South Africa’s agricultural sector: The story so far…

Often said is the statement that the macroeconomic standing of the agricultural sector has diminished – and this argument is supported by the sector’s declining share of GDP, which fell from 4.2% in the 1996 to 2.3% in 2015. What is not captured in this narrative, however, is the fact that the value of the agricultural sector has grown by 40%, from R50.5 billion to R71.4 billion over the same period. This translates to a fairly modest annual growth rate of 2.1% per annum over the past two decades.

The modest growth of the sector explains why agriculture’s relative share to the economy has been declining. It is because other sectors, particularly the services sector, have grown at a faster pace from a much higher base.

At this juncture, the sector has just come out of one of the worst droughts in history, following two consecutive years of progressively drier seasons. As a result, the period 2015 through 2016 saw the agricultural sector enter into a protracted recession, enduring eight consecutive quarter-on-quarter GDP declines over the period.

The contraction of the sector has been observed through a number of commodities – for instance, maize production declined by 30% year-on-year (YoY) in 2015, and by a further 22% YoY in 2016, to reach 7.8 million tons, the lowest output in a decade. Sorghum touched its lowest level on record, while high value commodities such as peanuts reached their lowest level in seven decades.

Overall agricultural exports declined by 10% YoY in 2015, and then further by 1% YoY in 2016, in real terms. However, the trade balance for the sector remained positive, as agricultural exports continued to trend above imports.

On the back of the impact of the weather, the sector has been in a perpetual state of uncertainty, emanating from a lack of clear and consistent policy direction. The country’s politics has, by and large, contributed to this policy vagueness and inconsistency, which has been exemplified by land reform policy discussions – with mentions of expropriation without compensation, land ceilings etc. – all of which add weight to uncertainty, and in turn affect production and investment decisions.

In 2017, we are seeing signs of a strong production recovery across all agricultural commodities in the country, with the exception of the Western Cape province, where dry conditions have persisted for some time.

For instance, South Africa is expected to harvest the second largest maize crop on record, estimated at 14.5 million tons – which is an YoY increase of 86%. The soybean crop is expected to increase by 66% YoY to reach 1.2 million tons, the highest output in history.

Even though a strong recovery is expected, there are concerns that it may be short-lived as the risks to El Nino are set to increase the possibility of dryness towards the end of the year.

Amid the uncertainty posed by domestic factors – such as politics, policy, and weather events –  the country’s trade policy has presented both opportunities and threats to the industry.

One the one hand, the SACU-EU Economic Partnership Agreement (EPA) has seen South Africa’s market access being expanded for fresh fruit, sugar, wine, and ethanol – among other agricultural products. However, as the United Kingdom (UK) negotiates to leave the EU, there is some degree of uncertainty over the impact of the Brexit negotiated deal on South Africa’s market access to the UK, post 2018.The UK represents a quarter of the value of South Africa’s fruit and wine exports to the EU, respectively. However, a SACU-UK transitional arrangement could potentially see an expansion of South Africa’s fresh fruit and wines in the UK.

On the other hand, the Africa Growth Opportunity Act (AGOA) has seen a continued growth of South Africa’s exports of macadamia, citrus fruit and wine, among other products to the United States (US). Additional market access for other commodities for South Africa – such as avocadoes, litchis, and lamb – are expected to become eligible for export in the near term.

The AGOA poultry rebate which came into effect in December 2015 has seen South Africa importing 56 700 tons of bone-in chicken from the US between January 2016 and March 2017. Nonetheless, South Africa has imported 47 000 tons in the first annual quota – between 1 April 2016 – 31 March 2017. Even though the 65 000 tons AGOA rebate for US bone-in chicken, is subject to an annual adjustment, the quota will not growth over the period 1 April 2017 – 31 March 2018.

Over the foreseeable future, South Africa’s agricultural sector will continue to operate within the context of increasing uncertainty due to policy, politics, climate change, as well as global trade developments. The performance of the sector in 2017-18 production season will depend on the interplay of the aforementioned factors.

