Worth over $15bn to the national economy, South Africa’s agriculture sector has historically been one of the strongest on the continent. Diversified and increasingly export-oriented, it enjoyed a strong year in 2014, on the back of a healthy maize crop and demand from abroad in particular. While the short-term outlook for 2015 is weaker, thanks to the worst drought for over two decades and macroeconomic headwinds, the sophisticated and efficient large farms that proliferate in the country should be able to ride out difficult periods.
Higher-value segments and those vertically integrated with the thriving fast-moving consumer goods segment are particularly well placed. For thousands of smallholders, the going is tougher, but the government and sector organisations are outlining policies to support these farmers and help them reach their potential.
Agriculture accounts for only 2% of GDP, or 2.5% including forestry (0.4%) and fisheries (0.1%), according to the annual report from the Department of Agriculture, Forestry, and Fisheries (DAFF) for the agricultural year 2013/14. However, citrus fruit and wine are important export earners for the country, making the sector a key source of foreign currency. Furthermore, the sector has a role both in supplying the large domestic market of 55m people, and in developing value-added downstream industries.
The government’s emphasis on agricultural development is not only due to economic factors, however. Agriculture also has a big role to play in social development, most obviously in rural areas. The UN Food and Agriculture Organisation (FAO) estimates that the sector employed 1.09m people in 2014, 5.55% of the total workforce.
Broadly speaking the agriculture sector has two major goals: supplying the large and growing domestic market, while at the same time boosting exports, which bring in valuable foreign currency earnings. For a period, production of crops for bio-fuels was also a growing interest in South Africa, but with the oil price dipping below $60-70 in 2015, and holding below the $50 line in the third quarter of the year, investment has waned.
Policy for Development
The sector’s economic and social importance has made it one of the main focuses of the government’s National Development Plan (NDP), first unveiled in 2012 and running to 2030. The NDP aims to tackle South Africa’s deeply entrenched problems of inequality, unemployment and social exclusion by encouraging broad-based economic growth.
The NDP states that agriculture could create nearly 1m new jobs by 2030 if developed correctly, and sets out ways in which this could take place: some specific, some broad. They include expanding the area under irrigation from 1.5m ha to 2m ha; cultivating underused land in communal areas (theoretically communally owned areas in former “black homelands”) and land reform to promote commercial production (see analysis); supporting those commercial agricultural industries with the greatest potential for growth and employment generation, including focusing on the most promising regions; and finding and capitalising on opportunities for cooperation and collaboration between commercial farmers, “communal” farmers and a range of complimentary industries.
As in other sectors, the NDP also emphasises the need for value creation and the strengthening of supply and value chains throughout the sector. This includes supporting job creation upstream and downstream, as well as supporting new entrants in gaining access to these chains. The strategy and backing is seen as crucial to ensuring the sector’s sustainability and profitability. “It’s officially the least government-supported farming sector in the world,” Aart-Jan Verschoor, senior manager of the Agricultural Research Council (ARC), an official research and development institution, told OBG. “One of the major challenges that farmers in general face is efficiency; being profitable in the light of climate limitations, the transformation of the sector, land reform and in light of general cost squeezes.”
Indeed, the number of commercial farms throughout the country has fallen by more than two-thirds since 1950, from 120,000 to 36,000, according to DAFF. The drop is partly attributable to consolidation of farms, as average farm size has risen. Meanwhile, farming has become more technologically sophisticated, while farm employment has fallen, in terms of both regular, permanent jobs as well as casual and seasonal work. As the department puts it, “there is less reliance on labour and more on capital”.
The trend is common, particularly in developed countries, and tends to go hand-in-hand with rural-to-urban migration; farms may be losing jobs but labour is often scarce. However, in South Africa, rural unemployment has become an increasing problem, and one that the government aims to use agricultural policy to tackle. This includes land reform as a priority, but also the better use of land and even the strengthening of large-scale farming, which generates many jobs.
Around 90% of South Africa’s food production comes from large-scale farms, according to Verschoor. There are around 2500 highly efficient large farms at the top of the scale, he says. Next there is a tier of middle-sized farms, and then between 1m and 3m smallholders of various levels who produce food, often as a secondary or tertiary rather than primary source of household income. While this segment is inefficient and is not the focus of ongoing investment in agriculture, it is nonetheless highly important for supporting households’ food supply, said Verschoor, helping to reduce food shortages and restrain price inflation that could lead to unrest.
