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BFAP Baseline: Agricultural Outlook 2017-2026


BFAP Baseline: Agricultural Outlook 2017-2026

BFAP Baseline: Agricultural Outlook 2017-2026
Photo credit: Steve Slater | Flickr

The 2017 edition of the BFAP South African Baseline presents an outlook of agricultural production, consumption, prices and trade in South Africa for the period 2017 to 2026 and relates these to the agricultural sector’s footprint, and hence contribution, in the South African economy.

The information presented is based on assumptions about a range of economic, technological, environmental, political, institutional, and social factors. The outlook is generated by the BFAP system of models. A number of critical assumptions have to be made for baseline projections. One of the most important assumptions is that normal weather conditions will prevail in Southern Africa and around the world; therefore yields grow constantly over the baseline as technology improves. Assumptions regarding the outlook of macroeconomic conditions are based on a combination of projections developed by the International Monetary Fund (IMF), the World Bank and the Bureau for Economic Research (BER) at Stellenbosch University. Baseline projections for world commodity markets were generated by FAPRI at the University of Missouri.

Once the critical assumptions are captured in the BFAP system of models, the Outlook for all commodities is simulated within a closed system of equations. This implies that, for example, any shocks in the grain sector are transmitted to the livestock sector and vice versa. Therefore, for each commodity, important components of supply and demand are identified, after which an equilibrium is established through balance sheet principles by equalling total demand to total supply.

This year’s baseline takes the latest trends, policies and market information into consideration and is constructed in such a way that the decision maker can form a picture of equilibrium in agricultural markets given the assumptions made. However, keep in mind, markets are extremely volatile and the probability that future prices will not match baseline projections is therefore high. Given this uncertainty, the baseline projections should be interpreted as one possible scenario that could unfold, where temporary factors (e.g. weather issues) play out over the short run and permanent factors (e.g. biofuels policies) cause structural shifts in agricultural commodity markets over the long run.

The baseline, therefore, serves as a benchmark against which alternative exogenous shocks can be tested and interpreted. In addition, the baseline serves as an early-warning system to inform role-players in the agricultural industry about the potential effects of long-term structural changes on agricultural commodity markets, such as the impact of a sharp increase in input prices or the impact of improvements in technology on the supply response.

Executive summary

The South African agricultural and agro-processing industries as a whole are currently facing a mixed bag in terms of current and future prospects. Following the severe drought of 2015 and 2016, it is clear that despite the all-time record harvests being achieved for maize and soybeans in the current season, the recovery from the drought in the summer rainfall region will take more than one season. This is especially true in the livestock sector, where herd numbers will have to be rebuilt and a recovery in pasture quality takes time. While the summer rainfall regions are at different stages of recovery, the situation in the Western Cape remains dire with major long-term impacts due to severe restrictions on the availability of water for irrigation of high-value export industries. In the informal sector, there has been a general increase in economic activity, with approximately 300 000 more households who are involved in crop farming on less than 20 hectares since 2010. This translates to an additional 75 000 hectares added in rural areas, boosting supplies into informal value chains. However, these households have also been severely affected by the drought and apart from the farmers who are linked to well-structured support programs, the recovery from the drought will take some time.

Looking ahead, one has to consider the outlook for the South African agricultural sector in the global context. The world is awash in grain and oilseed stocks. The USA, along with South America, produced above average crop volumes on the back of higher acreage, but also above average yields. This resulted in soft commodity prices, with global prices hovering near 10-year lows for most of 2015 and 2016. In South Africa, during 2016, the impact of low global soft commodity prices was negated by the combination of drought impact and a rapidly weakening and highly volatile Rand. During 2017, however, reality set in with much improved weather conditions in the summer rainfall areas along with a rapidly strengthening Rand. The result is a return to export parity levels and South Africa catching up with the global lower price cycle.

The low grain and oilseed prices create significant risk to grain and oilseed producers, but offer opportunities for the intensive livestock industries to recover. Even though yields are exceptionally good in the summer rainfall areas, grain producers are experiencing immense pressure on their cash fl ow and payment ability given the low grain and oilseed prices and the prior impact of the drought. On the other hand, the intensive livestock operations such as broilers, pigs and dairy are finally catching a breather. Following two seasons of record high grain and oilseed prices, and hence exceptionally high feed costs, feed costs have shown a significant decrease. Feedlot operations are also faced by much lower feed prices, but weaner prices have shot up due to a lack of supply in the weaner market, which has curbed potential profit margins to some extent. The good news is, however, that beef exports are growing consistently and South Africa has in the past five years become a net exporter of beef. Lamb and wool prices have also increased sharply following the aftershocks of the drought and in all of these extensive livestock industries, significant growth can be unlocked mainly by means of improved productivity, especially in the informal rural areas.

