According to AgriSA’s Omri van Zyl “We’re talking about food security and social stability. There’s a lot of stu that coincides with this.” The Land Bank, which has equity of R5bn and liabilities of about R45bn, defaulted on some of its debt last month, triggering a cross-default on bonds worth R50bn. Lenders refused to roll over maturing loans.
It funds more than 30% of SA’s farming sector with money it borrows on the open market at commercial rates. Its credit rating was already in junk territory when it was downgraded to junk by Moody’s in January, so it has had to pay more for these loans, making them less aordable to the farmers who depend on them to pay their production costs.
It has sent an SOS to the Treasury for a R22bn bailout, which Van Zyl doesn’t see happening. “Given the Covid-19 challenge we have and all the other state-owned enterprises [SOEs] that are really struggling, government will now have to draw a line in the sand and say we need to privatise the entities we can privatise as soon as possible and get them protable and running on well-oiled wheels.”
Without “drastic interventions”, the country’s food security will be compromised along with the commercial agriculture sector and associated value chains, he says.
“We’re talking 850,000 jobs in primary agriculture, in other words farmworkers. Add secondary agriculture — the processing guys like Tiger Brands, the mills, the guys who process the feed lots, the abattoirs etcetera — to that and you’re looking at 1.5million jobs.”
He says the government has not been serious enough about food security. “Because our agriculture system works very well and our food system works very well, people have been taking it for granted.”
He hopes the Land Bank crisis will be a wake-up call. “I think the smart move from government is to invest in agriculture.”
SA exports 25 agricultural commodities including wool, table grapes and citrus. Loss of demand because of the Covid crisis is being oset by a weaker rand, “so investing in our export sectors will be critical for us to get foreign revenue into this country and create jobs”, says Van Zyl.
AgriSA and its aliates have been working closely with the department of agriculture, land reform & rural development to prepare SA’s harbours to handle more exports. But all this, including the development of emerging farmers, which AgriSA has been heavily invested in, would be endangered by the collapse of the Land Bank and failure to put anything suitable in its place, he says.
“We desperately need a development nance institution, which the Land Bank has not been to date.”
Although it has a developmental mandate, it has had to borrow money on the open market, limiting the rates it can oer emerging farmers.
“Giving a farmer prime minus 1% is not a developmental option. You need at least prime minus 6% or 7% for these guys to start their business, get cash in the business and start growing it.” The Land Bank’s problems stem from an inherent contradiction in its business model, he says.
“On one hand you have a commercial bank imperative, on the other you’re trying to implement a developmental strategy on top of that. But the two don’t work together.” Making agriculture an investment priority would mean the creation of a development bank and injecting cheaper money into the sector by providing tax incentives for farmers who are expanding. “That would re up the agriculture sector a lot.”
Another imperative must be taking expropriation without compensation (EWC), which Moody’s cited among its concerns, o the table. Any appetite there may be to invest in the agriculture sector will diminish extremely quickly once something like that becomes law, he says.
“Just having it on the table contributes to the policy uncertainty in the whole investment environment in SA. Who wants to invest in a country where they can take your land without paying for it?”
He says it was one of the factors contributing to the Land Bank’s present crisis. “It weakened the Land Bank the moment it became policy.” One of the Land Bank’s credit terms is security of tenure, which is why it gives loans against
the title deeds of farms.
“The moment that there’s a potential default on that principle a lot of the lenders to the Land Bank will call up their debt because then the risk becomes too high for them,” says Van Zyl. Even if EWC is as yet not implemented, it is an “uncertainty creator. It denitely added to the risk prole of the Land Bank.”
This would have had an eect on property prices and the Land Bank’s ability to access loans at the best rates because it gears against the value of the land.
“If it falls by 30% it’s a major problem. “You can’t get a full production loan to plant your maize or whatever. We saw this happening after EWC was put on the table.” If it was ill-advised before the Covid lockdown devastated the economy, pursuing it now would be “complete lunacy”.
It would have a ripple eect on investor condence, “which we desperately need to get us out of junk status”, and would aect the agriculture industry’s potentially enormous contribution to the economy’s post-pandemic recovery.
