Agricultural Market Viewpoint with Wandile Sihlobo

The Western Cape, which accounts for over two-thirds of South Africa's winter crops and a large share of wine grapes and various horticulture products, faced another heavy and destructive flood this past week. The rainfall peak was mainly the Bredasdorp in the Southern Overberg region.

Significant damages to farm infrastructure, electricity supply and road networks are reported in various small farming towns of the province, mainly the southern areas. Still, the impact of the floods on wine grapes and table grapes remains unclear as industry horticulturalists continue assessing the fields. We have seen anecdotal evidence of damages in some storage facilities and crop fields in the southern regions of the province.

Another challenge caused by wet soils has been the difficulties of tractors spraying herbicides and fertilizers, so some farmers now use drones to spray the fields. Perhaps this is a positive step toward technological advancement accelerated by unfavourable weather conditions.

Regarding the winter crops, mainly wheat, barley and canola, the focus has been on whether the excessive rains would undermine the yield potential. As best as we can tell, and from various interactions with farmers in the Western Cape, we suspect the impact on crops will be minimal, but the harvest quality may be an issue. The southern regions could have some damage, but its scale remains unclear. We maintain a positive view of South Africa's 2023/24 winter crop harvest.

On 27 September 2023, the Crop Estimates Committee (CEC) released its second production estimates for winter crops and kept wheat harvest at 2,1 million tonnes, up 1% from the previous season. Importantly, this is well above the 10-year average harvest of 1,8 million tonnes. This is supported by an expected large crop in the Western Cape and Limpopo, which overshadowed the anticipated decline in the Free State, Northern Cape and other provinces. This means that the crop conditions in the Western Cape are far more consequential for South Africa's winter wheat harvest size. Monitoring crop conditions in the coming weeks remains crucial to us.

Assuming that there will be no major changes in the crop forecast in the coming months, one can be confident that a wheat harvest of 2,1 million tonnes implies that South Africa will likely need to import about 1.6 million tonnes of wheat to meet domestic consumption in the 2023/24 season (down from the forecast 1.7 million tonnes in the 2022/23 season). Still, we must keep an eye on the CEC report of 26 October, as this would have accounted for the impact of the heavy rains in the Western Cape.

Moreover, the 2023/24 barley production is estimated at 389 920 tonnes (up 29% y/y). This will be the largest crop in three years and will mainly be supported by an expansion in the area planted and the anticipated better yields. The 2023/24 canola crop is estimated at a record 230 950 tonnes, slightly down from last month (up 10% y/y). The annual uptick is also due to increased plantings and expected better yields. The following CEC report will also provide further insights into the yield expectations of these crops and whether the recent floods have had a more severe impact than we currently see

We discuss more in this week's podcast segment.

My writing on agricultural economic matters is available on my blog: https://wandilesihlobo.com/

Podcast production by: Lwandiso Gwarubana, Richard Humphries, and Sam Mkokeli Wandile Sihlobo website

This is a quick comment on the current avian flu in South Africa. The segment is mainly to update the listeners of the podcast on this topical issue Wandile Sihlobo website

Last week, South Africa's Crop Estimates Committee (CEC) released its 2022/23 8th summer crop production forecasts. In these production estimates, there were no new surprises or significant adjustments to the existing forecasts.

For example, if we can highlight maize, the 2022/23 commercial harvest is 16,4 million tonnes, roughly unchanged from August figures (-0,09% m/m). This crop is 6% more than the 2021/22 season and the second-largest harvest on record. The expected ample harvest is primarily on the back of large yields, as the area planted is slightly down from the 2021/22 season.

Notably, a crop of 16,4 million tonnes implies South Africa will have sufficient supplies to meet domestic maize needs of roughly 11,4 million tonnes and have approximately 3,3 million tonnes for export markets in the 2023/24 marketing year (this marketing year corresponds with the 2022/23 production season).

Furthermore, the soybeans harvest was unchanged from August's record estimate of 2,8 million tonnes (up 24% y/y). The annual crop improvement is due to an expansion in the area planted and higher yields. The ample soybean harvest means South Africa could meet its domestic demand and remain with about 420 000 tonnes of soybeans for export markets (from 277 504 tonnes in the previous season).

There were, however, 2% month-on-month downward revisions on the sunflower seed harvest, which is now estimated at 729 110 tonnes (down 14% y/y). The annual decline is on the back of both the reduction in the area planted and the lower yields in the far western regions of the country. Consequently, South Africa will likely remain a net importer of sunflower seed. The Supply and Demand Committee forecasts South Africa's 2023/24 sunflower seed imports at 8 000 tonnes, marginally up from last season's 6 805 tonnes. There were no major adjustments in the production forecast for other small grains, such as groundnuts and dry beans.

