07 May 2020 – It is now inevitable that COVID-19 will lead to global recession and the local economy will not be spared. The true extent of its impact is not yet measurable however we are looking at negative GDP growth for the year and potential job losses with the South African Reserve Bank estimating GDP contraction of more than 6%.
The overall impact will exert further pressure on small scale farmers who were already struggling with amongst others rising input costs, limited market access, limited pricing power, critical agriculture and business skills and the list goes on. In this context we are looking at the profile of farmers targeted by the recently announced R1.2bn from the Department of Agriculture and Land Reform. Those are the farmers earning between R20,000 to a R1M per annum through their agricultural activities. The COVID-19 pandemic may worsen the pre-existing challenges but also open new opportunities. Looking at what could potentially be worsened;
- Due to restrictions on local sales of alcoholic beverages, cashflows for small scale wine and spirit producers as well as beer brewers will take a knock. In addition, the restrictions on travelling and gatherings limits extra incomes from social events such as beer festivals, wine tasting events and Agri-tourism.
- Market access and low demand on informal trading platforms– Market access is one of the pressing issues for smaller producers. Now with movement restrictions on consumers and companies closing off, informal traders keep below normal stocks. Most small growers sell their produce on informal markets and therefore reduced activity on these markets does pose a challenge on stocks on hand.
- Fresh produce has limited shelve life and needs proper functioning cold storage to retain marketable quality which is another challenge for small producers. Looking at the livestock, demand for meat may come under pressure given that some consumers are not getting their full salaries with others getting no salaries at all.
- The poultry market is of concern as keeping birds on farms for longer than eight weeks starts to eat into the producer’s profits and may lead to further burden on margins. Other livestock keepers may experience difficulties in marketing their stocks or even have proper access to feed and supplements given possible disruptions along the value chain.
- Labour availability – smaller producers may not have the capacity to transport their labour, therefore some may see themselves having to either cut working hours or operating on limited capacity.
- Farmers depend on events gatherings such as farmer’s days to access information, and with the restrictions on the number of people per gathering, this tool is limited. Network reception issues in rural areas adds to the difficulty in information access.
Some opportunities presented by the pandemic;
- Fuel price decline – this cannot have come at a better time, it is the harvesting season and some farmers are preparing for their fields for planting of winter crops. This will help reduce input costs to operate tractors and other equipment’s. It also reduces transport cost to markets.
- Input cost– input costs such as fertilizers, pesticides and herbicides may ease given that they are by-products of crude oil, helping to relieve some production cost pressure. However, Rand volatility does pose a risk to the upside on prices of these commodities.
- Interest rate cut – this will relieve those farmers who are highly indebted and those wishing to acquire more credit. The current prime lending rate of 7.75% per annum essentially makes credit facilities cheaper. Of course, credit applications will be evaluated using prudent financial measures.
- Higher demand for staple food items – for those producers who have access to markets, they may enjoy benefits of high demand for staple food items such as white maize by-products and some staple vegetables and fruits. However, some commodities have seen a decline in demand due to closure of hotels and limited operation for fast foods and restaurants.
- Government support– The Department of Agriculture, Land Reform and Rural Development (DALRRD) has set aside R1.2bn to assist small scale farmers (turnover of between R20,000 and R1M). These funds will be released in a form of vouchers for mainly inputs. Priority will be given to critical industries such as horticulture, poultry and farmers should take advantage of this fund to help relieve some of the cost push pressures.
With some of the restrictions eased, we will see a slow return to normality as economic activity resume.
Comment by Pertunia Setumo, Agricultural economist at FNB Agri-Business
RSB’s community of members and certified operators around the world are adjusting to the coronavirus crisis – working remotely and responding to challenging economic and social situations, mitigation regulations and navigating new and proposed policy shifts.
We’ve been sharing updates from our own team, as well as RSB members and Participating Operators, to provide a collective overview of some of the impacts the pandemic is having on the global bio-based and circular economy – and the people working in it.
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Headlines last week highlighted an unprecedented fall in oil price prices to below zero. Before becoming overly alarmed or excited by this event, there are several nuances that are important to highlight.
Oil prices are driven by three factors, namely supply, demand and market sentiment. A fall in oil supply will result in the price of oil moving up as by definition it becomes scarcer. Oil supply is linked to oil production, which means the events that could disrupt production will have a positive impact on the price. Similarly, it is linked to the movement of product, thus any event that may impact oil pipelines or seaborne movement will place upward pressure on the price. Higher oil production will push supply upward, driving down the price because the commodity is less scarce.
