14.09.2017

Western Cape drought and declining confidence weigh on farmers

Although the agricultural sector emerged as an anchor of South Africa’s economy in the second quarter of this year growing by 33.6% quarter-on-quarter, a closer observation shows that things are not all rosy - Wandile Sihlobo, Agbiz economist

* This column appeared first in BusinessDay on 14 September 2017

Although the agricultural sector emerged as an anchor of South Africa’s economy in the second quarter of this year growing by 33.6% quarter-on-quarter, a closer observation shows that things are not all rosy. The decline in agribusinesses confidence and persistent dryness in the Western Cape province could slow the performance of the sector in the short-to-medium term.

After declining by one index point in the second quarter of this year, the Agbiz/IDC Agribusiness Confidence Index declined further by two index points in the third quarter to 54 points. A reading above 50 indicates expansion in South Africa’s agribusiness activity, which means conditions were still fairly favourable in the third quarter of the year but on a declining trend.

It remains unclear whether confidence could be revitalized in the short term, given the nature of the key drivers of the recent decline. These key drivers were the unfavourable weather conditions in the Western Cape province, as well as slow white maize export activity.

Just last week, the South African Weather Services indicated that the south-western parts of the country could remain dry and warm over the foreseeable future. This does not bode well for winter crops and horticulture in the Western Cape province which urgently needs rainfall to replenish lower soil moisture and dam levels.

The water levels in the Western Cape dams averaged 35% at the beginning of this week, which is 27% lower than the corresponding period last year. This is a cause for concern, not only because it is weighing on agribusinesses confidence, but the province’s contribution to the agricultural economy. Data from Stats SA shows that the Western Cape contributes roughly 22% to total agricultural GDP.  

The slow pace of white maize exports was also identified as one of the factors that were weighing on agribusinesses confidence, particularly the ones operating in the northern parts of the country. Unfortunately, this too is unlikely to change in the near term. As I indicated in this column on the 17th of August, South Africa’s traditional export markets for white maize are well supplied due to large harvests in those countries. This means that the country will continue to see slow white maize export activity in the near term.  

I place more emphasis on the Agbiz/IDC Agribusiness Confidence Index performance because it typically signals how South Africa’s agricultural GDP could perform in the succeeding quarters. Thus, a decline in confidence suggests that the performance of the agricultural sector in the coming quarters might not be as robust as was observed in the first two quarters of this year.

Apart from the aforementioned agribusiness confidence constraining factors, the northern parts of the country could receive good rainfalls in the 2017/18 summer season. The South African Weather Services indicated that between October and December 2017, the north-eastern parts of the country could receive above normal rainfall and thereafter average showers. This bodes well for summer crops as it coincides with the planting period.

Above all, the agricultural sector will maintain the current positive GDP growth throughout the year despite the aforementioned factors. However, this will be at a relatively slower pace than previously observed. The impact of Western Cape drought on a crop such as winter wheat will be clear by the end of the month when the National Crop Estimate Committee releases its second production assessment. In their first estimate, the Committee slashed production by 16% year-on-year to 1.6 million tonnes. This means that South Africa will have to increase wheat imports in the 2017/18 season in order to meet the domestic demand. For horticulture, the impact of dryness might be clear towards the end of the year, but incoming reports from industry groups such as Hortgro paint a concerning picture regarding the production outlook in the province. 

Business Day link:  https://www.businesslive.co.za/bd/opinion/columnists/2017-09-14-wandile-sihlobo-drought-and-declining-confidence-weigh-on-farmers/

 

Copyright © 2018 by Agricultural Business Chamber