The high-frequency data across the major economies and the developing world underscore the view that the world will experience one of the sharpest declines in economic activity in history. Covid-19 has caused widespread turmoil and volatility since the start of 2020, and the measures implemented to contain it have sent shockwaves throughout the global economy. The latest projections from the International Monetary Fund (IMF) and the Organisation for Economic Cooperation and Development (OECD) are bleak, with the global economy projected to contract by 5-6%, with a more gradual recovery than initially suggested.
For South Africa, the Bureau for Economic Research (BER) expects a contraction in GDP of 9.5% in 2020, with a modest rebound of just 3.1% in 2021. Structural challenges pre-Covid-19 suggest the recovery will be prolonged, with real GDP only projected to exceed 2019 levels by 2026. Limited consumer spending power, rising debt and lagging unemployment are some of the challenges to overcome what will most likely cause a slowdown and reversal in some of the progress made in class mobility over the last two decades.
Amid all of these negative impacts and projections, the South African agricultural sector has emerged as a shining light, although its small share contribution to the overall economy will mean that it won’t be able to change the bleak outlook.
As a provider of essential goods, the agricultural sector was exempt from the lockdown in Quarter 2 and the Bureau for Food and Agricultural Policy (BFAP) Baseline projects that the sector will grow by 13% this year. Growth is underpinned by a bumper maize crop of 15.5 million tonnes (the second largest in history), surging export prices of major fruits (further supported by the weak exchange rate) and strong overall sales of agricultural produce in the first four months of the Covid-19 pandemic. The exceptions are wine and tobacco, where trade has been restricted through various stages of the lockdown.
While the weaker exchange rate combined with above-average harvests supported the rebound in performance in 2020, the outlook beyond that remains under pressure – growing by an annual average of just 0.7% from 2021 onwards. Many structural challenges, (such as infrastructure maintenance, reliable electricity supplies, and the capacity of critical public services and municipalities) have been exacerbated by the pandemic, and low economic growth over the next few years does not provide the demand base conducive to rapid growth in the agricultural sector.
The effects of lockdown action on agricultural markets are threefold.
First, it proliferates the risk for supply chain interruptions, often increasing short term price volatility.
Second, while interruptions across the value chain could result in short-term spikes, the fundamentally weak demand environment, combined with persistently high stock levels for most commodities, suggests that prices of most products will remain under pressure for some time.
Third, the Covid-19 pandemic has triggered policy responses that influenced trade flow patterns. Some countries have acted to protect domestic food security by imposing restrictions on export volumes and, at the same time, the disruptions to logistics flagged the potential vulnerability and risks associated with global trade and supply chains. This trend does not portray the end of global food and agricultural trade, but a tougher trade environment with stricter protocols, competition and non-tariff trade barriers will require effective and well-capacitated government departments working in close collaboration with the private sector to grow access in regional and global markets.
In South Africa, much of the decline in global crop prices was offset by the sharp depreciation in the exchange rate. While South Africa’s bumper maize crop will push prices to export parity, these parity levels have increased as a result of the weaker rand and hence prices will not decline to the same extent that would normally be expected in a bumper year. Oilseed prices are expected to increase substantially, supported by high import parity prices for products such as vegetable oil and protein meal.
This is also expected to support a 5% expansion in summer crop area in 2021. This is mostly attributed to oilseeds, with soybean area increasing by 150,000 hectares and sunflower area by 100,000 hectares. Conversely, maize area is projected to decline by 90,000 tonnes, mainly attributed to white maize. While the revenue generated in 2020 provides some respite, the long-term prospects for the more marginal growing areas remain a challenge, with increased diversification into livestock enterprises likely to occur to ensure long term sustainability.
Projected growth in beef production is underpinned by the drive to increase exports. Despite challenges from the foot-and-mouth-disease (FMD) outbreak in 2019, exports have resumed successfully under bilateral agreements and play a key role in balancing carcass value. The premium obtained for high-value cuts in the export market also allows the industry to sell the rest of the carcass at more affordable levels domestically.
The agricultural sector is currently in another planning phase with the development of an Agriculture and Agro-Processing Master Plan (AAMP), which has the potential to provide a solid basis for inclusive growth going forward.
Acceleration of export growth through improved animal health management and wider market access remains a significant opportunity to accelerate inclusive growth in the agricultural space. In the case of poultry, the competitiveness of domestically produced meat relative to imports will benefit further from recent tariff increases, and the combination of actions under the recently signed poultry Masterplan aimed at ensuring fair competition with imported products. Consequently, the trend of rising imports is expected to slow, with domestic production accounting for a larger share of total consumption by 2029 relative to current levels.
The predominantly export-orientated horticultural sector also stands to gain from the price support provided by the weaker exchange rate with citrus exports expected to gain the most, due to the absolute volumes being exported, firm international prices and timing of its peak season. Over the next few years, however, prices are expected to come under pressure, as rapid orchard expansion from recent years reaches full bearing capacity, bringing substantial additional volumes into production. In this respect, expanded market access will be critical to absorb these additional volumes and limit price declines.
While agriculture has risen to the occasion to ensure food availability in a challenging year and looks set to contribute positively to the economy in 2020, the reality is that reductions in consumer income and increases in unemployment still resulted in food being unaffordable to many. Furthermore, progress concerning transformation remains too slow. To compete effectively in this new global environment and harness the full potential of the agriculture and food value chain to ignite inclusive growth throughout the value chain and thereby drive broader economic prosperity, a continuation of business as usual will be insufficient. The vision contained in chapter six of the National Development Plan of an inclusive and thriving agricultural and agro-processing sector is now just as applicable as it was during its launch in 2011.
The agricultural sector is currently in another planning phase with the development of an Agriculture and Agro-Processing Master Plan (AAMP), which has the potential to provide a solid basis for inclusive growth going forward. Practical solutions need to be researched, debated and implemented rather than spending more time on the old debates of large versus small, and industry concentration issues that really should be dealt with through the effective operations of the Competition Commission.
It will be tragic if this sorely needed opportunity for inclusive growth is missed due to a lack of alignment and unity between government, labour and private sector. DM
Note: the details of the outlook presented here will be part of the 2020 Baseline, that covers all major agricultural commodities and policy aspects, which will be available on our website: BFAP
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