How the war will affect the South African consumer

Aside from the products discussed above, South Africa is generally a net exporter of agricultural products and has sufficient supplies for domestic consumption and exports to the typical markets. Still, given the possible spike in demand for major grains such as maize, South Africa should keep a close eye on its supplies to ensure that while exports continue, the country keeps sufficient supplies for domestic use.

To be clear, this is not a call for policy intervention on the movement of crops per se. Rather, regular monitoring and publication of output and export volumes allows market pricing to adjust accordingly, as is already the usual practice for most major commodities such as grains.[9] The information about the supplies and domestic stocks will be a sufficient signal to the market, which will adjust the export volumes through price. When South Africa's stocks are stretched, the price increases will force buyers to look elsewhere, and thus ensure that there is availability of supplies in the country.

For the South African consumer, the inescapable effect will be higher prices. The rise in agricultural commodity prices, domestically and globally, along with rising fuel costs, presents significant upside risks to consumer food price inflation. However, it should be noted that farmers do not necessarily always produce food products, but rather agricultural commodities that are inputs into manufactured food. This means that the final food-products price consumers pay is a combination of a range of factors, including labour, transport, and processing.[10] This also means that an increase in commodities prices does not necessarily mean an instant rise in retail prices. There is typically a lag, especially for grain-related products, as manufacturers usually keep several months’ worth of inventories for their production processes.

Moreover, we are in an environment of increasing grains and vegetable-oil prices, but fruits and vegetables could come under pressure. With Russia, a key market for some fruits, temporarily disrupted, products that would have been exported there will remain in South Africa or diverted elsewhere. The meat price inflation dynamics are also uncertain, as some farmers could increase slaughtering on the back of higher animal feed costs (maize and soybeans). This means that the food basket products are not all increasing at the same rate, and there is possibility of moderation in some products. But with fuel being an underpinning product for movement of most food products, the risks to overall consumer food-price inflation are generally.to the upside.

At the Agricultural Business Chamber of South Africa (Agbiz), we had initially thought South Africa's consumer food-price inflation would average between 4% to 5% in 2022 (compared with 6.5% in 2021). When we made the current consumer food price inflation estimates, the war was not on our radar, even though the global food prices were already relatively high. However, we now see more upside risks to these numbers, and we are currently reviewing our forecasts, a tough exercise in the current volatile environment.

Conclusion

Much remains unknown about the coming weeks and months. But there is little doubt that local agricultural markets and consumers will be affected by these geopolitical events, primarily through the price transmission of a range of commodities and inputs.

South Africa’s agricultural sector has had two consecutive years of strong growth, with expansion in all subsectors, i.e., livestock, field crops and horticulture. This year will be a break from the 2020 and 2021 strong performance. We expect the sector’s gross value added to fall by roughly 3-5% year on year given the high base from 2021. The overall field crops harvest will likely be lower than the previous season, although some crops such as soybeans and sunflower seed promise a large harvest. But this will not be the only source of potential contraction in the sector. The livestock sector, which accounts for roughly half of the sector’s gross value added, continues to face numerous challenges. First, the generally higher grains and oilseed prices, a key feed ingredient, have presented increased cost pressures to livestock and poultry farmers since 2020. For example, yellow maize prices were up by 38% year on year on 23 June 2022, trading at R4 357 per tonne.

 While the farmers were somewhat able to manage the rising feed costs in the past two years, the current season has presented new challenges: a vast outbreak of foot-and-mouth disease as well as continued occurrences of swine flu and avian influenza outbreaks. South Africa has had 91 foot-and-mouth disease outbreaks in previously disease-free zones. The disease has for the first time in history spread outside the demarcated foot-and-mouth disease zone and is now active in five provinces, namely, Limpopo, KwaZulu-Natal, North West, Gauteng and Free State. While the outbreak does not necessarily mean a wide slaughtering of cattle for farmers and has now, encouragingly, been quarantined in various sites or farms, the economic impact still cuts deep. The impact on livestock auctions is huge. Moreover, bans by many countries on exports of South Africa’s livestock products constrain the growth of the sector and harm the potential for black farmers to reap the benefits from an increasingly export-oriented livestock sector. South Africa’s beef industry is aggressively building its export activity, with exports having grown nearly seven-folds over the past two decades, reaching 54 334 tonnes in 2021 (see Exhibit 1 in the attached file). But we are still not able to export our top-quality beef products to the USA, UK and EU markets where the returns will be much higher than exporting to the Middle East and other smaller markets.

