The 2019/20 production season follows two seasons, which were hampered by drought in some areas, negatively affecting farmers’ finances. In ordinary times, the expected large output in both field crops and horticulture this season would be part of the recovery phase. But we doubt if that will be the case in the face of Covid-19, which has disrupted supply chains, leading to lower global demand. South Africa’s agricultural sector is export-oriented. In value terms, roughly half of the products the country produces are destined for export markets.
Locally, some agricultural industries’ performance is interlinked to some sectors which are hard hit by Covid-19. A case in point is the wine industry, whose performance is somewhat influenced by tourism. The decline in tourism will hurt this sector. The Covid-19 pandemic comes at a time when wine grapes production had started to recover following seasons of drought. This essentially means the South African wine industry could be hampered by both the potential decline in demand locally and the global market, specifically in Europe, which is now the epicentre of the Covid-19 pandemic.
Through export earnings and domestic sales, farmers can generate the revenue necessary for servicing their debt, among other things. Hence, as policymakers and private financial institutions try to find ways to ease the possible financial pressures from Covid-19, it might be helpful to also consider the farm debt issue.
Global agricultural commodity prices have already taken a knock because of fears of slowing demand due to Covid-19. If we consider maize, soybean, and wheat prices, there has been a 10%, 8%, and 6% decline over the past month, respectively. However, global price shifts have thus far not spilt over to the South African market, which is currently supported by growing demand for the commodities mentioned above from the southern Africa region countries and the relatively weaker domestic currency. But over time, the South African agricultural market could experience a similar trend, particularly given that there are already expected large supplies.
The financial impact of Covid-19 will vary across agricultural subsectors, depending on the debt overhang from the previous seasons and also the stage of production. For example, the deciduous fruit and table grapes exports might not be badly hit as most exports have already been processed by this time of the year. Meanwhile, in the case of citrus, the harvest and exports have recently started. While so far there haven’t been glitches, a lot depends on the measures the European countries place in terms of commerce amid Covid-19 intensification in that region. From a local market perspective, as long as food retailers are operating, there should be a flow of products to market.
The wool industry has just returned to the market following a ban placed by China, where 70% of wool is exported in a normal season, because of foot-and-mouth disease. This year was set to be a recovery phase from this event, and also the drought that hit parts of the Northern Cape, Western Cape and Eastern Cape. Any major disruptions on trade could negatively affect this industry and thereby farmers’ financial positions. Already, wool prices have declined notably over the past week, in part due to fears of potential slowing global demand.
The red meat industry is in a somewhat similar situation — the foot-and-mouth disease outbreak towards the end of 2019 led to a ban in exports which negatively affected the financial conditions of farmers. With limitations in restaurants, we could see a decline in demand for beef which some often consume away from home and which is more expensive than other protein foods. This too will negatively affect the beef farmers’ finances.
Overall, while lower agricultural commodity prices, which we anticipate, are favourable for consumers, the opposite is true for farmers. Under such a scenario, the question is whether farmers will be able to have sufficient revenue to service their debts. Admittedly, there are still a lot of unknowns about how the Covid-19 pandemic will play out, and the various levels of indebtedness among farmers, but a proactive policy response could help prevent financial ruin for farmers, particularly those of a small to medium-sized scale.
So far, the recent 100bp interest rate cut by the South African Reserve Bank helps to reduce the cost of debt. What we’ve observed in countries such as the United Kingdom, is that financial institutions have set mortgage payment holidays of up to three months.
However, the unpaid interest will still be recovered later. It is unclear if such a policy response would be plausible for South Africa, but in these extraordinary times, it might be worth considering and drawing lessons from. Perhaps the measures taken to support SMEs should be extended to the farming sector given its significance to food security. DM