“Suddenly all these issues we’ve been debating for so long have become frighteningly real and the time for debate is over,” says Van Zyl, an MBA graduate and former head of Deloitte’s African agribusiness unit.
“It’s time for decisive action.”
Van Zyl says that under former CEOs Phakamani Hadebe and Tshokolo Nchocho, the Land Bank was probably the best run and most protable SOE in the country. But after Nchocho left in December 2018 “the wheels came o. There’s not much time to sort it out. The next planting season is coming up in three months.” Because our agriculture system works very well and our food system works very well, people have been taking it for granted.
South Africa’s agricultural sector, which is export-orientated, is one of the sectors we had feared would be disrupted by the pandemic. So far, however, there has been minimal disruptions as the agricultural and food sector had been generally operational across the globe. The coming months could be even better as many countries are slowly easing restrictions on economic activity and people movements after widespread lockdowns. In the first quarter of the year, which is a period before the coronavirus lockdowns were implemented across the globe, South Africa’s agricultural trade was vibrant. The country recorded an agricultural trade surplus of US$773 million as illustrated in Exhibit 1 in the attached file. This is up by 16% y/y, with exports having increased at a much higher rate than imports.
The exports were underpinned by grapes, maize, wine, wool, pears, apples, plums, lemons and macadamia nuts, amongst other agricultural products. We expect these products to continue underpinning South Africa’s agricultural exports in the second quarter of 2020, but with some decline in wine exports which had briefly been impacted by domestic lockdown regulations. Citrus will feature prominently from the second quarter data onwards as its exports for this year are expected to reach a record 143.3 million cartons (for the Southern Africa region, mainly from South Africa). The export activity of this particular product has also continued with minimal interruptions during the lockdown period. Similar to citrus, maize will dominate this year; we estimate South Africa’s maize exports at 2.7 million tonnes, up 89% y/y because of higher domestic harvest. This is at a time where we expect increased maize needs in the Southern Africa region, a primary market for white maize.
From a destination point of view, the African continent and Europe continued to be the largest markets for South Africa’s agricultural exports in the first quarter of this year, respectively accounting for 44% and 29% in value terms. Asia was the third-largest market, taking up 19% of South Africa’s agricultural exports in the first quarter of 2020. The balance of 8% value was spread across other regions of the world.
In terms of imports, the leading products included wheat, palm oil, rice, poultry meat, sunflower oil and sugar. For the year, we believe rice, wheat and palm oil will dominate the agricultural import product list. South Africa’s 2020 rice imports could amount to 1.1 million tonnes, up by 10% from 2019, according to data from the International Grains Council. Meanwhile, South Africa’s 2019/20 wheat imports could increase by 29% y/y to 1.8 million tonnes. We could also see an increase in palm oil in the coming months.
In a nutshell, while the pandemic will result in a loss of incomes in various regions of the world, and in turn, a decline in demand for goods; the agriculture and food sector is one of the few that might not be as hard hit. As such, for the year, South Africa’s agricultural exports could increase from the US$9.9 billion of 2019. The key catalysts this year will be the increase in grains and horticulture output and to some extent the weakening domestic currency. Therefore, as in the previous year, trade will continue to be a key driver of South Africa’s agricultural sector, at least in 2020.
The outlook for the following years will, in part, depend on the magnitude of the economic shock of COVID-19. In an event of a massive shock and slow recovery, as some analysts expect, it is plausible that the demand for high-value agricultural products could somewhat be impacted in South Africa’s traditional markets. This also means that South Africa should, after the pandemic, continue its efforts of developing the export market for agricultural products, specifically to China and India.
To ensure that all operations remain up to date with current technology and to address any precautionary measures in light of COVID-19, West Pak Avocado has made recent strides to expand the capabilities of its various facilities.
“Continuous improvement through innovation and integrated systems are core to operating safely, efficiently, and within safe increases in anticipated volume here at West Pak,” explained West Pak Avocado Vice President of Operations Trevor Newhouse. “Between effectively processing year-round fruit and anticipating increased capacity at the height of the California season, last fiscal year, we identified critical opportunities to address our facilities to accommodate such needs.
