Economic Update

Drought continues to impact agricultural production in South Africa, though seasonal rains should underpin a sector rebound along with government efforts to stimulate the agro-processing segment.

South Africa’s agricultural sector shrank in the first quarter of the year, with output contracting 6.5%, as a result of decreased production of field crops and horticultural products, according to data issued by Statistics South Africa (Stats SA) in June.

Stats SA cited adverse weather conditions as one of the main reasons behind the industry’s fifth consecutive quarter of negative growth. The sector as a whole has fallen 14% since the fourth quarter of 2014.

The contraction of the agricultural sector, along with a sharp fall in the mining industry, contributed to South Africa’s GDP shrinking 1.2% quarter-on-quarter in the first quarter of the year, or by a more modest annualised 0.2%.

Inflationary growth

Price indices, which have also been affected by lower agricultural output, are contributing to the country’s inflationary pressures.

The impact of supply side shortages was apparent on wholesale prices, for example, with April’s producer price index rising to 7% on the back of sharp increases in foodstuffs and raw materials.

Though April’s consumer price index eased marginally to 6.2% year-on-year (y-o-y), down from 6.3% the month before, the food and non-alcoholic beverage component rose by 0.3% for the month, taking food inflation to 11% y-o-y. The drought’s impact on crops could be seen in price increases for fruit and vegetables, which jumped 5.8% and 6% month-on-month respectively, in April, according to Stats SA.

Agricultural inflation was at 14.5% y-o-y as of April, with prices for grain-milled products rising 21% y-o-y, a reflection of wheat and maize crop shortages, while fruit and vegetable prices rose 9.4% y-o-y. Meat prices are also likely to rise higher than the 4% y-o-y posted in April, as the cost of animal feed climbed sharply, up 14.9% y-o-y.

As an agricultural exporter, in both staple crops and high value-added agricultural segments, South Africa’s balance of payments will also come under pressure, with shortfalls meaning the country may need to turn to imports. Low production may force South Africa to import up to 2.8m tonnes of maize, for example, at a cost of up to R13bn ($885.8m); the country is traditionally a net exporter.

Adding value to the rebound

With the easing of El Niño and the advent of seasonal rains, however, prospects for next year are more positive.

“The weather patterns are starting to change for the better, but it will be too soon to expect a recovery. The real recovery will be seen towards the end of 2017,” Wandile Sihlobo, senior agricultural economist at the Agricultural Business Chamber, told local media in early June.

Meanwhile, the government is looking to new initiatives to stabilise sector revenues ahead of the anticipated rebound in primary production on the back of increased rainfall.

The Department of Trade and Industry (DTI), for example, has moved to stimulate the sector through incentives and infrastructure development in the country’s agro-processing segment.  

Launched on May 9, the government’s Industrial Policy Action Plan 2016 includes a section of work to design sector-specific incentives for agro-processing. These incentives, and other measures such as higher export credits and export insurance, aim both to help stimulate domestic production in the sector and to build the base for value-added agricultural products for the export market.

The DTI’s Critical Agro-processing Infrastructure Support Programme will also target improving participation, competitiveness and integration of marginalised processors into the agricultural value-chain, and redress the lack of past investment in the support structure for agricultural exports, Rob Davies, minister of trade and industry, said when launching the scheme on June 9.

“This is part of our efforts to boost the growth of the agro-processing sector to increase its contribution to the country’s GDP, job creation and the reindustrialisation of the country’s economy,” Davies said. 

To achieve this, the DTI will work with industry stakeholders to map out the needs of smallholder farmers, producers and processors, to develop the necessary infrastructure and contribute to completing the agricultural value-chain, according to local media reports.

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