Notably, given that we are at the tail end of the season, the attention is shifting to the 2023/24 upcoming summer crop. The primary focus as we approach this new season will be the weather outlook. As I recently stated in the Business Day, the uncertainty regarding the intensity of the El Niño weather event and the possible higher temperatures and lower-than-normal rainfall that this could bring is still a concern. However, the latest message from the South African Weather Service (SAWS) through their Seasonal Climate Watch on 28 August 2023 was encouraging, stating that "the multi-model rainfall forecast indicates above-normal rainfall for most of the country during mid-spring (Sep-Oct-Nov) and late-spring (Oct-Nov-Dec)."

We discuss more in this week's podcast segment.

My writing on agricultural economic matters is available on my blog: https://wandilesihlobo.com/

Podcast production by: Lwandiso Gwarubana, Richard Humphries, and Sam Mkokeli Wandile Sihlobo website

We are three weeks into the start of South Africa's 2023/24 summer crop production season. The uncertainty regarding the intensity of the El Niño weather event as well as the, possible higher temperatures and lower-than-normal rainfall that this could bring is still a concern.

However, the latest message from the South African Weather Service (SAWS) through their Seasonal Climate Watch on 28 August 2023 was encouraging, stating that "the multi-model rainfall forecast indicates above-normal rainfall for most of the country during mid-spring (Sep-Oct-Nov) and late-spring (Oct-Nov-Dec)."

The Weather Service added that “the early-summer (Nov-Dec-Jan), however, indicates below-normal rainfall over the central parts of the country and above-normal rainfall for the north-east." This means that some regions of the country, mainly central to western, may not have a similar start of the season to the eastern areas. Still, the broad sentiment is that showers will likely support crop germination during the beginning of the 2023/24 production season. This is also an encouraging message for horticulture and livestock, as the rains will help production conditions in these subsectors.

The central message from the SAWS report is that there are concerns about potentially below-normal rainfall, mainly from the start of 2024, while the current year could have showers in most regions. Aside from the planting and germination, the other critical point of crop development is pollination, which requires moisture and is typically around February if farmers plant crops from mid-October in the eastern regions and mid-November in the country's western areas.

Importantly, with improved soil moisture from the last rainy seasons, mainly in east and central South Africa, the expected El Niño will likely have minimal impact on the agricultural conditions. With that said, we remain concerned about the far western regions of South Africa.

Firstly, there is anecdotal evidence that soil moisture in these regions is not as conducive as in the other regions of South Africa because of drier weather conditions towards the end of the 2022/23 production season. Secondly, the SAWS indicates stronger prospects of rainfall in the coming months in the northern and eastern regions of South Africa, with less emphasis on the far western areas. The production conditions in these regions requires constant monitoring.

The northern hemisphere countries experienced excessive heat during their summer season. Thus, we remain concerned about whether this could be a reality for South Africa in the coming season. There is no clarity about this thus far, but it will need constant monitoring.

The SAWS's view is also unclear, stating that "minimum and maximum temperatures are expected to be mostly above-normal countrywide for the forecast period." The possibility of maximum temperatures in an environment where moisture is already constrained would not be ideal for crop production

We discuss more in this week's podcast segment.

My writing on agricultural economic matters is available on my blog: https://wandilesihlobo.com/

Podcast production by: Lwandiso Gwarubana, Richard Humphries, and Sam Mkokeli Wandile Sihlobo website

The South African government voiced concerns about the higher food prices and instructed the cabinet's economic cluster to implement a food security plan to cushion consumers. We have yet to see the government's strategy and approach.

But it is worth highlighting that South Africa's consumer food price inflation has started to decelerate from the high levels of 14,4% we saw in March 2023. In July 2023, consumer food inflation was recorded at 10,0%, from 11,1% in the previous month. The product prices underpinning this deceleration in recent months are primarily bread and cereals; meat; fish; and oils and fats, which are crucial for low-income households.

Notably, as the cabinet's economic cluster prepares to start its work, it is vital to have a common understanding of the key drivers of food prices in recent years and an appreciation that this is a global challenge, not unique to South Africa. For example, two primary drivers of global food prices existed before the covid-19 pandemic.

First, the drought in South America in the 2019/20 season reduced the harvest notably, primarily in Brazil and Argentina. These countries collectively account for 14% and 50% of global maize and soybean production. The drought has spread for roughly three seasons since 2019/20, further exacerbating the grain price increases from 2020 to the end of 2022.

