ADVERTORIAL

PHILARGO

AGRI

 For many years, South Africa has prided itself as the most food-secure country in the African continent and has also ranked relatively well with its peer BRICS countries. But disappointingly, the results of the 2020 Global Food Security Index recently released by The Economist and Corteva show that South Africa has regressed. South Africa is now ranked 69th most food-secure country out of 113 countries, from 44 (out of 113) in 2019. Technically, South Africa's scoring dropped by just a point from last year's position (scoring 57,8 down by 1,4 from 2019 in the Global Food Security Index). Still, other countries improved notably, resulting in a drop in South Africa's ranking.

 The Global Food Security Index comprises four significant subindices, namely; (1) food affordability, (2) food availability, (3) food quality and safety, and (4) natural resources and resilience. The affordability and availability have a higher weighting of a combined two thirds (each 32,4%). In 2020, South Africa experienced a sharp deterioration in the food affordability subindex (a 5,5 drop), while all other subindices improved marginally. Notably, the major challenge was an overall increase in food prices and a deterioration in South Africa's food safety net programmes.

 These results are unsurprising. The 'third wave' of the National Income Dynamics Study – Coronavirus Rapid Mobile Survey (NIDS-CRAM) published on 17 February also pointed to a rise in hunger in 2020. Moreover, South Africa's overall food price inflation also started rising in the last quarter of 2020, averaging 5,8% y/y, from an average of 4,3% y/y in the first three quarters of the year. This challenge speaks to the rising costs of food in an environment where more people were out of work.

  Increases in staple grain prices mainly underpinned the overall rise in South Africa's food prices in late 2020. The deterioration in South Africa's measured food security was not an issue of availability, as the subindices of availability showed an improvement, reflective of higher agricultural output in 2020. The driving factor behind grain price increases was, to no small degree, the strong demand for South African grains and other agricultural products in the Southern Africa market and the broader global market. This global demand phenomenon is illustrated by agricultural exports, which reached the second-highest level on record in 2020 (see Exhibit 1 in the attached file). The weaker domestic currency was amongst the factors increasing the competitiveness of South Africa's products in the global market.

Across the rest of the continent, Morocco, Algeria, Tunisia, and Egypt are now the most food-secure countries, with South Africa trailing them. Nevertheless, within the BRICS countries, South Africa is still two positions ahead of India, 18 positions behind Brazil, 29 places behind China, and 44 behind Russia.

While South Africa's scoring in terms of food security declined only slightly in 2020, it is worth noting that this reflects the national picture. There are pockets of food insecurity within South Africa when one considers a household-level perspective. Over 6 million South Africans in low-income households are not food secure, primarily due to affordability. There is also wide variation across the different provinces. Food insecurity is significantly more prevalent in Limpopo, KwaZulu-Natal and the Eastern Cape. The affordability challenge in such regions is typically caused by higher unemployment. The rising unemployment and closure of various businesses because of the pandemic in 2020 exacerbated already challenging conditions for the provinces mentioned above. Indeed, several townships across the country experienced a similar food-insecurity challenge, as multiple studies published in 2020 and the beginning of this year have shown.

The latest data from the Global Food Security Index are a clear indication more will need to be done to improve food security, not only at national level but also through household-targeted interventions. These could include agriculture-related interventions – encouraging smallholder farming. In areas where land availability and environmental conditions permit, commercial production and other programmes that improve employment prospects should be encouraged and supported by the government, NGOs and social partners.

In terms of agriculture, Limpopo, KwaZulu-Natal and the Eastern Cape, which are amongst the most food-insecure provinces, also have vast tracts of underutilized land. These provinces should be a priority in the Agriculture and Agro-processing Master Plan. With a commercial focus where conditions permit, agriculture improvement would help in job creation and, ultimately household food security. Notably, the Master Plans' actions are the responsibility of government, the private sector and all social partners.

 

Weekly highlights

SA set to have its largest summer grain and oilseed harvest on record in 2020/21 production season

  The data released by the Crop Estimates Committee (CEC) last week show that South Africa's 2020/21 summer grain and oilseed production could increase by 5% y/y to 18,5 million tonnes.  While this is still the first production estimate for this season, with eight more to follow, this could be the largest on record if it materializes.

The crop increases are expected in all summer grains and oilseeds, except sunflower seed, whose harvest is set to fall 10% y/y, primarily on the back of a decline in area plantings. Farmers switched some typical sunflower seed hectares to maize because of favourable prices. The overall expected increase in summer grain and oilseed production is due to an expansion in area planting and expected higher yields. The weather conditions have generally been favourable since the onset of the season and thus supportive of the production conditions and subsequently the yields.