In the Western and Eastern Cape, producers of all agricultural products are holding their breath to see whether the current season will provide sufficient rain. Given the continuation of the drought in these areas, grain, livestock, fruit, vegetable and dairy producers are facing severe pressure and the risk of significant production failures. Even though most horticulture crops as well as other long terms crops showed significant growth over the past decade, it is expected that these industries will face severe pressure in the short-term due to the lack of water, but also the costs associated with water and electricity. Expectations are therefore that growth is set to slow down in these industries, at least until water availability has returned to normal.

In terms of horticultural products, the rapid expansion in industries such as blue berries, macadamias and pecan nuts is worth noting. BFAP already flagged these industries in the NDP matrix in 2011 as high-growth labour intensive industries and growth over the past five years has been phenomenal. These are highly capital intensive and export orientated commodities and for growth in these industries to continue, the investment climate will have to remain positive.

Food prices are one of the key drivers of food security in the country. The recent drought has had a major impact on the affordability of staple maize, with the cost of a single serving of maize meal increasing by 43%, while the cost of the staple food basket increased by 22%. The good news is that the rate of staple food price inflation is projected to decline by 16% on the back of the improved weather conditions and the appreciation of the exchange rate. Yet, this rate is measured from a higher base and therefore, in absolute terms, staple food prices remain high.

Regional Market Dynamics

Strategic policy response to transformation in regional agri-food systems

Africa’s rapid population growth is changing global views on Africa, from merely a supplier of raw materials to a potentially major export market for food and other consumer goods. If African producers and agro-processors are to benefit from the projected growth in food demand by its citizens, Governments need to be strategic with respect to trade, agricultural productivity growth and agro-processing development.

Will African demand influence the growth in global agricultural commodity markets over the next ten years?

International perspectives on Africa are changing. At the turn of the century, Africa’s natural resource base was a source of raw material inputs for the global food system. Today the combined effect of a projected slowdown in China’s growth rates and Africa’s relatively young and growing population, is changing Western perspectives on Africa. Over the next 10 years, the U.S.A. and EU expect rising African demand for high-valued food commodities, making Africa an important output market for surplus agricultural commodities.

Over the next 85 years, Africa’s population is expected to grow from 13% to 35% of global population, more than doubling between 2015 and 2050. Given this rapid growth, major concerns exist over whether adequate supplies can be sourced through local production to meet this growing demand. Projections by the OECD and FAO of Africa’s consumption and production of high-valued and cereal commodities over the period 2016-2026 indicate that an increasing share of the region’s growing demand for food products will be met by imports. For example; exports of dairy products to Africa are expected to increase rapidly over the next 10 years, with African markets accounting for more than 20% of the growth in global dairy imports by 2026 relative to the 2014- 2016 base period (OECD-FAO, 2017).

World import demand for poultry meat is expected to rise, reaching 14 million tons by 2026. Key growth markets for poultry imports include Asia, sub-Saharan African and the Middle-East.

Is Africa moving towards integrated agricultural food markets?

As African consumers become contenders in global food markets, African leaders are attempting to move the continent towards self-sufficiency. The Malabo Declaration adopted at the African Union (AU) includes an ambitious and promising recommitment “to fast-track the establishment of the continental free trade area (CFTA), and the action plan for boosting intra-African Trade (BAIT)” (AU 2014). The intended aim is to triple intra-African trade by encouraging transparent and regulated policies that strengthen existing trade partnerships, foster long-term investment, and ensure continental food security.

As a first step to facilitating regional integration, the level of applied duties on food imports faced by African exporters are relatively low and declining over time. Over the past 11 years the average ad valorem equivalent (AVE) tariff rate on food products faced by African exporters fell by 3.2%. Across the 19 food product categories traded intra-regionally, Vegetable & Roots (HS 07) and Cereals (HS 10) were the only two categories that experienced an increase in the applied import duties between 2005 and 2016.

The actual realization of intra-regional trade is the growing share of total food imports supplied to SSA by Sub-Saharan African (SSA) exporters. To date, though imports from non-Sub-Saharan African (SSA) markets still dominate, the share of SSA imports coming from other SSA countries has risen; averaging an annual growth rate of 12% over the past fifteen years.

The commodities accounting for the rapid growth are high-value products (HVP’s) with some degree of processing. In 2015, of the USD 8.09 billion in intra-regional trade of food products, cereals were the second largest product traded, accounting for 11% of the total imports. However, over the past 15 years, trade in vegetables, fish, and meat (fresh, semi-processed and processed) realized average annual growth rates above 13% compared to cereals, which grew by 10.4% per annum.

» Download: BFAP Baseline: Agricultural Outlook 2017-2026 (PDF, 7.16 MB)


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