Secondly, China's continuous imports of grains and oilseed as the country was rebuilding its pork industry after a devastating African Swine Fever also added to the surge in demand at a period when global stocks were tight. China's growing demand had a consequential impact on global grain prices because of its share size of imports — for example, the country imports about 60% of globally traded soybeans.

As covid-19 spread in early 2020, several major grain producers, such as India, Kazakhstan and Vietnam, worsened global price increases by temporarily banning exports. As this unfolded, shipping costs soared, increasing global grain prices. In sum, a combination of trade policy actions by other countries, logistics and weather conditions placed upward pressure on food prices.

These all-important fundamentals challenge food supplies, further worsened by the Russia-Ukraine war. Russia and Ukraine are substantial players in the grains and oilseeds market.

As a small, open economy, South Africa, interlinked with the world, was not insulated from these agricultural and food price shocks. Admittedly, South Africa was in a reasonably better place, with abundant supplies, as the La Niña weather event brought good rains across the country and supported agricultural activity. Still, the prices did not reflect the increased domestic supplies as the global shocks mainly underpinned them.

Over the period of higher global commodity prices, the food producers and processors had to deal with higher agricultural commodity prices and process such commodities further to produce the food products available at the retail level. The activities between the producer and retailer do not happen without costs, and time lag. The food value chain first depends on expansive logistical systems and networks, while processing involves labour, energy, packaging and finance costs. Once the food is processed, it must be distributed to retail outlets, bearing these costs. On top of that, we can add the dramatic costs of load-shedding and crime.

If food processors and retailers accounted for all these cost increases across the value chain, consumers would face a much sharper price increase. But this was not the case in South Africa. Food prices increased at a moderate pace (compared to other countries), averaging 9,5% in 2022, compared with 6,5% year on year in 2021. Countries like the US, Brazil, and the EU saw higher consumer food price inflation rates. This suggests that food processors and retailers if anything, absorbed some costs.

Notably, while the consumer food price inflation averaged 9,5% in 2022, the produc Wandile Sihlobo website

South Africa's agricultural exports amounted to US$3.4 billion in the second quarter of this year, up by 0,1% y/y. Despite challenges in key export markets such as the EU in the case of citrus, the products that dominated the export list this quarter were citrus, maize, apples and pears, wine, sugar, soybeans, wool, avocados, pineapples, fruit juices, nuts, and grapes. Importantly, this good export performance was not only a function of price but also improved volumes.

The prices of some agricultural products have declined notably from the 2022 levels. The improvement in agricultural exports also partly demonstrates the results of continued collaboration between the industry and Transnet to improve the logistics at the ports. However, more work is needed to improve the efficiencies.

The South African agricultural industry has established forums to continuously engage with Transnet and enhance communication about problems at the ports so that the response could be swift to drive the exports of high-value and perishable products.

From a regional perspective, the African continent remained the largest market for South Africa's agricultural exports, accounting for 36% of the exports in the second quarter of 2023. Asia and the Middle East were the second largest region, with a 30% share.

The EU was the third largest region, accounting for 18% of the agricultural exports, with the Americas region at 6%. The UK remained one of the largest single markets for South Africa's agricultural exports, accounting for 7% of the exports in the second quarter. The remaining 3% was spread to other various regions of the world.

Regarding imports, South Africa's agricultural imports fell by 6% y/y in the second quarter of this year to US$1,8 billion. The products that still dominate the import list are rice, wheat, palm oil, whiskeys, and poultry.

The whiskeys, wheat and poultry products were the main drivers of the decline in the value of imports in the first half of the year. Overall, South Africa had an agricultural trade surplus of US$1,6 billion in the first half of 2023, up 9% y/y.

We discuss more in this week's podcast segment.

My writing on agricultural economic matters is available on my blog: https://wandilesihlobo.com/

Podcast production by: Lwandiso Gwarubana, Richard Humphries, and Sam Mkokeli Wandile Sihlobo website

The Kingdom of Saudi Arabia was mentioned as one of the countries that are set to join the BRICS in January 2024. This is a major development, and one that offers another avenue for diversifying the geographic destinations of South Africa’s agricultural exports.

There is no doubt that South Africa’s agriculture stands to benefit enormously from close cooperation with Saudi Arabia. As chair of the 15th BRICS Summit, South Africa championed the need to deepen trade and investments amongst the BRICS countries, a point that other members overwhelmingly supported.

The agribusiness working group of the BRICS Business Council, in particular, raised the trade aspect and the need to resolve non-tariff barriers that would distort agricultural trade amongst BRICS countries.