 If we zoom into significant crops, the 2020/21 maize, soybeans and sunflower seed harvests are forecast at 15,8 million tonnes (up 4% y/y), 1,6 million tonnes (up 30% y/y, a record harvest), and 712 940 tonnes (down 10% y/y, as previously mentioned). The maize production estimate is slightly below our estimate of 16,7 million tonnes, while the soybean production estimate is well above our estimate of 1,5 million tonnes.

  This variation can largely be explained by adjustments in area plantings, which for maize was revised down somewhat, and for soybeans revised up from the preliminary estimates released by the CEC on 28 January 2021. There is also a difference in the yield assumptions we had applied.

 In the case of maize, the current production data essentially mean that South Africa would remain a net exporter in the 2021/22 marketing year, which starts in May 2021 (corresponds with the 2020/21 production season). This could also add downward pressure on maize prices, especially as we expect a good harvest in South Africa and across the Southern Africa region, which was a major importer in the previous year. For example, Zambia's maize production could reach 3,4 million tonnes (up 69% y/y), while Malawi's maize harvest is estimated at 3,8 million tonnes (up 24% y/y). There is optimism about the harvest 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 think the domestic crop conditions will matter more for price movements in the future than has been the case over the past few months.

 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. 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.

SA agricultural employment down 8% y/y in Q4, 2020

 Last week we also had South Africa's Quarterly Labour Force Survey (QLFS) data for the last quarter of 2020. In the case of agriculture, the data showed that South Africa's primary agricultural jobs were down 8% year on year in the fourth quarter of 2020, with 810 209 people employed. There was a decline in employment across most provinces except for the Eastern Cape, Gauteng and Mpumalanga, which registered job gains from the last quarter of 2019. The most considerable headcount losses were in the Western Cape, amounting to about 51 000 below 2019. KwaZulu-Natal followed this, with jobs down by 21 000 compared to the last quarter of 2019 (see Exhibit 3 in the attached file).

Except for the Western and Northern Cape, we suspect that social distancing measures that were enforced to limit the spread of the virus might have contributed to the decline in employment. Some farmers that would have typically employed seasonal workers around this period of the year were discouraged. We say this because the Free State, North West, KwaZulu-Natal and Limpopo are amongst provinces with a good field crop and horticulture harvest in 2020. In the Western and Northern Cape case, the constrained cash flow following the ban of wine and alcohol sales at various intervals of the lockdown has possibly contributed to the decline in employment. The producers in the provinces expressed a similar view.

From a subsector perspective, only the forestry and fisheries industries recorded an overall increase in employment in the fourth quarter of 2020, compared with the previous year. All other subsectors recorded a decline in employment. Worth noting, however, is that the dynamics from the provincial level differ, as evidenced by the Eastern Cape, Gauteng and Mpumalanga, where primary agricultural employment increased in the fourth quarter of 2020 compared with the same period 2019.

 Notably, the employment data will be of interest in the coming months following the 16,1% increase in the farm minimum wage to R21,69 per hour with effect on 1 March. Various commodity groups, especially those heavily affected by the lockdown regulations, have indicated that the recent increase in the minimum wage could cause a further squeeze on cash flow and negatively influence hiring decisions. Nevertheless, the actual effects of the current minimum wage increase on jobs will be apparent later this year. From an agricultural conditions perspective, the outlook for 2021 is positive, with prospects of higher yields in horticulture and field crops and good performance in the livestock industry.

Data releases this week

  The agricultural calendar this week is relatively light. On Wednesday, the South African Grain Information Service (SAGIS) will release the weekly grain producer deliveries data for the week of 26 February. This data cover summer and winter crops, although the focus is still on winter crops whose harvest has recently been completed. On 19 February, about 8 561 tonnes of winter wheat were delivered to commercial silos. This placed the 2020/21 wheat producer deliveries at 1,95 million tonnes, which equates to 92% of the expected harvest of 2,11 million tonnes. From April onwards, the focus will shift to summer crops as the harvest process will be gaining momentum.

 On Thursday, SAGIS will release the weekly grain trade data for the week of 26 February. In the previous week of 19 February, South Africa's 2020/21 total maize exports were at 2,18 million tonnes, which equates to 83% of the revised seasonal export forecast (2,64 million tonnes). In terms of wheat, South Africa is a net importer. On 19 February, imports amounted to 520 334 tonnes, which equates to 33% 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 week ahead brings a flurry of critical data on the South African agricultural sector. The most notable releases are the Quarterly Labour Force Survey data for the fourth quarter of 2020, which is due for release on 23 February. On 24 February, the results of the 2020 Global Food Security Index will be published. On 25 February, the Crop Estimates Committee releases its first production estimates of South Africa's 2020/21 summer crops. But in addition to the data releases, the tabling of the national budget on 24 February could also have important implications for the sector from a policy perspective. We provide a brief preview of each of these critical events in the calendar this week.