With the sector under pressure from rising costs, not least due to the fall of the rand (see Economy chapter), the DAFF is emphasising a shift towards conservation agriculture from conventional agriculture. Conservation agriculture is defined by the FAO as, “an approach to managing agro-ecosystems for improved and sustained productivity, increased profits and food security while preserving and enhancing the resource base and the environment”. This type of farming relies three main interlinked principles – minimum mechanical soil disturbance, permanent organic soil cover, and diversification of crop species grown in sequences or associations.
Other than its environmental and sustainability benefits, the DAFF argues that conservation farming substantially reduces input needs, bringing down costs and thus boosting competitiveness. By lowering demand for imported agricultural inputs while strengthening competitiveness on global markets, this could potentially have a favourable impact on the sector’s trade balance, the department says in its 2013/14 annual report.
In the 2014/15 agricultural year, which ran from July 2014 to June 2015, South Africa’s gross farming income totalled R221.9bn ($19.2bn), up 9.5% from R202.565bn ($17.5bn) in the 2013/14 year, according to the “Crops and Markets Second Quarter 2015” report issued by the DAFF.
Total farming costs rose approximately 6.5% from R140.45bn ($12.1bn) to R149.61bn ($12.9bn) in that timeframe, leading to a net farming income of R77.06bn ($6.66bn), which was up 15.3% from the previous year. Net farm income in the “exceptional” calendar year 2014 was the highest on record, according to the Bureau for Food and Agricultural Policy (BFAP), a non-profit organisation, in its “Baseline Agricultural Outlook 2015-2024” published in July 2015. The BFAP Baseline is an annual publication of forecasts and policy recommendations for the sector.
Field crops generated R54.11bn ($4.7bn), up 5.6% from R51.22bn ($4.4bn) in the 2013/14 agricultural year. This was driven in large part by a 17.6% rise in maize earnings, to R27.7bn ($2.4bn) from R23.56bn ($2.04bn). Some other major crops saw earnings fall, notably wheat, dropping 3.7% on the year to R5.22bn ($499.3m), and sugar cane (down 3.8% to R7.04bn, $608.3m).
Horticultural products generated revenues of R59.35bn ($5.1bn), up 8.4% on R54.75bn ($4.7bn) in 2013/14. Vegetable earnings rose 2.6% to R17.8bn ($1.5bn), those of deciduous fruit (from trees that shed leaves in the winter, such as apples, peaches and nectarines) increased 17.2% to R16.4bn ($1.4bn), and citrus rose 9.9% to R12.33bn ($1.1bn). The animal products segment generated R108.4bn ($9.4bn), up 12.2%, with poultry earnings rising 10.8% to R36.6bn ($3.2bn) and those from slaughtered cattle up 15.9% to R26.3bn ($2.3bn).
South Africa is a net exporter of agricultural products, with the trade surplus rising 30% in 2014 to R35bn ($3bn) on the back of exports of R104bn ($9bn) – up 12.3% on 2013, according to the BFAP. Imports rose 4.8% to R67.9bn ($5.9bn).
Exports to Africa increased 14%, driven by particularly strong growth in food preparations, fruit juices and maize, while exports to the EU were up 8%, with grapes and citrus fruit important drivers. Exports to Asia grew 20%, with citrus fruit, nuts and sugar rising particularly strongly.
The citrus industry is growing at 6-7% per year, despite non-tariff barriers such as the EU’s tightened restrictions on South African citrus over the fungal disease, citrus black spot, according to John Purchase, CEO of the Agricultural Business Chamber, a South African agribusiness association. The tighter requirements, imposed in April 2014, have led South African exporters to seek other markets, with some success, bolstered by the weak rand.
However, 2015 will be a leaner year for South African agriculture. The BFAP Baseline forecasts a 16% drop in real farm income ( taking into account inflation) for the calendar year, albeit from a record level. Drought in the southern hemisphere summer of early 2015 led to a lower than expected harvest. While smaller supplies pushed product prices somewhat higher, they did not compensate for loss of production; internationally, strong harvests leading to high stock levels kept commodity prices down.
