Food supply secure, but exporting farmers in for tough time amid Covid-19
The Covid-19 pandemic is fast changing the way we live our lives. The virus has affected every facet of life - health and safety, travel, school and work, and access to basic provisions such as food.
Many supermarkets were in a frenzy ahead of the 21-day lockdown as people scrambled to secure basic needs. This scramble was mainly by those fearing the worst - food shortages. Should South Africans be afraid?
From a national perspective, I doubt that SA will experience food shortages, at least for most food products, over the next 12 months. SA is an agriculturally endowed country, generally a net exporter of agricultural and food products. There are high prospects for an abundant harvest of staple grains and fruit this year, which will increase local supplies.
Nonetheless, there are essential imported food products that SA is dependent on, such as; rice (100% dependent on imports), wheat (50% dependent on imports) and palm oil (100% dependent on imports). Key palm oil suppliers are Indonesia and Malaysia.
The typical suppliers of rice are Asia and the Far East, namely Thailand, India, Pakistan, China and Vietnam, some of which are hard-hit by the pandemic. In the case of wheat, the suppliers are usually Germany, Russia, Lithuania, the US and the Czech Republic, some of which are also hard-hit by the pandemic.
But some of the countries that have reported cases of Covid-19 have not taken drastic measures to limit business activity to reduce the spread of the virus. This means the importation of some agricultural products mentioned above into SA could continue unabated, barring any unforeseen eventuality.
Aside from the major products, SA also imports poultry products and sunflower oil, but these are products that can be replaced by local suppliers should there be disruptions in global supply.
In the unlikely event of potential shortages, they will be due to glitches in the logistics of shipping imports rather than a decline in global essential supplies. The 2019/20 global wheat production could amount to 764Mt, up 5% year on year, according to data from the US department of agriculture. Moreover, the estimated 2019/20 global rice production is 499Mt, which is roughly unchanged from the previous season.
The global palm oil market is also well supplied, with about 8Mt, according to data from Sunseedman. It is the domestic food supply chains that will perhaps be tested in the coming weeks and months. The implications for Covid-19 on food price inflation are unclear in the near term.
Suffice to say, SA has ample food supplies for 2020. At the Agricultural Business Chamber of SA, we forecast food price inflation this year at about 4% year on year compared with 3.1% in 2019.
The uptick in food price inflation compared with the previous year is associated with a potential increase in meat prices rather than the Covid-19 pandemic.
Where negative pressures of the virus are likely to hit are on farmers and agribusinesses, through the potential slowdown of export demand, and a likely subsequent decline in agricultural commodity prices. SA's agricultural sector is export-orientated and heavily reliant on global markets. Nearly half of the value of what the country produces is exported.
Asia and Europe, which accounted for half of the $10bn (R176bn at current rates) of SA's agricultural exports in 2019, are the areas hardest hit by Covid-19 thus far. There are likely to be disruptions in supply chains in these regions as governments strive to limit the spread of the virus.
This is at a time when SA's agricultural sector is heavily in debt. As at 2018, the total farm debt was at a record R168bn. About 60% of the debt is with commercial banks, with 29% with the Land Bank and the rest spread between agricultural co-operatives, private persons and other institutions.
The escalation of debt, particularly in more recent years, was because of the expansion in area farmed, specifically in horticulture, and to some extent the financial pressure brought by frequent droughts, which have limited agricultural output in the recent past.
Also worth noting is that some agricultural industries' performance is interlinked with some sectors that are hard-hit by Covid-19. A case in point is the wine industry, whose performance is somewhat influenced by tourism. The decline in tourism will hurt this sector. Essentially, the financial impact of Covid-19 will vary across agricultural subsectors, depending on the debt overhang from the previous seasons and also the stage of production.
For example, deciduous fruit and table grape exports might not be badly hit as most exports have already been processed by this time of the year. Meanwhile, in the case of citrus, the harvest and exports have recently started. While so far there haven't been glitches, a lot depends on the measures the European countries adopt in terms of commerce amid Covid-19 intensification in that region.
The wool industry has just returned to the market following a ban placed by China, where 70% of wool is exported in a normal season, because of foot-and-mouth disease. This year was set to be a recovery phase from this event, and from the drought that hit parts of the Northern Cape, Western Cape and Eastern Cape. Any major disruptions in trade and suspension of auctions in the domestic market could negatively affect this industry and thereby farmers' financial positions.
Already, wool prices have declined notably over the past week, in part due to fears of potential slowing global demand. The red-meat industry is in a somewhat similar situation, the foot-and-mouth disease outbreak towards the end of 2019 having led to a ban on exports, which negatively affected the financial conditions of farmers.
With limitations in restaurants, we can see a decline in demand for beef, which people tend to consume away from home and which is more expensive than other protein foods.
This will negatively affect beef farmers' finances. Overall, while lower agricultural commodity prices, which we anticipate, are favourable for consumers, the opposite is true for farmers. Under such a scenario, the question is whether farmers will be able to generate sufficient revenue to service their debts.
Admittedly, there are still a lot of unknowns about how the Covid-19 pandemic will play out and the various levels of indebtedness among farmers, but a proactive policy response could help prevent financial ruin for farmers, particularly those of a small to medium scale.
So far, the recent 100 basis points cut in the interest rate by the South African Reserve Bank has helped to reduce the cost of debt. In the UK, financial institutions have set mortgage payment holidays of up to three months. However, the unpaid interest will still be recovered later.
It is unclear if such a policy response would be plausible for SA, but in these extraordinary times it might be something worth considering and drawing lessons from.
Perhaps the measures taken to support small and medium enterprises should be extended to the farming sector, given its significance to food security.
• Sihlobo is chief economist of the Agricultural Business Chamber of SA (Agbiz) and author of ˜"Finding Common Ground: Land, Equity and Agriculture"
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