 

The Quarterly Labour Force Survey will be an important update on employment ...

 

 The Quarterly Labour Force Survey (QLFS) data will be of particular interest following the 16,1% increase in the farm minimum wage to R21,69 per hour with effect on 1 March. Agriculture has had a good season in 2019/20, which improved farm incomes, but the positive performance was not widespread. The subsectors that were affected by the lockdown regulations performed poorly. Such subsectors include the wine industry, tobacco, cotton and floriculture, amongst others. The wine industry's negative impact was already evident from the third quarter of 2020, where farm jobs in the Western and Northern Cape fell by 37% and 8% on a year-on-year basis, respectively. In the case of the Western Cape, agricultural employment fell to the lowest levels since the last quarter of 2014, at 136 729.  The fourth-quarter results will indicate whether this was a temporary blip or if the industry remained under pressure throughout the year. Discussions we have had with the wine industry suggest that the recent increase in the minimum wage could cause a further squeeze on incomes in a subsector that already had cashflow challenges resulting from the recent ban on domestic sales of wine. Nevertheless, the Q4 2020 will be historical. The actual effects of the current minimum wage increase on jobs will be apparent later this year.

 

while the national budget will likely provide an update on the Land Bank

 

 In terms of the national budget, the vital point that agricultural role players will most likely be watching is the National Treasury's messaging about the Land Bank, which has been experiencing liquidity challenges for a while. In the Medium-Term Budget Policy Statement presented in October 2020, Finance Minister Tito Mboweni noted that the Land Bank would "require an additional R7 billion over the medium term to support its restructuring". We will be watching closely to see if there will be any follow through on this, especially in the context of the country's fiscal constraints. The Land Bank is an essential institution in agricultural finance, interlinked with primary agriculture and various agribusinesses. Hence, any possible failures would potentially have broader implications on South Africa's agricultural sector and food security.

 

Global food security will also be in the spotlight this week …

 

The Economist Global Food Security Index, which will also be released on the same day as the national budget, will provide South Africa with a historical view of the food security conditions in 2020. We expect South Africa's food security conditions to have deteriorated somewhat from 2019 as more people were out of work because of the pandemic. In 2019, South Africa ranked as the 48th most food-secure country out of 113 countries measured in The Economist Global Food Security Index, a few inches worse from last year’s ranking of 45. This ranking was relatively good and leading in the African continent, although slightly behind most BRICS countries, i.e. Brazil, Russia, India and China. For example, South Africa has ranked 13 spots behind China, nine places behind Brazil, six spots behind Russia, and 24 spots ahead of India. The current food security conditions are primarily supported by the productivity gains in agriculture, which ensured that South Africa could supply food at a reasonably lower cost.

 

 Nevertheless, there are pockets of food insecurity within South Africa when one considers a household-level perspective. Food insecurity speaks to the country's general inequality, where some households are food secure, and over 6 million South Africans of low-income households are not, primarily due to affordability. Food insecurity is significantly more prevalent in Limpopo, KwaZulu-Natal and the Eastern Cape. We fear that in 2020, this may have been exacerbated by the rising unemployment and closure of various businesses because of the pandemic. The National Income Dynamics Study – Coronavirus Rapid Mobile Survey (NIDS-CRAM) published last week also pointed to a deterioration in hunger in South Africa in late 2020.

… while the Crop Estimates Committee will publish the first 2021 summer crop forecast

 The Crop Estimates Committee data, which are out also this week, will provide a view of the potential size of the 2020/21 summer grains production. The season started on a positive footing with favourable rainfall and higher commodity prices, which incentivized an increase in all grain area plantings by 6% to 4.2 million hectares. As stated in the previous notes, this dataset comprises maize (white and yellow), soybeans, sunflower seeds, groundnuts, sorghum and dry beans. There is an expansion in most crops, except sunflower seeds, whose plantings declined by 5% year on year (y/y) to 473 300 hectares, which would be the smallest area in nine years.

 The focus here will mostly be on maize and soybeans, a primary staple grain and oilseed, respectively. We estimate that South Africa's maize production could amount to 16,66 million tonnes, which would be the second-largest maize harvest on record (15,41 million tonnes in 2019/20). Meanwhile, the soybean harvest could amount to 1,47 million tonnes, up by 18% y/y and would be the second-largest harvest on record.

 In sum, the quarterly labour force data, national budget, global food security, and crop estimates data will be significant events to watch this week. What emerges from these critical events could have implications on the sector, particularly the national budget's outcome regarding the Land Bank challenge. Meanwhile, the Crop Estimates Committee's production estimates data may be key for domestic crop prices and, ultimately food inflation.

