An environment in flux – time to be vigilant
We all face the reality that the world around us is changing rapidly. So it doesn’t help that we look the other way or, like an ostrich, put our head into the ground. There will be challenges that we have to manage, problems that we have to solve and, most importantly, new opportunities will be up for the taking. What follows are some of the significant current risk factors that any agricultural businesses should consider and tactically plan on how they will be managed. Some might require contingency plans, whilst others require immediate action and potential changes in business operations. The tactics employed will differ for each agricultural business and even for different agricultural sub-sector.
Changing Economic Muscle and Geopolitics
According to the World Trade Organisation[1], there has been a global shift towards more inward-looking trade policies, with the number of Regional Trade Agreements (RTAs) globally increasing from 238 in 2012 to 355 in December 2022. Countries and regions are therefore seen to be placing more emphasis on self-reliance. The result is, amongst others, a shortening of Global Value Chains (GVCs) and the increased threat of more protectionist policies such as Non-Tariff Measures (NTMs). Undoubtedly, more stringent Sanitary and Phyto-Sanitary (SPS) measures will threaten South Africa’s agricultural exports. For example, recently, the European Union’s (EU) new cold chain storage regulations negatively impacted South Africa’s citrus exports and increased business costs.
The African Growth and Opportunity Act (AGOA), an Act that gives South Africa (and other African countries) preferential access to the United States (US), is set to expire in 2025. It will be vitally important that South Africa position itself tactically to take advantage of the opportunities provided by AGOA.
However, South Africa faces the conundrum that the government’s policy orientation is squinted. South Africa’s economic policy orientation is aligned Westward, whereas politics is looking Eastward, which could compromise future trade policy negotiations. This situation must be managed carefully.
The changing geopolitical landscape also influences executives’ economic and business decisions globally. This affects how business is conducted, how value chains operate and in what direction money flows. Recent years have seen Brexit, increased economic tensions between the United States and China, and, more recently, the Russian-Ukraine war. The latter has disrupted energy security globally, resulting in grown wheat and sunflower oil prices and fertiliser prices that have pushed inflation higher, prompting higher interest rates. Consumer spending globally is under pressure. This impacts profitability, access to finance and businesses being cautious about investing. Putting the highest quality products on the market is thus not negotiable, but this must be done in a financially feasible manner.
Energy and logistics
Power rationing is one of the most prominent immediate threats faced by the agricultural sector (primary and secondary) in South Africa. According to BFAP, a third of the total farming income in South Africa is dependent on irrigation. Irregular, insufficient and poorly timed irrigation raises costs and threatens crops’ size and quality. A primary concern going into 2023 is the decommissioning of power plants that could result in a loss of 7 000 MW. Although renewable energy plans are in the works, they may only be able to bring in an additional 2 000 MW to the grid. According to André de Ruyter, approximately R1.2 trillion is required to invest in generating, transmission and distribution capacity by 2030 to ensure a stable electricity supply. The full extent of the impact on agriculture is not yet clear regarding costs to individual agricultural businesses, but it will stifle growth with the increased cost of doing business. It will require a rethink by each business owner of the energy mix to be utilised, which should result in more efficient energy use in the future.
Logistics have become a significant driver in increasing business costs due to shipping delays and container shipping costs. Four-fifths of global merchandise trade in volume is carried by sea, with containers contributing to approximately 35% of the total books and 60% of the total value. Some of the reasons for the increased shipping costs globally can be attributed to[2]:
- COVID-related demand increases,
- Supply chain disruptions,
- Labour issues (disputes and availability),
- High diesel prices,
- Transport related logjams,
- Bottlenecks in harbours,
- Freight forwarders have more considerable negotiation power, and
- Slower production of new containers since 2019 (overall growth in 2019 was 11%, and in 2021 was only 5%).
On a more positive note, there has been some downward pressure on shipping prices, mainly due to lower discretionary demand than during COVID, seasonality, inflationary pressure impacting consumers and a recessionary economic environment. Therefore, shipping rates are expected to fall in 2023 but will unlikely fall to levels before the COVID outbreak (See diagram by Freightos).
Logistics infrastructure remains a significant concern. In South Africa’s case, the Container Port Performance Index (CCPI), an index that ranks 370 ports around the globe according to their efficiency, timeliness, and numerous other factors, ranks South African ports fairly lowly. Durban Port is 364, with Cape Town Port ranked 365 according to the CCPI. Unfortunately, South Africa’s ports are hampered by long waiting times, which add to business costs; waiting fines are sometimes charged. Fortunately, there are several initiatives, including the fruit industry, to address this issue.
