Agriculture under current economic conditions

What do the global economic impacts of Covid-19 and the war in Ukraine mean for South Africa? By Kyra Rensburg.

The global macroeconomy can be categorised according to recession, climate change, and the five i’s — infections, inventory, inflation, interest rates, and invasions, according to Wandile Sihlobo, chief economist of the Agricultural Business Chamber of South Africa.

Starting with infections, Sihlobo described how Covid-19 and the regulations put in place to control it in places such as China created limitations for farmers and other businesses to export their products. South African agriculture has also been impacted by infections such as foot-and-mouth disease in livestock.

Sihlobo described how foot-and-mouth disease has prevented the export of South African livestock and products to China. According to Sihlobo, whereas foot-and-mouth disease was a surface-level issue, there were limitations caused by logistical problems, which affected several industries.

Inventory has been characterised by the disruption of global supply chains due to logistical challenges, delayed shipping, and increased consumer demand.

Rising inflation is currently a major concern globally. Sihlobo explained that this was partly due to the increased supply of money during the Covid-19 pandemic. Many economies in the West and to an extent in Asia provided income support to households during lockdown. But at the same time, supply-chain disruptions meant that fewer goods were available, and prices rose.

The rise in oil prices has contributed to the surge in inflation. The central banks are now raising interest rates to control rising inflation, which will increase the cost of borrowing for the farming community.

“That increase in interest rates and the debt-servicing cost is one of the things that will put pressure on all of the growers across South Africa,” explained Sihlobo. At the same time, other input costs are rising, not least due to the fifth i — the Russian invasion of Ukraine.

Food in South Africa

Sihlobo shared data on South African agricultural production for 2010–2020. The gross value of agriculture has grown 44% in that time, and the total volume of production has grown 19%. The gross value of horticulture has grown 70%, and the total volume of horticulture has grown 23%.

The sector is in good shape, according to Sihlobo, with a surplus of most major crops expected this year.

“There are sufficient food supplies in South Africa,” said Sihlobo. “But you have to look at it from a food-price-inflation perspective, and you also have to appreciate how important food is in the entire inflation basket in South Africa.”

Food accounts for about 15% of the consumer price index in South Africa. “In that food-price basket, we see a mixed dynamic of where food prices will go,” explained Sihlobo. For example, South Africa imports about 50% of the wheat we consume, 100% of the rice and palm oil, and 20% of the poultry products.

Global food-price inflation was already occurring before the Russia-Ukraine war, mainly due to increased consumer demand and climate-change impacts. However, Sihlobo believes that South Africa may see softer price increases compared to other countries in the coming months.

South Africa’s agricultural policy direction

Sihlobo summarised the key constraints on the growth of South African agriculture in six points: inefficiencies in state administration; infrastructure issues; security; uncertainty; research and development; and geopolitics.

He emphasised infrastructure issues such as the challenges at our ports — South Africa exports 51% of its produce in value terms. “Last year, South Africa exported a record $12.4 billion,” said Sihlobo. The efficiency of the ports should be a priority when thinking about the long-term expansion of South African agriculture.

Security remains a concern, especially stock theft and vandalism of farm and railway infrastructure. Organised crime appears to be affecting the logistics industry, particularly railway lines.

Land reform is a big source of uncertainty. Sihlobo described the past implementation of land-reform policies as lacklustre. Nonetheless, the process has achieved more than most people realise, with nearly 70% of the National Development Plan target already met.

Although there are uncertainties regarding the direction of land-reform policy, Sihlobo regards the recently released ANC policy document as supportive of agriculture.

Sihlobo stressed that research is essential, both for production and to access and maintain export markets. For South Africa to remain competitive, the country must invest in technologies and skills that help improve productivity. Thereafter, we will need markets, which means that we will have to invest more energy in establishing new export markets in addition to the existing ones.

In closing, Sihlobo reiterated that the global economic slowdown will impact South Africa, including through rising inflation and interest rates. Although South African agricultural production is solid, the gross value of the sector could contract this year — but from a high baseline. Domestic food prices are likely to remain high.

On the bright side, Sihlobo considers the ANC’s new policy document to be positive, as it is geared toward growth and expansion. According to Sihlobo, the document, which acknowledges the importance of agriculture, and its role in growing the economy and uplifting the poor through increased food production, economic expansion, and job creation, is a source of hope and signifies a change in the policy direction.

Image: Wandile Sihlobo, Agricultural Business Chamber of South Africa. Supplied by Echo Media.