Weekly highlights

Fuel price increase on the cards in March 2021

 The Central Energy Fund's preliminary estimates suggest that South Africa's petrol (95 ULP inland) and diesel (0.05% wholesale inland) prices could increase by 57 cents per litre (c/l) and 48 (c/l), respectively, on 03 March 2021. This adjustment means the retail price of petrol could rise to R16,24 per litre from the current level of R15,67 per litre. Simultaneously, the wholesale diesel price could increase to R14,06 per litre from R13,58 per litre in February 2021. This will be the highest level for petrol since December 2019, while for diesel it's the highest level since March 2020. The underpinning driver of the price increase is the rising Brent crude price, which on 18 February 2021, traded at US$62,91 per barrel, which is 10% higher than the corresponding period last year.

 While this expected fuel price uptick will increase farmers' input costs, it, fortunately, comes at a quiet period in the agricultural sector. This is except for the agribusinesses in logistics, which will most likely experience an increase in activity due to an expected uptick in wheat imports and summer grains exports. It is worth noting that roughly 81% of maize, 76% of wheat and 69% of soybeans in South Africa are transported by road. On average, 75% of national grains and oilseeds are transported by road. 

SA food price inflation decelerates in January 2021

South Africa's food price inflation softened to 5,6% y/y in January 2021, from 6,2% y/y in the previous month. The deceleration was in most product prices in the food basket except for bread and cereals, which accelerated from the levels seen in December 2020. Nevertheless, this was overshadowed by the slowing price inflation in meat; fish; milk, eggs and cheese; fruit; and vegetables.

The "bread and cereals" products price inflation mirrors the increases observed in the past few months in grain prices. The current slightly elevated price inflation for this particular product prices will likely prevail for most of the first quarter as grain prices have continued to surge since the start of the year. While South Africa had its second-largest grain harvest in history in the 2019/20 production season, and ordinarily, one would have expected prices to soften; we have experienced the opposite. As indicated in our previous notes, domestic grain prices remained elevated on the back of strong demand for South African maize across the Southern Africa region and the Far East markets. The weaker domestic currency also added to the price increase and spillovers from higher global grain prices. The global grain market was primarily driven by the growing demand for grain in China.

 Nevertheless, we expect South Africa's grain prices to soften from the second quarter on the back of an expected sizeable domestic maize harvest of 16,6 million tonnes from 15,4 million tonnes in the 2019/20 production season. This is all against South Africa's annual consumption of about 11,4 million tonnes.

Meat, which has a higher weighting of 35% in the food basket, saw price inflation decelerating in January 2021, in part, due to increased supply following slightly higher slaughtering activity in December 2020. Cattle slaughtering was up by 1% in December 2020, at 281 043 head. This slight increase, combined with relatively depressed household incomes, has partly contributed to softening price inflation for the product. In terms of vegetables and fruit, the domestic supply recovery is mainly the contributing factor to easing price inflation.

  From now on, we still expect South Africa's food price inflation to remain at slightly elevated levels in the first quarter of the year because of higher grain prices and the imported vegetable oils and fats. But from the second quarter of the year, grain prices could soften and filter through, with a lag, on the "bread and cereals" products prices. 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. Slaughtering could slightly improve in 2021 in cattle, 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.

In sum, we believe South Africa's 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. Our baseline view is for food price inflation to average around 5,0% y/y in 2021.

Data releases this week

This is a fairly busy week in the agricultural calendar. In addition to the critical releases noted in the opening section of this note, on Wednesday, the South African Grain Information Service (SAGIS) will release the weekly grain producer deliveries data for the week of 19 February. This data cover summer and winter crops, although the focus is on winter crops whose harvest has recently been completed. On 12 February, about 9 068 tonnes of winter wheat were delivered to commercial silos. This placed the 2020/21 wheat producer deliveries at 1,95 million tonnes, which equates to 92% of the expected harvest of 2,11 million tonnes.

 On Thursday, SAGIS will release the weekly grain trade data for the week of 19 February. In the previous week of 12 February, South Africa's 2020/21 total maize exports were at 2,11 million tonnes, which equates to 80% of the revised seasonal export forecast (2,64 million tonnes). In terms of wheat, South Africa is a net importer. On 12 February, imports amounted to 465 444 tonnes, which equates to 29% of the seasonal import forecast of 1,58 million tonnes. On Thursday, Stats SA will release the Producer Price Index (PPI) data for January 2021.

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. As we have consistently outlined in our notes, China bought large volumes of US maize and soybeans to feed its pig industry and build stocks. China's pig industry is recovering after the devastation caused by the African swine fever outbreak in 2019. 


ADVERTORIAL

JONG

 LANDBOUSKRYWERS