“Agriculture had been holding up pretty well until the end of 2014, one of the reasons being the record 14.3m-tonne maize crop, which is the basis of many value chains, including dairy,” Purchase told OBG. “Conditions were fairly good. That has changed, and in the first quarter of 2015, agricultural GDP fell by 16.6%, and we foresee a significant drop in full-year 2015.” Purchase cites a range of factors beyond the drought contributing to the drop, including electricity shortages; policy uncertainty, particularly over land reform; and falling international commodity prices.
The BFAP forecasts that real net farm income will rise gradually after 2017, but that it will not be until 2024 that the level of 2014 is achieved again. Meanwhile, regulatory and supply-side issues remain to be addressed.
According to the DAFF, costs have risen steadily faster than values of agricultural outputs over the past three decades – at a rate of 3% per year. While the weaker rand, which has dropped by some 18% against the dollar as of September 2015, theoretically makes South African agricultural products all the more competitive on the world market, there are a number of substantial downsides for the sector as well. Indeed, it has pushed up inflation, particularly for imported inputs, while also leading to rising interest rates, which then makes capital all the more expensive for farmers to access.
Nonetheless, there are strong fundamentals for the longer term from South Africa’s long farming tradition, generally benign climate, reputation as an exporter of citrus among other agricultural products, and a strong downstream processed food and beverage industry (see Industry chapter). Improvements to grassroots farming through technology and skills upgrades, and potential consolidation, could boost yields. “Some areas of South Africa’s agriculture sector are almost de-linked from the GDP growth rate,” Chris Venter, CEO of Afgri, an agricultural services and processing company, told OBG. “So despite sluggish growth you will still see farmers purchasing equipment as expenditure is more related to commodity prices and yields for farmers.”
The BFAP expects field crop output to recover in 2016 if normal conditions return (by no means a certainty), but expects that agricultural commodity prices will flatline while costs edge upwards, squeezing farming margins. However, the livestock segment is another story. Feed prices have been driven down by lower input costs, while protein consumption per capita is rising in South Africa, as it is globally. Similarly, the horticulture segment, which includes citrus fruit, should continue to get a boost from the weak rand.
The savage drought of 2015, in broad terms the worst since 1992, is a major reason for the agriculture sector’s difficulties following a bumper year in 2014. Press reports in July 2015 suggested that farmers could lose R10bn ($864m), but with extreme weather conditions likely to continue, the figure could be higher. The maize crop has been particularly affected, having knock-on effects elsewhere on the agricultural supply chain, while the BFAP says that 2015 was the worst drought for the sugar industry in 103 years.
The severity of the drought led Free State, which produced 44% of South Africa’s maize crop in 2014, to declare an official disaster in September 2015. The maize crop for the year could fall by a third, according to international press reports. Venter told OBG that he expected grain production to drop by 30% in 2015 due to the drought.
In September 2015 the official South African Weather Service issued a forecast from October 2015 to February 2016 warning of further drought. It noted the “likelihood of extreme warmer temperatures” across most of the country, and “high probabilities” of below-average rainfall likely to continue through the season. The drought has been exacerbated by the El Niño phenomenon, and is being felt across Southern Africa.
The Agricultural Research Council expects water scarcity to become an increasing problem in the coming years, and as such is working to improve water use sustainability, as well as promoting harvesting practices that will support better water retention and lower usage, including lower tillage and leaving crop residue on the ground to prevent runoff. Research into more drought- and climate-resistant crops is also ongoing.
One of the biggest challenges that South African agriculture faces is also a major issue for rural and peripheral urban social and economic development – improving the lot of its many tens of thousands of smallholders. “Commercial farmers are well catered to by the banking industry, but smallholder farmers struggle for access to finance as well as advisory services,” said Venter. “As a result, smallholder integration in to the value chain and commercialisation is a challenge. They require assistance with inputs, training, storage and taking the product to market.”
One of the challenges that the government faces in its efforts to support smallholders is that it has historically failed to reach out to them on the ground. In 2010 only 8% of smallholders were visited by DAFF’s “extension officers”, rising to 13% in 2012. Nonetheless, the department sees substantial potential in this segment. In former homeland areas, where around three-quarters of smallholders farm, there are thousands of hectares of unused or underutilised land that could be farmed. The DAFF sees improving access to inputs, mechanisation, technical support and local markets as crucial to catalysing this development.