Demand for oil is driven by economic growth and technological change. Strong growth increases the demand for oil as it drives up energy requirements. A fall in economic growth reduces activity and therefore oil demand. Higher growth drives oil prices up and lower growth results in a decline in prices. As a major theme, technological change seems to be moving to reduce the world’s dependence on oil for growth, both from an energy generation perspective and in transport – where it remains the largest influence on fuel prices.
Market sentiment will dictate shorter-term price movements. This is usually related to the expectation of a possible change in the supply or demand dynamics for oil. For example, fears over lower economic growth due to the impact of COVID-19 prevention measures will have a negative effect on expected demand for oil, which will in turn result in the price falling. The Organisation of Petroleum Exporting Countries (OPEC) agreeing on production cuts or a difficult dictator in Libya blocking exports from certain ports will have a negative impact on supply prospects, which will result in the price rising.
Different oil price benchmarks
There are many different oil price benchmarks across the world, but the two main oil prices quoted are the West Texas Intermediate Crude (WTI) oil price and the Brent crude oil price.
- WTI references oil that is typically sourced from the oil fields of Texas and is known as a light sweet oil because of its low sulphur content and low density. It then travels through pipelines where it is refined in the US Midwest and the Gulf of Mexico. The main delivery and price settlement point for WTI is Cushing, Oklahoma – a tiny town with a large tank farm inland in the US
- South Africa mostly references the Brent crude price, which is different from WTI. Brent is the international benchmark price used by OPEC. Brent crude reflects the price of oil delivered from a variety of North Sea crudes –Oseberg, Forties, Ekofisk and Brent (in the UK). Similar to WTI, this oil is also light and sweet, which makes it ideal for refining. The areas of production to which the Brent crude oil price refers are closer to the sea.
These oil price benchmarks quote the one-month futures contract price for delivery. In the case of oil, a futures contract is an agreement by one party to buy a specific number of barrels of oil from a seller in one month’s time. As the settlement date draws closer, the closer the contract comes to expiry. After the settlement of that contract, the new quoted price will be the next month’s futures contract price.
For illustrative purposes, the last and current contracts quoted for WTI are as follows:
- 23 March – 20 April: futures contract for delivery in May.
- 21 April – 19 May: futures contract for delivery in June.
In the case of the Brent crude oil price, contracts roll over on the last business day of the second month preceding the relevant contract month (for example, the March contract month will expire on the last business day of January).
Oil benchmark prices usually experience a smooth transition when moving from quoting one contract to the next – although an anomaly occurred last week.
Brent crude oil versus WTI
What happened to oil prices?
Oil prices almost simultaneously received a demand-side shock and a supply-side shock in February and March. The demand shock came in the form of the COVID-19 outbreak which led to the unprecedented lockdown or partial shutdown of all major economies globally. This resulted in oil demand falling sharply – as economic activity slowed, oil requirements came down sharply – particularly because people have stopped moving around. The supply shock came as a result of Russia and OPEC failing to reach an agreement on reduced oil production in response to the fall in demand. Saudi Arabia decided to increase oil production in an effort to strong-arm the Russians and to a certain extent the US into a deal to cut supply. This resulted in what is termed a “supply glut”, due to an excessively abundant supply of oil. All this excess oil had to be stored somewhere and as countries kept producing oil at a high rate and demand continued to fall, storage capacity began filling up.
How is it possible for oil prices to fall below zero?
Not all oil prices fell below zero; what fell below zero was the NYMEX one-month futures contract for WTI oil that settled on 21 April. The NYMEX contract is different to Brent crude contracts as it requires that holders take physical delivery of the oil. Since there is very little storage space left for oil in the USA, the holders of the NYMEX one-month futures contracts for WTI oil would have had no place to store the oil once it was delivered. This resulted in an offloading of the contracts in the market on 20 April and, at one point, traders were willing to pay counterparties to take the contracts for delivery off their hands. The price returned to positive territory on 21 April as the June contract was then quoted.
Brent crude oil traded sharply down on the 20th but remained around the $20 per barrel mark. The main difference being that Brent crude oil rarely requires land transport and storage before being moved out to sea. Also, Brent crude oil contracts can be settled in cash, which means that holders of these contracts do not face the same dilemma as is the case with WTI.
Positives of low oil prices
Low oil prices are generally regarded as positive for consumers because this translates into lower transport costs. It is also positive for oil-importing countries, like South Africa, from a trade balance perspective and therefore may have a positive impact on their currencies and economic growth. Lower transport prices and a stronger currency could translate into a more benign inflation profile, which will in turn allow central banks to keep interest rates lower for longer – another positive for consumers.