“The original Cap-Ex (capital expenditure) plans were all pre-pandemic, but upon news of the international outbreak earlier this year, we stepped back to reevaluate our workflow, infrastructure, and additional safety measures. Understanding that our employees’ safety was at the forefront of every decision, we intensified all levels of sanitation programs, including handwashing and hygiene stations across all West Pak facilities. We also added protective dividers to separate employees along the packing line and installed newly designed HID based door systems, which require less human to human contact points. In addition, thermal detection camera systems and facial recognition software alert our internal staff of possible risk detection.
“Yet at the heart of our Operations department is always efficacy. We needed to ensure efficiencies were met, which could be costly to the company and, in turn, create potential slowdowns and possible food waste. Running additional shifts, adding automation, and updating equipment to further reduce unwarranted bottlenecks did the trick. Our continued expansion in new ripening rooms and cold storage capacities addressed safety, growth, and allowed Operations to continually meet key KPI indicators.”
As mentioned by Newhouse, many of the expansion and transformation efforts were centered around the company’s cold chain management systems. Installation of new cold docks, preconditioning rooms, and redundancy in infrastructure and systems were key. West Pak developed additional online services providing a data-driven platform to not only manage its new internal environmental needs but also highlight the company’s abilities to evaluate their performance in meeting both grower and customer requirements.
Keeping with its commitment for increased sustainability other West Pak operational upgrades included refrigerant conversions and migrating forklifts from lead-acid batteries to lithium-ion batteries. “As stated, continuous improvement entails environmental impact as well; this is also a core strategic area we focus on when enhancing anything we do,” mentioned Newhouse.
“West Pak is committed to our employee’s health and safety while continuing to grow our business,” added West Pak Avocado CEO Mario Pacheco. “With the completion of our recent expansion, we are well-positioned not only to support our customer’s growth in the years ahead but also to ensure the health and safety of our workers. We see it as part of our job to help keep Americans healthy. That’s why our commitment to supplying fresh avocados to our customers is as strong as ever.”
Courtesy: West Pak Avocado
South Africa exported 12,282 tonnes of blueberries in the season just ended, broken down into volumes shipped to the United Kingdom (46,2%), Europe (46,10%), the Middle East (2,57%), the Far East (4,90 %) and Africa (0,02%). These volumes confirm that the South African industry is one of those that has experienced one of the fastest growth in the region, both in terms of the number of hectares planted and the values obtained for its production, which is in line with the strategic political line designed by that country. to privilege and support high value crops, for export, and intensive in the use of labor. These exports grew from 1000 billion rand (USD 54 million approx.) In 2018 to more than 1500 billion rand (USD 81 million approx.).
New projects and more plantations
As a frame of reference, the South African industry closes the season by increasing its blueberry exports and exceeding its economic returns.
This increase in exports, which has meant growth of more than 1000% in the last decade and 50% in the last two years, is due to the fact that more companies and producers are joining the crop. With more hectares planted, with more technology and better knowledge, which is reflected in this increase in the industry and in the use of higher employment rates, which directly contributes to the development of the nation. By 2023, it is projected to have 4700 hectares planted.
Booming industry
The South African blueberry industry started in the Lydenburg district of Mpumalanga during the 1970s, and in 1987 blueberry cultivation reached the Western Cape. The first recorded batch of blueberries exported from South Africa was in 1992, which was valued at 9780 rand (approx. USD 530) and shipped to Zambia. In 2001 this value reached 5 million rand (USD 270 thousand approx.) And in 2018 blueberry exports exceeded the mark of 1500 billion rand for the first time, soaring to date over XNUMX billion.