**This article was based on a presentation made to the IDC by Wandile Sihlobo and I on the 18th May 2017 in Sandton, Johannesburg

Import Tariffs Aren’t Just Set Up To Protect Commercial Farmers At The Expense Of The Poor – A Response To Neva Makgetla

The issue of rising food prices has been at the core of the policy discourse for some time, particularly over the past year when the country experienced a perfect storm of a severe drought, and a volatile plus depreciating Rand. South Africa became a net importer of staple grains – such as maize and wheat – and we imported almost a third of our annual maize consumption and half of our wheat. The high level of staple grain imports exposed the market to the exchange rate shocks, which re-enforced the impact of rising food prices.

As food security is an issue of national interest, all citizens are naturally inclined to understand the fundamental drivers of the significant price increases we have witnessed thus far. But in our desire to understand the subject matter, it remains important to appreciate the complexity of food markets, particularly as it relates to price discovery and tariff formulation.

In that spirit, we want to address the fundamental flaws of Neva Makgetla’s argument contained in an article published in the Business Day of the 9th May 2017. In her view, Neva accuses government, farmers, farmer and trader organisations, and private companies’ of being complicit in authoring and sustaining food price increases – through price collusion and the setting of exorbitant import tariffs.

This, of course, is a serious allegation. If that were the case, or if Neva had evidence that large grain traders are having considerable influence on prices, surely the Competition Commission would have observed these tendencies and launched an investigation. Since that has not happened, Neva’s assertions are unsubstantiated claims.

With regards to tariffs, it is important to note that this is a matter of global significance, and South Africa is not the only country that has used tariffs to ensure sustainability of domestic production.

Neva’s arguments demonstrates a clear lack of appreciation of the tariff formulation process itself. Government does not wake up and decide to implement a particular tariff level. There is an intensive, evidence-based, and transparent public consultation process that is conducted by the International Trade and Administration Commission (ITAC) – which ensures that all views of the role players in the food value chain are captured in the tariff decision.

Such processes and decisions can take months, or even years, to complete, and all decisions are carefully crafted to ensure a balanced outcome of consumer and producer welfare. Moreover, decisions related to trade instruments such as tariffs are subject to compliance with World Trade Organisation (WTO) rules, and anyone who is familiar with the process will know that ITAC does not just give favourable decisions to commercial farmers. There are many reviews in the past in which tariff investigations have either led to lower-than-requested tariffs, or worse, tariff applications being rejected outright.

For Neva to now suggest that these tariffs are put in place to favour farmers at the expense of the poor is not only a blatant disregard of the enormous and complex work that is done by ITAC, but also an attack on the integrity of state institutions that are playing a vital social function.

Neva furthers her conspiracy theory by questioning the integrity of agricultural markets in price discovery, and indirectly alleging that the South African Grain Information Service is deliberately and selectively concealing domestic price information with the sole intent of covering up the grain price increases.

If Neva had cared to check the SAGIS website, Grain South Africa, and the primary source – the Johannesburg Stock Exchange, she would have known before she penned her allegations in a national newspaper that this statement is incorrect. With all price information publicly available, it is irresponsible of Neva to make innuendos that play into the fears of the public, using incorrect statements.

Neva also makes an inaccurate statement when she says tariffs are sustaining trading companies. Tariffs add no value to the business of traders, as these tariffs (taxes) are collected by government, and not by traders.

Generally, Neva’s reductionist views on tariffs and food markets show that she has no comprehension of commercial agriculture in general, and the global trading system in particular. For her to suggest that South Africa should give up its right to protect its own productive capacity and food self-sufficiency is absurd. Without tariffs, the wheat, chicken and sugar industries will collapse, not because we cannot competitively produce, but because there is so much distortion in the global market – everyone else is protecting their own and there is no reason why South Africa shouldn’t. Neva, of course, conveniently omits this part of the argument.