Initially, South African agribusinesses had their eyes on China and India as countries with reasonably higher tariffs on some agricultural products and a range of non-tariff barriers. With the inclusion of Saudi Arabia in the BRICS, South Africa would now look at three significant markets to broaden agricultural exports. It is important for a country like South Africa to push for geographic diversification of trade especially in the light of intensifying geoeconomics tensions and the growing protectionism in traditional markets.

The original BRICS countries are already an important agricultural market. According to data from Trade Map, they collectively import about US$320 billion of agricultural products from the world market in 2022. About 74% of the Group's agricultural imports come from China, 12% from 12% from India, 8% from Russia, 4% from Brazil and 3% from South Africa.

The key agricultural products the BRICS grouping imports are soybeans, palm oil, beef, maize, berries, wheat, cotton, poultry, pork, apricots and peaches, sorghum, rice, and sugar. These are products that are produced at scale by some BRICS countries. Yet, intra-BRICS trade remains low because of tariffs and non-tariff barriers.

Saudi Arabia is a major agricultural importer. Over the past five years, Saudi Arabia imported, on average, $21bn of agricultural products.

The dominant suppliers of farm products to Saudi Arabia are Brazil, India, the U.S., the United Arab Emirates, Germany, France, Turkey and Egypt. The top imported agricultural products were meat and edible offal, rice, barley, milk and cream, cigars, cheese, live sheep and goats, sugar cane, maize, chocolate, citrus, palm oil, oilcake, bananas, tea, vegetables and fruit juices.

South Africa is a minor player in the Saudi Arabian agricultural market, accounting for less than 2% of all the imports. The essential exportable products to the Saudi kingdom were oranges, lemons, pears, grapes, mandarins, apples, plums, grapes and avocados. An additional product likely to join this list in the coming months will be beef as South Africa recently established market access for exports to Saudi Arabia.

Notably, South Africa is generally a net exporter of some of the products mentioned above that Saudi Arabia imports from the world, albeit mainly concentrated in European, African and Asian markets. Therefore, the possibility of close cooperation and deepening of agricultural trade through the BRICS+ forum from early 2024 will benefit South Africa.

Again, this is not to minimize South Africa's close relationship with the E.U., the U.S., the African continent and other regions. These current markets remain strategically crucial to South Africa's agriculture.

We discuss more in this week's podcast segment.

My writing on agricultural economic matters is available on my blog: https://wandilesihlobo.com/

Podcast production by: Lwandiso Gwarubana, Richard Humphries, and Sam Mkokeli Wandile Sihlobo website

One positive development in South Africa's agriculture this past week was the re-opening of the Chinese beef market and the firm establishment of beef access to the Kingdom of Saudi Arabia. The Kingdom of Saudi Arabia has not featured prominently in South Africa's beef export markets in the past, with only small volumes last exported in the early 2000s.

The renewed access to this market is critical to South Africa's ambition to expand beef exports, as the Saudi beef market is sizable at over US$647 million in 2021, according to data from Trade Map.

About 62% of the Saudi beef imports were frozen beef, while 38% were chilled or fresh beef imports. Some leading suppliers to Saudi Arabia include Brazil, Australia, Pakistan, The US, New Zealand, and Canada. Beyond beef, the Saudi meat market is large, with all meat imports valued, on average, at US$1,9 billion annually over the past five years.

This means, over time, as South Africa increases its production in other meat value chains, Saudi Arabia could remain a strategic country for growing exports.

Regarding China, the country has an established trade relationship with South Africa. Over the past six years, China has been the leading importer of South Africa's frozen beef cuts in value terms.

Therefore, easing import restrictions that were put in place following an outbreak of the foot-and-mouth disease is a welcome development, as that could lead to an increase in exports.

These positive developments provide some relief when the South African beef industry has faced a challenging operational environment for several reasons. One of the significant challenges was the rise in feed prices since 2020, especially for maize and soybeans.

The rise in animal feed prices coincided with a worsening financial strain on consumers due to the Covid-19 pandemic's damaging effects. Thus, we saw a decline in the demand for red meat products as consumers opted for relatively cheaper forms of protein.

Moreover, the spread of foot-and-mouth disease (FMD) to six of South Africa's nine provinces for the first time in history was another challenge for the industry. This brought temporary bans in specific export markets, extending to auctions and livestock movement, mainly cattle, for some time in 2022.

Fortunately, the feed prices have now softened somewhat, with both maize and soybean prices, on average, down 13% y/y. This is in response to large domestic maize and soybean harvests and the easing of global grain prices (irrespective of lingering worries about the Black Sea Grain Deal).