When assessing road quality, the Road Quality Index (RQI) of the World Economic Forum is used to compare the quality of the road infrastructure within a country according to several variables. South Africa scores somewhat moderately in the RQI and ranks 51 out of 141 countries globally. Maintaining the roads and improving on them will be an essential driver for growth in not only the agricultural sector but the whole of the South African economy.
Climate Change and Greener Economies
After nearly thirty years since the signing of the United Nations Climate Change Conference (UNCCC), there has been a 60% rise in CO2 emissions from the energy sector[3]. Most economies must reorient their energy matrix towards cleaner and low-carbon energy.
The South African agricultural sector is a minor contributor to energy-related CO2 emissions, contributing only 2% in 2019[4]. However, reacting to the constant threat of climate change remains essential to minimise the risk of droughts, rising temperatures, and the increased frequency of heat waves and severe floods.
In response to climate change, there appears to be an increased dominance of ‘Green’ parties in the legislature. The EU Green Deal (EDG) and Farm 2 Fork (F2F) Strategy are examples of how the ‘Green’ parties in the EU use institutions to tackle climate change. The F2F strategy aims to reduce the use of fertilisers and pesticides by 20% and 50% by 2030. This will have a significant impact on countries exporting to the EU.
South African farmers need to be able to pivot towards ‘greener’ production practices to ensure the sustainability of their farming practices and to satisfy consumer demands, especially in export markets such as those in Europe (especially for South Africa’s fruit exports). The EU will require imports of agricultural products for the foreseeable future, which is a positive for South Africa’s agricultural export sector. However, imported foods into the EU must abide by the EU’s environmental and health standards. The EU will “ensure full implementation and enforcement of the trade and sustainable development provisions in all trade agreements”.
Input Costs
Input costs are at extremely high levels globally, and South Africa is highly dependent on the global market for its fertiliser and chemical inputs. 2017 for example, South Africa consumed 240% of its local fertiliser production capacity, up from around 120% in 2000[5]. This increased dependence on international markets and increasing international fertiliser prices expose South African agriculture to massive input price shocks (poor exchange rates do not aid in the situation). Global geopolitical tensions (Russia-Ukraine war, China-US trade war) significantly increase fertiliser, chemical and fuel costs.
Domestically, the minimum wage in South Africa has also increased, placing additional pressure on the South African agricultural sector, rising from just R6.74 in 2010 to R23.19 in 2022. Another challenge facing fruit farmers is the high cost of packaging in South Africa, a reasonably concentrated market with only five major players in the packaging industry.
Socio-economical issues
According to Investec (2023), the South African economy is projected to experience poor year-on-year growth of just 0.6%, placing pressure on consumer spending ability. A significant concern is the official unemployment rate in South Africa which was 33.6% by the second quarter of 2022 and is expected to increase to 38.64% by 2027, according to Stats SA (2022). High unemployment levels subsequently increased crime within South Africa and heightened tensions that could fuel civil unrest. Civil unrest remains one of the significant risk factors for the country and agriculture in particular due to its rural setting. Sandy la Marque of Kwanalu estimated the damage of the civil unrest during the 2021 riots in Kwa-Zulu Natal (KZN) at nearly R900 billion.
Last thoughts
To conclude, despite the seemingly insurmountable challenges faced by the South African agricultural sector, particularly the export sector. South Africa’s agriculturalists have shown resilience in the past and will show it going into the future. They will emerge much fitter and better and hence be more competitive. With this, we leave you with two powerful thoughts. The one is by Brand Pretorius – “As business people, you can’t wait until the storm has passed; you have to learn to dance in the rain.” The other is by Nokia CEO Stephen Elop; when he announced the acquisition of the once mighty Nokia by Microsoft, he ended his speech saying – “we didn’t do anything wrong, but somehow, we lost.”
This article was first published in the May 2023 edition of Die Krat, the bi-monthly newsletter by the Canning Fruit Producers’ Association (CFPA). Expressions of opinions, claims, and statements of supposed facts do not necessarily reflect the views of Agri, incorporating Die Boer/The Farmer editor or publisher. While every effort is made to report accurately, Agri, incorporating Die Boer/The Farmer, the publisher of the editor, does not accept any liability regarding any statement, advertisement, fact, or recommendation made in this magazine.
Sources:
[1] https://www.wto.org/english/tratop_e/region_e/region_e.htm#:~:text=As%20of%201%20December%202022,the%20GATT%20or%20the%20WTO%3F
[2] Freightos, 2022; The Economic Times, 2022,
[3] IEA, 2021.
[4] Climate Transparency, 2020
[5] World Bank, 2022