Given the nature of global agriculture and food markets, the conversation about tariffs should not consider food prices in isolation, but rather, it should take into account the number of jobs and productive capacity lost if we do not have a balanced tariff decision.

*This article was published in the Huffington Post on the 10th May 2017 by Wandile Sihlobo and I.

Industry remains on edge amid National Treasury’s tariff dilemma

On the 8th April 2016, the National Treasury released a statement which notified industry and other interested stakeholders of a review on the variable tariff formula for wheat, maize and sugar. The expectation was that, after soliciting for public comments, National Treasury would consider them and finalise the review process by the end of 2016, the conclusion of which would lead to necessary recommendations to the variable tariff formula in general, and the wheat duty in particular.

However, on the 23rd December 2016, National Treasury released another statement to inform interested parties that the review process would be extended up to the end of March 2017. It is now May 2017, and there is still no word from National Treasury regarding the conclusion and outcome of the review process.

This has obviously gotten the industry anxious, adding a degree of needless uncertainty to markets. What makes the tariff review process particularly tricky is the divergent views from different stakeholders in the sugar and wheat markets.

A Wheat Industry Perspective

The level of protection for wheat is determined by the difference between the world reference price and the 3-week moving average of the Chicago Board of Trade (CBOT) price, calculated on a weekly basis. When this deviation amounts to more than US$10 per ton for 3 consecutive weeks, a new duty is calculated and a new reference price is set.

The wheat industry has been concerned by the uncertainty that tariff adjustments bring to markets. While the wheat tariff remained unchanged for four years at null between August 2010 and October 2014, it has changed eight times between October 2014 and March 2017.

While farmers are content with the variable formula, traders are concerned that the tariff formula is exposed to currency risk, which has been particularly severe due to the volatility of the ZAR to US$ exchange rate.

Moreover, it takes about six to eight weeks for the tariff adjustment to occur – the lag period between the time the tariff adjustment conditions are met, and the time when a tariff change is effected by law. The average six to eight-week delay in the trigger causes a decline in volumes traded on the South African Futures Exchange (SAFEX). Industry experts point out that this decline in traded volumes on the market leads to a significant depletion in liquidity by a factor of 30%.

Meanwhile, data over the period October 2014 and January 2017 shows that, South Africa’s wheat imports during the “delay months” (320 910 tons) are three times the overall average imports of the other months (120 760 tons). This could be an indication of “stock-piling” by traders seeking to avoid tariff hikes.

Wheat 2

An additional effect of the delay is that, in the past, the timing of the trigger was sometimes overtaken by events in the market, such that tariffs decline (increase) when current market conditions suggest that it should increase (decline). In this sense, the variable tariff model can be, at times, counter-intuitive because the slow trigger mechanism works against fast-paced and quick changing market conditions.

A Sugar Industry Perspective

The level of protection for sugar is determined by the difference between the world reference price (the London No.5 Settlement Price) and the 20-trading-day moving average of the London No.5 settlement price, calculated on a daily basis. When this difference amounts to more than US$20 per ton for 20 consecutive trading days, a new duty is calculated and a new reference price is set.

The sugar tariff has changed 12 times over a 36-month period – between April 2014 and May 2017 (see Chart 2). After the sugar tariff peaked to R3 040 per ton between October 2015 to November 2015, the tariff declined to zero in February 2017. This was the first time the tariff had reached null since April 2014. But since March 2017, the sugar tariff has been R63.63 per ton.

Wheat 1

Like the wheat industry, sugar producers (cane producers and processors) do not have a problem with the existing tariff model. Although they are content with the overall framework of variable tariff formula itself, they hold a few reservations relating to specific variables used to calculate the tariff.

The dollar-based reference price calculation in the formula was based on a distortion factor of 7%, and this was drawn from a 2013 report by Patrick H. Chartenay. Some industry players believe that this 7% distortion factor was not appropriately quoted, as the true level of distortion – which captured both direct and indirect support in the Brazilian market for both ethanol and sugar markets – was in the order of 22%. As such, the dollar based reference price under-stated the true level of global market price distortion.

