A na­tional drought is leav­ing the pri­mary agriculture sec­tor, which con­trib­utes 2.5% to GDP, in dire straits. Econ­o­mists ex­pect the ef­fect to quickly trickle through to com­pa­nies that sup­port the sec­tor. And for the con­sumer, it means dou­ble-digit food pr

Finweek English Edition - - FRONT PAGE - By Robyn Jou­bert

if rain doesn’t fall in the next few weeks, the crop and live­stock prospects for many com­modi­ties will be de­cid­edly bleak, with di­rect and ma­te­rial im­pact on the earn­ings of farm­ers and the com­pa­nies that sup­port them, and on food price in­fla­tion.

Cou­pled with swel­ter­ing heat, the pro­longed drought is a ma­jor source of anx­i­ety to the farm­ing sec­tor, which con­trib­utes about 2.5% an­nu­ally to SA’s GDP through pri­mary agri­cul­tural pro­duc­tion.

The main com­modi­ties af­fected by the drought are maize, wheat, sugar cane and cit­rus, al­though all com­modi­ties and live­stock in drought-stricken ar­eas are af­fected.

Un­like more com­mon lo­calised droughts, SA is cur­rently in the grip of a na­tional drought.

“The only ar­eas where there are not prob­lems are the East­ern and South­ern Cape. There are se­vere prob­lems in Mpumalanga, KZN, most of the Free State, parts of Lim­popo and parts of North West,” says Jo­han van den Berg, San­tam agriculture man­ager: spe­cialised crop in­sur­ance. “The north­ern parts of the North­ern Cape are also suf­fer­ing se­verely and in some parts of the Kala­hari, north of Uping­ton, rain last oc­curred more than 18 months ago.”

In KZN, which ac­counts for 24.4% of SA’s agri­cul­tural ac­tiv­ity ac­cord­ing to Stats SA, dam wa­ter lev­els were sit­ting at 57.9% of ca­pac­ity as at 2 Novem­ber (com­pared with 70.5% a year ear­lier), with Hazelmere Dam at 26.3% (43.5%), Mid­mar Dam at 53.1% (68.7%), Hluh­luwe Dam at 30.2% (70%) and Pon­go­lapoort Dam at 52.8% (63.1%).The North West’s 25 dams are at 45.9% ca­pac­ity (68.7%), while Free State dams are at 66.4% (78%).

“While large dam wa­ter lev­els are still re­spectable, medium and smaller dams are in most cases empty or very close to empty,” ex­plains Van den Berg. “This will af­fect ir­ri­ga­tion in smaller ir­ri­ga­tion ar­eas. Bore­hole wa­ter is also be­com­ing a prob­lem and sup­ply to an­i­mals and for hu­man con­sump­tion is be­com­ing a se­ri­ous con­cern.”

Net im­porter of maize

The next few weeks are cru­cial for the maize in­dus­try, which grows 91% of its crop with­out ir­ri­ga­tion. Maize plant­ing takes place from mid-Oc­to­ber to late De­cem­ber.

“Maize ton­nage has de­creased from a record bumper crop of 14.2m tons in 2013/14 to just un­der 10m tons in 2014/15. For the first time in seven years, we will be­come a net im­porter, im­port­ing white maize from Mex­ico and Zam­bia and yel­low maize from Ar­gentina and Brazil,” says Agri SA se­nior econ­o­mist Thabi Nkosi. “We need to im­port an es­ti­mated 770 000 tons of maize this sea­son, of which al­most 60% has al­ready been im­ported. This will cost the econ­omy about R2.2bn at cur­rent prices and ton­nages.”

Of the 770 000 tons of im­ports, 700 000 tons are yel­low maize, which is mainly used for live­stock feed. “The sit­u­a­tion is more des­per­ate on the live­stock side but we are also con­cerned about sup­ply of white maize, which is used for con­sumer con­sump­tion. Not a lot of coun­tries pro­duce white maize,” Nkosi says.

Poul­try dou­ble whammy

As­tral Foods CEO Chris Schutte says con­di­tions in maize pro­duc­ing ar­eas would have a dra­matic ef­fect on the

poul­try sec­tor. “If maize farm­ers, es­pe­cially in the east­ern ar­eas like Mpumalanga, don’t get good rain soon, they will be un­able to plant. It will lead to re­duced acreage and prob­a­bly also a re­duced yield. Com­ing on the back of the pre­vi­ously poor crop, it will se­verely up­set the maize bal­ance sheet and will most prob­a­bly push the price to record highs,” he says.