In terms of economic growth, the blueberry industry has significantly outperformed other fruit industries, increasing its value exponentially for a decade, doubling its growth as an industry in recent years and doubling its economic income in the last year of production and exports. Within the family of berries cultivated in South Africa, blueberry production is the largest, occupying about 74% of the entire planted area. The Western Cape has the highest proportion of blueberry hectares at 60%, followed by Limpopo (15%), Northwest (10%) and Gauteng (8%). According to SABPA executive Elzette Schutte, the projections for the South African industry by 2023 are to reach a production of 50.000 tons, which would mean reaching 35.000 tons in exports, placing the South African industry in the first five blueberry exporting countries in the world.
Modern industry
Most blueberry farms are planted under shade mesh structures (43%) or outdoors (40%), compared to 17% under plastic cover, however these percentages are rapidly changing with new investments and new project implementations, since there is a strong drive towards planting under plastic mesh and covers to guarantee high quality fresh products, with cutting-edge technologies to ensure efficient water management, pest and disease control, and to protect farms from sunburn, wind, hail and bird damage.
In this perspective of implementation and use of new technologies, many producers are converting their management and adopting cultivation techniques in bags or containers with substrate, achieving better control and higher plant density, in addition to acquiring newer varieties, achieving yields of above 10 tons per hectare, which is the current average production in the area.
Courtesy: https://blueberriesconsulting.com
“Back in the day the exchange rate was R2 to the US dollar”
The rand tends to weaken over time and to understand this phenomenon, it is important to look at some of the basic drivers of exchange rates over time. For ease of reference we stick to the rand against the US dollar, but the same principles apply to almost any currency pair.
• Differentials in inflation: A country with a consistently lower inflation rate relative to another country exhibits a rising currency value over time. This is because purchasing power increases relative to other countries. The US has a consistently lower inflation rate than South Africa, so the rand tends to weaken against the US dollar over longer periods.
• Differentials in interest rates: Higher interest rates attract foreign capital and cause the exchange rate to strengthen. However, higher interest rates usually coincide with higher inflation rates, which will mitigate this positive impact.
• Current account deficits: The current account is the balance of trade between a country and its trading partners. If the current account is in deficit, it means that South Africa is selling more rands to buy foreign currency to pay for foreign goods and services, than our partners are buying to pay for South African goods and services. South Africa generally runs a current account deficit, which coincides with a weaker rand.
These factors will likely continue to drive a weakening of the rand against the US dollar over time. However, the rand occasionally moves too far in one direction or the other, which could result in major short-term deviations from its expected trajectory.
The rand has depreciated 30% this year
Shorter term, exchange rates are also driven by market sentiment or perceptions of a specific country as an investment destination. When international investors are jittery, they tend to stay away or disinvest from countries that are perceived as higher risk. South Africa is an emerging market and tends to experience outflows when there is uncertainty in global financial markets. South Africa has also lost appeal as an investment destination due to rising public debt, weak economic growth, and sovereign credit rating downgrades over the past few years. The trading in and out of South Africa’s financial markets are termed “portfolio flows” and they have been negative, particularly over the past four months, which has placed pressure on the local currency.
Portfolio flows tend to be quite volatile and an improvement in global investment sentiment or an improvement in the relative attractiveness of a country as an investment destination could see the country’s currency appreciate quickly, particularly if it has moved away from its natural trend.
Where do we expect the rand to go?
Predicting day-to-day movements in exchange rates are nearly impossible – particularly because sentiment and other “unknowns” like the news cycle plays a large role. Due to the longer-term drivers summarised above we expect the rand to continue weakening over time. There are other reasons why we could see a strengthening in the rand over the medium term:
• Real yields are attractive: South Africa’s government bond yields are higher than many other countries after adjusting for inflation. In the US, yields on US 10-year treasuries are comparatively much lower after adjusting for inflation. This may result in portfolio flows to South Africa, which could support the rand. This will be particularly prevalent as the COVID-19 pandemic subsides.
• An eventual improvement in sentiment: While the exact timing is unknown, sentiment does tend to recover after shocks and emerging markets could return to favour.
Risks to this view
A potential further weakening of the rand could occur should sentiment worsen (for example if there is a second wave of COVID-19 infections) or if this event-driven global recession triggers a prolonged structural or cyclical downturn.
Insights provided by:
Chantal Marx, Head of Research at RMB Wealth and Investments