“Smallholders differ from big farmers in more than just size,” Verschoor told OBG. “They often use different equipment and seed sources, as hybrid and GMO [genetically modified organism] sources are more expensive; their human resource needs are different; and they often use intercropping, which isn’t seen so much on big farms.”
Hans van der Merwe, executive-director of AgriSA, an industry organisation, suggests that many smallholders would be better off in the longer term if they consolidated their holdings into larger agricultural companies, in which they would take an equity stake. This would boost economies of scale, including through the pooling of resources to invest in mechanisation, a capital-intensive process. This, he suggests, is a more viable long-term model than a fragmented sector relying on support from the cash-strapped government.
But Verschoor says that the notion that smallholders will inevitably struggle is misguided. While many farm on marginal soils, others do not. For example, there are thousands of smallholders in the Eastern Cape who farm what could be a breadbasket of the country, but whose potential is constrained by infrastructure in particular.
He suggests that to avoid the economies of scale limitations on low margin crops, smallholders could be supported towards niche, higher value crops such as moringa (which can be used in food and medicine), cassava, macadamia nuts and honeybush tea. Ensuring higher and more secure incomes for smallholders should be a priority above that of making South Africa fully self-sufficient in food production, Verschoor says, pointing out that higher agricultural export earnings can be used to cover increased costs of importing primary agricultural products such as wheat.
Though they make up only a small part of the agriculture sector, fisheries are seen by the Department of Trade and Industry (DTI) as a potential growth industry, given South Africa’s long coastline, productive waters and wide range of marine life. Fisheries output is estimated to be 600,000 tonnes annually, worth R6bn ($518.4m), according to the DAFF’s annual report for 2013/14. Around 16,000 people are employed in the primary fisheries sector and 11,000 in the secondary and tertiary sectors, with an additional 81,000 in industries at least partly dependent on the segment.
The west (Atlantic) coast is particularly productive, with species including tuna, abalone, anchovy, sardines, hake and horse mackerel. On the east (Indian Ocean) side, line fish, squid and intertidal species are found. Maricultre (farming) of species including mussels, oysters and abalone is an important commercial concern.
Managing a Balance
Parts of the sector are bearing the brunt of past overfishing. The DAFF estimates that 68% of commercial line-fish stocks have less than 10% of their pre-fishing populations, while a further 15% of stocks are overexploited. Nearly half South Africa’s marine resources are fully exploited, and 15% overexploited, including high-margin commercial species such as yellow-fin tuna and rock lobster. Monitoring of other species is patchy. Inshore stocks are more vulnerable, and illegal fishing is a problem. The department has tightened regulation on the sector by allocating regularly adjusted quotas on specific species.
While looking to stabilise sea fisheries, the government has been strongly promoting aquaculture – or rather, freshwater farming. While the segment is still small, with output of only 7700 tonnes worth around R700m ($60.48m) and employing 6000 people directly and indirectly, it has been growing at 11% annually. “The marine economy, including aquaculture, has been somewhat neglected in the recent past,” Garth Strachan, deputy director-general for Industrial Development Policy at the DTI, told OBG. “We only produce about 1% of Africa’s aquaculture in GDP terms, and there is potential in the demand and supply side. There are already pockets of excellence where we may even be ahead of the global technology curve, for example the cultivation of abalone.”
The year 2015 looks set to be a difficult one for parts of the South African agriculture sector, particularly maize and the related livestock segments. That this is due to unavoidable climatic conditions experienced across Southern Africa, rather than inherent weaknesses in the sector itself, will be scant consolation.
Nonetheless, a steady recovery is likely once the drought passes, and the most competitive parts of the sector are well placed for a pick-up in agricultural commodity prices. Citrus fruit and other higher-value, export-oriented cash crops – including more niche products – are expected to continue to perform well, particularly with the rand not seen as likely to climb steeply in the near future. Farmers in other segments have a large domestic market to service, as well as the potential for regional exports if trade barriers are eased. Helping smallholders integrate into the value chain will be a test, and the issue of land reform continues to loom large, but there is potential both to boost agricultural output considerably, and help alleviate some rural poverty. Opinions on how best to do this differ, but political will is indeed growing.