Therefore, the resumption of exports to China and the opening of export opportunities to the Kingdom of Saudi Arabia adds to this improving operational environment going forward.

We discuss more in this week's podcast segment.

My writing on agricultural economic matters is available on my blog: https://wandilesihlobo.com/

Podcast production by: Lwandiso Gwarubana, Richard Humphries, and Sam Mkokeli Wandile Sihlobo website

South Africa's agricultural export earnings will likely soften this year from the 2022 record. The lower commodity prices, ongoing restrictions to exports of some livestock products because of the foot-and-mouth disease and the stringent regulations of the citrus black spot disease in the EU market are among some of the factors likely to result in lower export earnings.

While SA's agricultural exports have remained relatively solid in the first few months of the year, we are expecting the effects of these challenges to be more evident in the second half. South Africa's agricultural exports for the first five months of this year were still robust, amounting to US$5,06bn, roughly unchanged from the corresponding period in 2022.

The export destinations remained the same as the previous years, with the African continent as a leading market, followed by the EU and selected Asian and Middle-East markets.

Outside these regions, the US was also a prominent export market. With the citrus industry and nuts benefiting from AGOA in the US market, its continuation is vital for these industries. In terms of products, citrus, maize, apples and pears, soybeans, wine, wool, sugar, flour meals, fruit juices, and various nuts were the leading products in the exports.

The citrus challenges in the EU are not new. In the 2022 export season, South Africa experienced another challenge in that market, where the EU proposed changes to its plant safety regulations for citrus without notifying its trading partners within a reasonable time.

These changes purported to protect the EU from a quarantine organism, the false codling moth, by introducing stringent new cold treatment requirements, particularly on citrus imports from Africa, mainly impacting South Africa, Zimbabwe and the Kingdom of Eswatini. But South Africa had already put rigorous measures to control false codling moth. As such, we viewed this as a measure to protect the EU's citrus-growing countries like Spain.

The engagements on this issue between South Africa and the EU are ongoing, and the citrus black spot disease issue adds to this challenging environment. The appropriate channel for resolving the matter is through the continuous engagement of the South African government with the EU authorities. From a South African perspective, the EU is a crucial export market for the citrus industry. A speedy resolution of these matters and clarity for long-term rules is important beyond the near-term dissatisfactions on both sides.

Regarding foot-and-mouth, the livestock industry continues to struggle with the tail-end challenges of last year's outbreaks. As we stated in a previous note, the South African government, organized agriculture, and industry bodies should closely work together to address biosecurity challenges in the country. Notably, the government must assist at such times to ensure the sustainability of farming businesses and jobs in rural South Africa. Fortunately, this year, wool exports have not been interrupted, as was the case in 2022 when China temporarily banned wool from South Africa because of fears of foot-and-mouth disease. Hence, wool was amongst South Africa's top ten agricultural export products in the first five months of this year.

Beyond these industry challenges, another constant matter worth continuous engagement is the effectiveness of the ports. This year is arguably better than last year regarding delays the agricultural sector faces. The ongoing engagements between Transnet and the industry help ensure effective communication and that glitches in logistics are resolved quickly. Still, more work is needed to improve the logistics and, by extension, lower the cost of exporting.

South Africa's agricultural sector will remain a net exporter in 2023. But the value may not be as robust as in 2022 when the sector reached a record US$12,8bn. At the time, the increase in the volume and value of exports was the key driver.

We discuss more in this week's po Wandile Sihlobo website

We spent most of July on the road, engaging with Agbiz members and sector role-players in various regions of the country.

The feedback about the near-term outlook was reasonably positive in all our engagements, with many attributing their optimism to the favourable 2022/23 summer crop and 2023/24 winter crop seasons. The feedback from the horticulture and wine industries also remained encouraging as various stakeholders forecast growth and expansion prospects in the coming years.

The outlook was less optimistic when we engaged the livestock and poultry industries that struggled with higher feed costs and persistent animal disease outbreaks.

Beyond this, what all meetings agreed on was that the persistent load-shedding, rising protectionism in key export markets, rising interest rates, intensified geopolitical tensions, ongoing weakness of municipality service delivery and network industries (water, rail and ports) and deterioration of rural roads remain a significant threat to the sustainability of their businesses.

While these are not necessarily new issues, the extent of weakness this year has reached worrying levels in some. Not all these issues are within the government's control, but many are, and in such cases, the government should urgently assist. Here are a few of such cases.

We discuss more in this week's podcast segment.

My writing on agricultural economic matters is available on my blog: https://wandilesihlobo.com/

Podcast production by: Lwandiso Gwarubana, Richard Humphries, and Sam Mkokeli Wandile Sihlobo website