 The frequent outbreak of the foot-and-mouth disease risks reversing or slowing the export drive that the beef industry has embarked on. Weaker exports could also translate to softer domestic beef prices at a time when the feed costs – grains and oilseeds – are elevated. This ultimately adds financial strain on farmers. The financial pressure is not limited to the cattle industry but also to sheep, goats, pigs and poultry. For instance, China has temporarily suspended imports of South Africa’s wool for roughly three months due to the foot-and-mouth disease outbreaks. China is a significant market, accounting for roughly 70% of South Africa’s wool exports. The current export ban has a broad negative financial impact on the wool industry and the communities that rely on the industry.

 Livestock is also one of the subsectors with the deep involvement of farmers from the former homelands’ regions of South Africa. For example, the National Agricultural Marketing Council estimates suggest that black farmers account for 18%, 13% and 34% of wool, mohair, and cattle production, respectively. The accuracy of these data is debatable, but the point here is that a sizable share of agricultural output by black farmers is affected by these financial pressures. We highlight this data to note that these new entrant farmers might not have financial buffers to carry them through in a tough livestock market, as we already hear from established commercial farmers about these financial pressures.

 Keeping in mind the focus of the Agriculture and Agro-processing Master Plan on inclusive growth and employment creation in the agricultural sector, efficient prevention and management of animal diseases and maintenance of animal health is critical. Government has a critical role to play here and the legislative, budgetary and coordinating tasks of public veterinary services and animal health services are absolutely vital in protecting our national livestock herd and enabling the growth that the sector desperately needs.

 The Department of Agriculture, Land Reform and Rural Development established an Animal Biosecurity Task Team, which we understand completed its task with crucial recommendations for improving the current challenges. The report should be made public, and its recommendations implemented urgently. This could provide a platform for effective collaboration between the private sector and the government in placing measures in place to curb the spread of diseases and improve the health of all sectors of the livestock sector.

 Importantly, for key markets for the wool industry such as China, the Department of Agriculture, Land Reform and Rural Development should actively engage the Chinese authorities to resume exports, as we believe there was the framework for engagement from the previous episodes of this nature of outbreaks. The engagement is crucial as China has slowly opened its economy from the tough lockdowns. Our government should move with speed on its engagement. In the case of rising feed costs, the potential rains will be a saving grace that natural grazing veld will continue recovering well and assist the livestock, to an extent.

 Overall, South Africa’s agricultural sector faces numerous challenges, which range from network industry, and broad policy matters such as a need for increased export markets. But in the near term, resolving the constraints above facing the livestock industry would bring a slight relief.

Weekly highlights

South Africa’s consumer food price inflation accelerated in May

 We are in a period of elevated prices, and food is at the core of these increases. For example, in May, South Africa’s consumer food price inflation accelerated to 7,8% y/y, from 6,3% in the previous month. This is the quickest pace since March 2017. The increase was broad base on all food products in the inflation basket. This largely mirrors the uptick we have been seeing in the global agricultural commodity prices, and indeed the domestic market.

 Importantly, we are now also starting to see the spillover the Russia-Ukraine war had on agricultural commodity prices transmitted into retail food prices. In fact, for the grain-related and vegetable oils products, we will likely see a continuous mild uptick in the coming month or two, which could push up mildly the headline food consumer price inflation number further. Since the Russia-Ukraine war began and disrupted the global grains market, the global agricultural commodity prices have increased significantly, with the FAO's Global Food Price Index in May averaging 157 points, which is up 22% y/y, coming from a record high seen in March.

 The disruption in the palm oil market, and indeed the entire vegetable oils market, the ban on wheat exports by India, and the expected lower wheat harvest in the 2022/23 production season are added upside risks that could sustain prices at higher levels. We, however, don’t see potential further increases in the global agricultural commodity prices, but that prices could hover at current elevated levels for some time. South Africa, which is interlined with global agricultural markets, has also experienced increased agricultural commodity prices. The result of these developments is the recent uptick in the cereals, and oil and fat products prices in the consumer food price inflation basket. These could remain elevated, in line with our expectations of agricultural commodity prices.

