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South Africa Agribusiness Report Q2 2011
Business Monitor International, Feb 2011, Pages: 57
Business Monitor International's South Africa Agribusiness service provides proprietary medium term price forecasts for key commodities, including corn, wheat, rice, sugar, cocoa, coffee, soy and milk; in addition to newly-researched competitive intelligence on leading agribusiness producers, traders and suppliers; in-depth analysis of latest industry developments; and essential industry context on South Africa's agribusiness service.
BMI View: This quarter sees revisions to our production forecasts for corn, wheat and barley. The latest official figures show that corn production increased by over 6% in 2009/10 to reach 12.8mn tonnes. Although lower than previous estimates, output contributed to an oversupply of the grain whose price fell by around 21%. In 2010/11, we predict a fall for corn and wheat production, a phenomenon which reflects an ongoing disincentive for farmers to produce. Meanwhile, lower sugar output will reflect the impact of drought in some of the country's major producing regions. BMI's long-term forecasts envisage positive growth for corn, wheat and sugar; in the case of corn and wheat, growth will not be dramatic.
Positive production growth is also envisaged for beef, poultry and pork. Meanwhile, we predict that consumption growth will remain positive across all of South Africa's major agricultural sectors over our five-year forecast period. In 2010, demand for poultry was weaker than expected. However, over the long term rising living standards and a fall in unemployment should result in accelerated consumption growth. Consumption growth will be particularly strong in the case of rice, poultry and beef, with rising incomes and population growth being two main factors fuelling growth.
Key Forecasts Output of corn is expected to fall by almost 7% in 2010/11. The fall in output follows another bumper harvest in 2009/10 which resulted in an oversupply of the grain together with falling prices. Although some farmers are likely to switch to alternative crops in the short term, South Africa's most widely produced and consumed grain is generally expected to perform well over the long term: corn production is predicted to expand by 7% to 2014/15, while consumption will grow by 15%. South Africa's authorities will come under mounting pressure tackle the significant production surplus.
We forecast a 22% rise in output in the five years to 2015. In 2010, consumption growth was negatively affected by the recent rise in unemployment. However, over the long term, consumption growth will be fuelled by rising incomes, a fall in unemployment and an increasing prevalence of fast food outlets. Meanwhile, stronger production growth of 7% is envisioned for South Africa's poultry sector in 2010/11. In the five years to 2014/15, production is predicted to increase by 32%, fuelled by rising demand for the meat.
A 6% y-o-y fall in sugar production is predicted for the 2010/11 agricultural year. Our forecast reflects the impact on sugar cane production of a severe drought in KwaZulu-Natal. Over the long-term, we expect improved macroeconomic fundamentals and the increasing use of sugar for biofuels to have a positive impact on sugar production; a 9% increase in production is anticipated for the five years to 2014/15. These positive influences on output growth will be counterbalanced by the negative effect of falling global sugar prices.
We continue to envisage a 29% increase in rice consumption in the five years to 2015. Rising incomes will lead people to choose rice over traditional, more labour-intensive carbohydrate sources. African-produced 'Nerica' rice could also grow in popularity.
2010 Real GDP Growth: 2.8% (up from -1.7% in 2009; predicted to average 3.9% over 2011- 2020).
Unemployment: Estimated at 25.2% in 2010, although predicted to fall to 24.0% in 2011 and 22.0% in 2012.
Consumer Price Inflation: averaged at 4.3% year-on-year in 2010, down from 7.2% in 2009 (predicted to fall to an average of 4.0% in 2011).
Key Views Although South Africa will remain an important producer and exporter of corn, a combination of bumper harvests, a growing corn surplus, low global prices and weak demand from South Africa's neighbours has fuelled concern about the economic and social consequences of overproduction. Grain SA, the industry body that represents most of South Africa's corn producers, has estimated that up to 10,800 small farmers could face bankruptcy as a result of a rising surplus, falling prices and reduced export potential for South African corn; this could lead to almost 30% of commercial farmers being out of business in the 2010/11 agricultural year. A number of initiatives are necessary, in order to ensure that a crisis in the sector can be averted. One possible solution would be to find new countries willing to import South African corn as a source of cattle and poultry feed; some analysts are arguing that South Africa needs to look beyond traditional markets in the Southern Africa region and, instead, explore new markets in Eastern Europe, the Middle East and Asia. Other possible strategies for dealing with the corn surplus include establishing a corn export pool to relieve current supply pressures and lifting the current ban on using corn for biofuel.
Land reform in South Africa will remain a contentious issue for the foreseeable future. A new draft land reform law, currently under discussion, aims to redress the shortcomings of the land distribution programme which has left many farms unproductive in the hands of beneficiaries. If approved, the new legislation would seek to review and strengthen the land claims programme by giving value to beneficiaries, secure the land tenure for vulnerable farm workers as well as balance land ownership. Existing land reform policies have been criticised for deterring potential investors in the sector and resulting in a fall in productivity. Following the end of apartheid in 1994, the South African government set a target of handing over 30% of commercial farmland to black citizens by 2014 as part of a plan to correct racial imbalances in land distribution. The programme has caused unease and slowed investment in the agricultural sector, mainly because commercial farmers are reluctant to reinvest in farms under claim by new owners.
South Africa's agribusiness sector could face a prolonged struggle over the control of seeds. In December 2010, it was reported that South Africa's Competition Commission had blocked a merger bid between Pioneer Hi-Bred, a US-based multinational seed producer controlled by DuPont, and local company Pannar Seed. Opponents of the merger have argued that allowing foreign corporate control of South Africa's seed supply would erode availability of traditional conventional seed varieties, hurt export business with countries opposed to biotech crops, and force farmers deep into debt to pay for expensive seeds that are the patented properties of the US corporations. Pioneer Hi-Bred and Pannar Seed are understood to be planning to log an appeal with South Africa's Competition Tribunal.
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