This would have a se­vere im­pact on the pro­duc­tion cost of com­mer­cial chick­ens. “Feed makes up 65% of the cost of pro­duc­ing a chicken. In Jan­uary and Fe­bru­ary, we will see feed prices in­creas­ing to the high­est level in my his­tory of 32 years in poul­try. Pro­duc­ers have to try and re­cover part of it from the con­sumer. But re­tail is dead set against any price in­creases so pro­duc­ers will go into a mar­gin squeeze of note.This in­abil­ity to re­cover the higher maize cost could lead to the demise of smaller pro­duc­ers,” Schutte states.

The heat wave was also wreak­ing havoc on poul­try pro­duc­tion, with the wind en­ter­ing nat­u­rally ven­ti­lated poul­try houses be­ing warmer than the air in­side. Chick­ens don’t eat when they are hot and so their growth slows.

“It’s a dou­ble whammy for poul­try pro­duc­ers,” Schutte says. “It will take long, slow, soft rain to im­prove soil mois­ture – and this is un­likely be­cause of the ef­fect of El Niño. This is a dark cloud with no sil­ver lin­ing. And it’s not a rain cloud.”

Red meat prices could rocket

The drought has also re­sulted in a cri­sis in terms of graz­ing and dry mat­ter for an­i­mals. Hay and fod­der has be­come so ex­pen­sive that many farm­ers strug­gle to af­ford to feed their herds. The cost of grass bales has in­creased from about R250/bale of medium-qual­ity grass a year ago, to R450 or more.

Dave Smit, a grass farmer from Tweedie in the KwaZulu-Natal Mid­lands, says the sit­u­a­tion is des­per­ate. “It is not just that hay has be­come ex­pen­sive. It is that there is next to noth­ing avail­able. Where we should be head­ing for sec­ond cuts on rain­fed grass, we have had just one minute cut. The grass looks like a soc­cer field.”

As a re­sult, farm­ers are cut­ting their herd sizes, “right down into their nu­cleus herds”, says Red Meat Pro­duc­ers Or­gan­i­sa­tion CEO Ger­hard Schutte. “Their over­drafts are up to the limit.”

“Even af­ter rains, it would take two to four years for farm­ers to re­cover fi­nan­cially, and it will be a fine bal­ance be­tween pay­ing the bill for the drought and ex­pand­ing.”

Abat­toir fig­ures in­di­cate the rate at which farm­ers are send­ing an­i­mals to mar­ket. “The na­tional slaugh­ter fig­ure for mut­ton for Oc­to­ber was 431 820 sheep, 10% higher than the pre­vi­ous month. Beef is 21% higher than

a year ago, at 258 443 cat­tle. Last year was also dry [with an el­e­vated slaugh­ter rate], so on top of that we are still slaugh­ter­ing more cat­tle,” says Pi­eter Cor­nelius, AgInfo Man­ager: Live­stock.

There is cur­rently suf­fi­cient live­stock on farms to en­sure nor­mal red meat sup­ply. How­ever, live­stock farm­ers are run­ning the risk of an­i­mal mor­tal­ity, es­pe­cially among cat­tle. Many an­i­mals have just given birth and need high-qual­ity nu­tri­tion. If rain holds off un­til next win­ter, it will send meat prices rock­et­ing. “The ef­fect will start to be felt from next win­ter to the end of 2016. SA im­ports lit­tle meat but if lo­cal sup­plies fall short, we will be forced to im­port from coun­tries like Aus­tralia and New Zealand,” says Cor­nelius. “This will have a strong ef­fect on prices. The price of medium cow meat from Aus­tralia for Oc­to­ber is R68.39/kg, com­pared to R28.74/kg for SA’s Class C2/C3; while medium steer meat costs R74.09/ kg, com­pared to R33.92/kg for SA’s Class A2/A3. The im­port par­ity price for Aus­tralian trade lamb is R66.48/ kg com­pared to R53.89/kg for SA Class A2/A3.”

The rand has al­ready fallen 21.3% against the dol­lar in the past 12 months. “If we go into a pro­longed drought and the econ­omy fails to per­form, the rand could de­pre­ci­ate 30% or 40% year-on-year, mak­ing im­ports even more ex­pen­sive,” Cor­nelius adds.

Two sea­sons of drought for sugar cane

In the sugar cane in­dus­try, the drought has thus far spanned two pro­duc­tion sea­sons, be­com­ing in­creas­ingly se­ri­ous in the 2015/16 sea­son. Es­ti­mates as at Septem­ber pre­dict the loss of grower rev­enue to be R1.9bn, with the na­tional crop es­ti­mated to be 25.89% lower than 2013/14 at 14.8m tons, com­pared with 20m tons in 2013/14 and 17.7m tons in 2014/15.

