COVID-19 crisis puts SA’s agri input supply to the test

In this article, one of a series of papers on the direct and indirect effects of the COVID-19 pandemic on South Africa’s food system, researchers at the Bureau for Food and Agricultural Policy focus on the agricultural input supply. In particular, they examine the extent of import dependence, the rising cost structure, and the commodities most likely to be affected in the short and medium term.

COVID-19 has caused turmoil and volatility since the start of 2020 and the measures implemented to contain it have sent shockwaves throughout the global economy. Investors’ appetite for risk has declined drastically, resulting in a major sell-off in financial markets, as well as a depreciation in many emerging market currencies.

In South Africa, the situation has been exacerbated by consecutive downgrades to the sovereign credit rating: by Moody’s to sub-investment level for the first time, followed by Fitch to a level further into sub-investment grade. The rand has also depreciated significantly against the US dollar and other major currencies. At the same time, reduced economic activity, especially in mining and manufacturing, the grounding of commercial airliners, and the ongoing price war in major oilproducing countries, have caused the largest oil price crash in decades.

Amidst this perfect storm, food security has remained paramount in the country, and most agricultural value chains have therefore been exempted from the lockdown restrictions. But while South Africa is a net exporter of agricultural products, it imports a substantial share of the inputs required to produce this surplus. Moreover, many of the support services required for the agriculture and food system to function efficiently are not operating at full capacity.

farming input imports

South Africa is highly dependent on imports of agricultural inputs. It is estimated, for example, that more than 80% of domestic fertiliser demand and more than 95% of plant protection chemicals are imported. This implies that local prices are subjected to the same supply-and-demand forces that drive international markets and influence global price fluctuations, currency exchange rates, and shipping and distribution costs.

In addition to fertilisers and chemicals, South Africa imports animal feeds and products related to mechanisation, including tractors, implements, machinery and parts.

From 2017 to 2019, most of South Africa’s agricultural inputs were from the European Union (EU), the US, China and Argentina.

The relative importance of the regions is dependent on the types of inputs imported, however. Considering a broad range of inputs for crop production, which includes mechanisation, fertiliser, plant protection and seed imports, the EU is South Africa’s main source of imports, accounting for 30% of total value. This is contrary to the popular belief that most agricultural imports come from China.

A further 16%, mainly fertiliser, is imported from the Middle East, followed by the US and China, which account for 14% and 12% respectively. The majority of chemicals related to plant protection are sourced from the EU (42%), followed by China with a share of 24%. Considered in conjunction with the recent impact of the coronavirus disease (COVID-19), this means that 80% of plant protection chemicals are sourced from countries or regions severely affected by the pandemic.

The risks of import dependency

The risks associated with high dependency on imported inputs are twofold.

The first relates to availability, either due to supply disruptions in sourcing countries, or logistical and distribution problems arising from COVID-19 containment measures. Domestically, uncertainty about the supply and distribution of agricultural inputs can make it more difficult to obtain inputs in time for production. For example, a backlog in port operations as a result of a reduced workforce early in the South African lockdown could cause harvesting delays due to machinery parts not being available.

The second risk involves affordability, which is linked to availability and also influenced by the macroeconomic environment. Here, the relative weakness of the exchange rate has the potential to cause substantial price volatility.

The two main factors influencing the cost of fertiliser are the rand/US dollar exchange rate and the price of crude oil. Oil price movements influence the cost of all imported inputs indirectly through sea freight and other distribution costs. They also affect the cost of inputs such as fuel and fertiliser directly, and could influence

the costs of manufactured inputs such as chemicals, plant protection and machinery. Over the past decade, the combined impact of these two factors, as well as rising labour costs, have already led to substantial increases in input cost structure.

Significant uncertainties exist around how COVID-19 will affect input supply chains in the coming months and how value chains will cope with these volatile conditions. The seasonal nature of agriculture implies that the impact of the highlighted risks associated with input procurement this year could be very different across subsectors.

agri subsectors

Production systems differ, and the periods during which inputs are procured and the rate at which they are used vary accordingly. With the persistence of the pandemic and the time required to contain it still uncertain, the operations that could be affected have to be considered independently across subsectors.

South Africa’s summer crop is at the end of its growing season and harvesting has already started. This will require labour for harvesting, transport and storage, as well as machinery and parts for repairs. The planting period of winter crops, which include wheat, barley and canola, will commence soon. Producers need to start with land preparations and planting, which requires a sufficient number of farmworkers to operate machinery, and is dependent on timely availability of inputs.

Orchards entering the harvesting period, such as nuts, avocados and citrus, will require a considerable number of reliable and healthy workers to pick the fruit and transport it from farms to packaging/ processing facilities. Once the fruit has entered cold storage, this chain cannot be broken until the final destination is reached, as fruit quality starts to deteriorate once its temperature increases.

Any delays in the distribution process, be it at packhouse, trucking facilities, marketplace, harbour or shipping environment, drastically increase the risk of claims for below-par produce delivered, which can result in a net loss due to the cost of preparing and delivering the fruit.

Animal products are less seasonal, but the continuous availability of high-quality feed products is critical. This is particularly true of feed-intensive operations, such as pork, poultry and beef and sheep feedlots, where there is very little flexibility in the feeding and production system. In this regard, delays in the procurement and delivery of key vitamins and minerals from the international market can have devastating effects. Operations are typically capital-intensive and any delay has extended effects through the production cycle, which is often long, with a substantial lead time on planning and ordering of animals. Consequently, delays at any point in the process of production or delivery can affect the entire chain.

Collaborative planning

With the volatility caused by the COVID-19 crisis, and poor economic prospects ahead, the agricultural input supply chain will be tested severely. Although several factors are beyond the control of agribusinesses, farmers and decision-makers, it will be crucial to manage supply chains and prioritise policy decisions on access to and distribution of inputs, and execute these in a way that minimises disruption.

Throughout the value chain, ongoing planning and communication will be essential to mitigate the risk of product unavailability and major price hikes.