Sugar market stakeholders further argue that, the variable tariff formula does not contain an inflation adjustment factor, which would ideally capture the rising cost of production inputs. While one might argue that the exchange rate could be a proxy for an inflation adjustment, it is largely exogenous and its volatility present considerable risk.

With sugar producers and processors generally in favour of the variable tariff model, traders remain skeptical for the same reasons that wheat traders have. After peaking to 720 000 tons in the 2013/14 season, sugar imports declined by 24% in the 2014/15 season to 544 000 tons as the tariff increased from null to an annual average of R1 390 per ton. Imports fell further by 15% in the 2015/16 season to 462 000 tons as the tariff increased by a futher 80% to an annual average of R2 508 per ton.

Like in the wheat sector, a series of tariff hikes between April 2014 and October 2015 saw a peculiar trend of peaking sugar imports just before tariff hikes. There is evidence of traders stock-piling non-SACU originating sugar imports which are affected by higher tariffs.

The discussion above reveals two diametrically opposite views related to the variable tariff formula. One the one hand, traders generally favor the a departure from the variable tariff formula. Traders in the wheat market suggest that the it would be ideal to ditch the less predictable “complex variable” tariff formula for a more predictable much “simpler constant” ad valorem tariff. Further arguments to support this view suggest that such an ad valorem tariff could be adjusted every three to five years to reflect the most recent structural market conditions, and should also incorporate an appropriate distortion factor.

The dilemma

On the other hand, traders from both the sugar and wheat industry seem to favour the current structure of the variable tariff formula. Sugar producers have reservations on the variables contained in the formula, namely the selection of an appropriate distortion factor, as well as the need to incorporate an additional inflation adjustment factor, as previously discussed.

Traders, however, prefer to see a more predictable and certain tariff mechanism. Tariff hikes have significant implications on trader’s sourcing decisions. What makes it even more difficult is that the dates on which regulators decide to effect tariff hikes is never known until the day they are published through the Government Gazette. As a result, there are instances in which tariff changes occur when shipments are already in transit, which is problematic.

The divergent views between producers and traders in the sugar and wheat markets present an interesting dilemma for the National Treasury, especially given that both divergent arguments have merit.

Debunking the paradox of land expropriation without compensation

I had a colleague of mine lambast my views in the Farmer’s Weekly of the week of 27 March 2017 where I argued why expropriation without compensation is not a viable alternative. Before I debate my views, it’s important for me to point out that I am a firm believer of social justice, and I believe in land reform as a means to addressing inequality. The only difference between myself and my colleague lies in the manner through which this goal is attained.

Some strong believers of social justice argue that, since land was expropriated from the black population without compensation, the white population that now owns it should be afforded the same courtesy. Though logical, the reality however is not that straight forward. There are two reasons why land should not be repossessed without compensation.

The first reason why it is now imperative to pay for land that was taken for free is that South Africa needs to maintain a delicate system of confidence – otherwise known as the economy. Today, South Africa is the most dynamic and complex economy in Africa – much more sophisticated than what it was back in 1913 when the Land Act was passed.

So complex is this system of confidence that the expropriation of land will in itself not be the problem, but rather, the perceptions around it – namely its weakening of property rights and the perceived risk of capital to be securely invested within the agricultural sector and the rest of the economy.

The second reason, why it is important to pay for land that was taken for free is that, expropriating land without compensation, in effect, strips the land of its intrinsic value. When you make land a free commodity, the system of confidence can no longer accept it as collateral because it will be perceived to no longer hold its value. Some analysts will argue that one could consider collateralizing agricultural output instead of the land itself.

That proposition, however, does not resolve the enormous risk created by weak property rights at farm level. The system of confidence will not afford farm-level agriculture any capital without a significant premium. This premium – otherwise known as the cost of capital, or simply as interest – will adjust upwards because the cost of money has to match the level of risk associated in investing within a system that has weak property rights.