“This drought is deemed one of the worst in 100 years,” says Richard Ni­chol­son, eco­nomic re­search man­ager at the SA Cane Grow­ers’ As­so­ci­a­tion. “The en­tire KZN dry­land pro­duc­ing re­gion has been neg­a­tively af­fected, with the North Coast, Zu­l­u­land and the Mid­lands par­tic­u­larly af­fected by pro­duc­tion de­clines.” Mills at Umz­imkulu and Dar­nall have been closed.

The drought has caused the farm gate price of sugar and mo­lasses re­cov­ered from the sugar cane to in­crease due to lower sup­ply. “How­ever sugar pro­duc­ers are still able to meet do­mes­tic de­mand for sugar so the price has not yet been dras­ti­cally af­fected,” Ni­chol­son says.

The pain trick­les down

The drought would have a sig­nif­i­cant im­pact on the broader econ­omy and on the farm­ing sec­tor, says Vu­nani Se­cu­ri­ties an­a­lyst An­thony Clark. “We have al­ready seen that the lower maize crop and sig­nif­i­cantly lower wheat crop has had a di­rect, ma­te­rial ef­fect on the earn­ings of farm­ers and com­pa­nies that sup­port them. Equip­ment sales, for ex­am­ple, have fallen sharply.”

Grain SA econ­o­mist Wandile Sihlobo says maize prices had hit record highs and re­mained at the up­per lev­els. “White maize is now sit­ting at around R3 100/ton. That is 65% higher than a year ago. Yel­low maize is around R2 800/ton and that is 45% higher than a year ago,” Sihlobo ex­plains.

Clark ex­pects higher prices to fil­ter through to con­sumers by the end of the first quar­ter of 2016.

“Most food com­pa­nies hedge their pro­cure­ment three to six months for­ward. As they start to un­wind their po­si­tions, they will have no choice but to pass on un­der­ly­ing price in­fla­tion to con­sumers. We are look­ing at dou­ble-digit con­sumer food price in­fla­tion on all ba­sic com­modi­ties like mealie meal and bread from March 2016, which will lead to vol­ume pres­sure and stress on the re­tail side,” Clark says.

Un­listed agri­cul­tural com­pa­nies, such as OTC, Sen­wes and Kaap Agri, and food com­pa­nies like Pi­o­neer and Tiger Brands, would be im­pacted, but some more so than oth­ers.

“Pi­o­neer Foods is a very large sta­ples busi­ness in­volv­ing milling and the sup­ply of wheat and mealie meal. They will have greater ex­po­sure than Tiger Brands, which is more of a gro­cery-type busi­ness. It is not a cri­sis but if prices re­main high and if the 2016 wheat and maize crops do not re­cover, it will mean mar­gin con­trac­tion and lower earn­ings.”

The im­pact could also be felt by agri-in­sur­ance com­pa­nies. Drought cover is not avail­able on win­ter crops any­more but it is on sum­mer crops, which farm­ers have been un­able to plant. If con­di­tions pre­vent them from plant­ing sum­mer crops, “this will re­duce the po­ten­tial mar­ket for in­sur­ance, es­pe­cially hail in­sur­ance, which is the main line of in­come for most in­sur­ance com­pa­nies”, Van den Berg ex­plains.

The plant­ing win­dow for sum­mer crops is be­com­ing crit­i­cal in the East­ern Free State, KZN and Mpumalanga, with win­dow pe­ri­ods very close to an end. Farm­ers in the rest of the Free State and North West can still plant maize un­til about Christ­mas and sun­flower un­til the sec­ond to third week in Jan­uary. “It is very likely that farm­ers in the east­ern pro­duc­tion ar­eas will not be able to plant all in­tended hectares be­fore the op­ti­mum plant­ing win­dow closed,” Van den Berg says.

If rain falls be­fore the end of Novem­ber, farm­ers will prob­a­bly still plant but the yield po­ten­tial will be much lower due to a shorter grow­ing sea­son.

“The only thing to mit­i­gate the worst-case sce­nario is if SA has good rains and a bumper maize crop of 12m tons to 14m tons, along with a sta­ble rand. 2016 is go­ing to be a chal­leng­ing pe­riod for food com­pa­nies that have en­joyed mar­gin ex­pan­sion over the past few years; and poul­try com­pa­nies that have en­joyed pro­tec­tion­ism and ris­ing poul­try prices,” Clark says.

Many farm­ers have pre­pared their lands to start plant­ing, but rain is des­per­ately needed for plant­ing to com­mence.

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