 Nevertheless, we still think the outlook on food product prices will remain mixed, despite the recent broad increase in product prices. In the case of fruits and vegetables, South Africa has a sizable harvest and the disruption in fruit exports within the Black Sea region could add downward pressure on domestic prices; Therefore, we hold a generally favourable view of these product price directions for the coming months.

 The one essential product whose price trend remains uncertain is meat. The recent outbreaks of foot-and-mouth disease have led to the temporary closure of some key export markets for the red meat industry, thus potentially adding downward pressure on prices. Still, this will be dependent on the cattle and sheep slaughtering activity, which for now remains robust, with 197 712 head of cattle slaughtered in April 2022 (-2% y/y), and 318 155 head of sheep slaughtered in the same month (-10% y/y). Conversely, there are fears of a potential increase in poultry product prices, which could lessen the benefit of softer red meat prices.

 Overall, various factors in the food market will likely push in opposing directions in the coming months. Thus, we believe that South Africa's consumer food price inflation could average just above 6,0% y/y in 2022 (from 6,5% in 2021). The base effects, along with meat, fruits and vegetables, will likely provide a constructive price inflation path ahead. With that said, the next month or two will likely show elevated consumer food price inflation, with moderation in much of the second half of the year.        

Data releases this week

 We start the week with a global focus, where, today, the United States Department of Agriculture (USDA) will publish its weekly US Crop Progress The planting activity has been completed, and thus we now focus on the crop-growing conditions. In the previous release, in the week of 19 June 2022, about 70% of the maize crop was rated good/excellent, compared with 65% in the corresponding week in 2021. Moreover, about 68% of the soybean crop was rated good/excellent, compared with 60% in the same week last year. On Thursday, the USDA will release the US Weekly Export Sales data.

 On the domestic front, on Tuesday, the Crop Estimates Committee will release its fifth summer crop production estimates. We don’t expect any major adjustments from the current estimates, aside from a marginal uptick in the soybeans harvest estimates.

 On Wednesday, SAGIS will release the maize Weekly Producer Deliveries data for the week of 24 June 2022. This data will help us get insight into the progress of the maize harvest activity. In the previous release of the week of 17 June, 2,7 million tonnes of maize had already been delivered to commercial silos, out of the expected harvest of 14,7 million tonnes. Moreover, the soybean harvesting process is nearly complete. In the week of 17 June 2022, about 1,9 million tonnes had already been delivered to commercial silos. The data for 24 June 2022 will likely show additional small volumes of deliveries. In terms of sunflower seed, in the week of 17 June 2022, about 594 236 tonnes had already been delivered, against an expected harvest of 963 000 tonnes (second largest on record).

 On Thursday, SAGIS will publish the Weekly Grain Trade data for the week of 24 June 2022. In the previous release on 17 June 2022, which was the seventh week of South Africa's 2022/23 maize marketing year, the weekly exports amounted to 99 019 tonnes. The key markets were Japan, Taiwan, Vietnam and the Southern Africa region. This brought the total 2022/23 exports to 563 796 tonnes out of the seasonal export forecast of 3,2 million tonnes. This is slightly down from 4,1 million tonnes in the past season due to an expected reduction in the harvest.

 South Africa is a net importer of wheat, and 17 June was the 38th week of the 2021/22 marketing year. The total imports are now at 1,17 million tonnes out of the seasonal import forecast of 1,48 million tonnes (slightly below the 2020/21 marketing year imports of 1,51 million tonnes because of a large domestic harvest). About 25% is from Argentina, 23% from Lithuania, 18% from Brazil, 14% from Australia, 13% from Poland, 4% from Latvia and 3% from the US.

 If one looks into South Africa’s wheat imports data for the past five years, Russia was one of the major wheat suppliers, accounting for an average share of 26% a year. This has now been replaced by the above-mentioned suppliers.

 Also on Thursday, Statistics South Africa will release the Producer Price Index (PPI) data for May 2022.     

A number of countries in Africa have in the recent past reformed their cannabis regulations – moving it away from being a prohibited drug to a source of income as an exportable commodity.

We are entering a busy period in South Africa's agricultural production cycle.