The inherent problem is that, returns in agriculture are generally low, and do not match this risk premium. As a result, the potential risks will outweigh the returns to agriculture. The result is that capital will seek higher returns with lower risks in other sectors of the economy. Without any investment in agriculture, you end up with is land that has no value, and a system of confidence that cannot accept land as a safe haven of investment.

Given the foregoing, my argument is that you cannot restore human dignity through land if such land becomes a dead asset. You cannot empower a landless population sustainably by giving out a valueless asset. Real economic empowerment lies, rather, in giving people a productive asset in which the system of confidence offers its true intrinsic value – you cannot have one without the other.

For many land reform radicalists, the principle of compensating land that was taken away at no cost under the apartheid system is one that sounds counter-intuitive at best, and even anti-poor, at worst. And I know many will reject the rationale articulated in this opinion piece, not on the basis of merit, but ideology.  With due respect to the pain and suffering of the poor, many of whose stories are yet to be told – I believe that as the nation reflects on the failures of past land reform efforts, a new collective wisdom can emerge to craft a new progressive model.

*This article was published in the Farmer’s Weekly edition of the 24th April 2017

Investment in irrigation infrastructure now an integral part of Africa’s Green Revolution

It was not until Anton Earle asked the question, when I learnt that Johannesburg is actually wetter than London. I had to cross check online just to make sure – Johannesburg receives an average annual rainfall of 604 mm per year, compared to London’s 593 mm. But why then does London look and seem wetter than Jo’burg?

Anton, who happens to be a water expert, and also a Director at the Stockholm International Water Institute (SIWI) explained this to be a result of evaporation. There tends to be relatively much less evaporation in London compared to Jo’burg – so moisture is retained for much longer in London.

In fact, as Anton explained, water in sub-Saharan Africa tends to evaporate three times faster than in Europe. Therefore, sub-Saharan Africa requires more water use efficiency, as well as harvesting – particularly for agriculture, in order to achieve food security.

Yet much of African agriculture is almost entirely dependent on rain-fed agriculture, which suffers from the curse of either too much or too little rainfall. The forces of nature hardly ever provide that precise amount of rainfall that perfectly suits agricultural production.

And with extreme weather phenomena becoming more of a new norm, the variation in yields and production have become particularly severe. This reflects the extreme vulnerabilities of production systems in sub-Saharan African agriculture.

Yet there is very minimal investment that has gone into developing irrigation infrastructure. Recent studies point out that 13 million hectares in Africa are under irrigation, which is 6% of the continent’s total cultivated land. In South Africa, 12.9% of cultivated land is under irrigation – which is 1.7 million hectares.

Perhaps part of the reason for this low irrigated hectarage is the exceptionally high levels of investment required to develop irrigation infrastructure. Water experts argue that developing a hectare of irrigation requires up to US$8 000 per hectare. This is well beyond the reach of many small to medium scale farmers, who form the bulk of sub-Saharan African primary agriculture.

Part of the reason for this high investment cost has been explained by the unfavourable topography and bio-physical terrain. What is even more discouraging, however, is that such significant investment will unlikely be made if returns in agriculture remain low.

Analysts believe that doubling area under irrigation will take an investment cost of US$32 billion – which would expand  sub-Saharan Africa’s irrigated area by 16.3 million hectares, with an average return of 6.61 percent.

With that said, and against the reality of climate change, what then becomes of the much hoped for Green Revolution for Africa? Whereas poor infrastructure, lack of political will, and corruption, among other factors, led to a false start of the Green Revolution in Africa, the centrality of climate change to the discourse of agricultural development means irrigation has become an integral part of future growth path of the sector.

This emerging reality seem to suggest that Africa’s Green Revolution in will not follow a path comparable to that of Asia. It will be driven by the evolution and revolution in climate smart agriculture.