Depending on the business, lower fuel costs and lower interest rates are generally positive for businesses due to lower costs and lower interest expenses which will improve profitability. A stronger rand will support businesses with a large import component attached to them.
Negatives of low oil prices
Low oil prices are regarded as negative for oil-exporting countries. Lower royalty and tax revenue usually translate into less social spending, which is negative from a consumer perspective and bad for economic growth. In the case of oil-importing countries, the stronger currency resulting from lower oil prices will be bad for companies that export product into other markets. It also has a negative impact on companies whose product is tied to the price of oil.
So … What about Sasol?
Sasol is exposed to the Brent crude oil price because it is an important determinant in final selling prices that the company receives for its products. While refinery production has come down in line with a deterioration in demand, Sasol has hedged 80% of its production for the quarter to June at $32/barrel. At the current ZAR exchange rate this translates to about R600/bbl. Management has indicated that this business is profitable at around R520/bbl but this will exclude required capital expenditure. So for now, the company seems as if it will muddle through this quarter but, as with most oil-exposed companies, oil prices will have to recover meaningfully to ensure longer-term profitability.
Where do we see oil prices going in future?
Oil prices will remain volatile over the next few weeks as uncertainty around the depth of the demand shock following COVID-19 interventions and supply-side negotiations remain erratic. The oil price will only recover sustainably once there is a clearer view of when economic activity will normalise (when lockdown and social distancing measures will end) or OPEC, Russia and the US agree on further supply cuts. While the demand side of the equation remains unclear, we have seen some movement on the supply side. US oil rig counts are already going down and, after agreeing to an initial cut of 10 million barrels per day, it seems that OPEC, Russia and the US are in talks for further production reductions. US shale companies are running losses and most oil producing nations are running large budget deficits at these levels. There is further upside risk in the form of renewed geopolitical tension in the Middle East – which has been a major source of oil price support for decades.
Courtesy: Chantal Marx, Head of Research at RMB Wealth and Investments
30 April 2020 – Agriculture received some positive news this week.
Firstly, it was the further upward revision to the country’s crops estimates with the South Africa’s Crop Estimates Committee (CEC) pegging the 2019/20 crop 17.52 million tons of grain and oilseed crops which is up 2.6% from March and 31.3% higher year-on-year (y/y). At 15.22 million tons, the maize harvest will be the third largest on record having been raised by 2.8% from the previous month and 35% y/y. Encouragingly, soybean output jumped 1.7% from March despite earlier yield concerns to 1.29 million tons which is up 10% y/y. While the sunflower harvest estimate came in unchanged month-on-month (m/m), it is still 10% up on last year. This is good news for consumers as food inflation is expected to remain contained in particularly the bread and cereals which decelerated by 3.8% y/y during March 2020.
Secondly, it is inevitable that fuel prices are going to fall in May and all indications are that it will be by a big margin. This comes at the time when harvesting gets in to full swing for the summer crop areas while the winter crop planting season begins. The implications are reduced costs for farmers from planting, harvesting, and distribution bearing in mind that the distribution of agricultural produce is dominated by road transport with over 80% of grain is transported by road.
Thirdly, the lockdown regulations have been eased and wine can now be transported for the critical export market to ensure that we retain our markets and improve cashflows for producers. After earlier confusion with some of the provinces, the issue of livestock has been clarified and sales can continue unhindered.
Comment by Paul Makube, Senior Agricultural economist at FNB Agri-Business
Picture: Business Maverick
Author: Sasha Planting
30 April 2020 The influential Moosa family, who have lived and traded in Lesotho for more than three generations and whose business interests span fast-moving consumer goods and real estate, is now investing heavily in the cannabis industry. Now, they are on a quest for global partners.
The family owns a large stake in Canna-Q, which secured a licence for the production of medical-grade cannabis in 2019 and is moving ahead with plans to cultivate the crop on land it owns in the Lesotho Highlands, where the air is clear and water abundant.
“This land holds an emotional connection for us. It has been in the family for a long time and we would like to see it developed,” says Shabeer Moosa, director of the Moosa Group.
Since being awarded the licence, Canna-Q has partnered with industry experts including specialist engineers to ensure the proposed production facilities adhere to good manufacturing practice (GMP) certified to European Union standing. Other partners include Vegtech for greenhouse design and Prohibition Partners for research and strategic planning on the cannabis project.
The company now has a commercially bankable business plan which it is ready to take to the market. It has appointed South African firm Uzenzele Holdings as part of its advisory team to secure finance and off-take agreements.
The farming of high-quality medical cannabis – and the production of oils and other offshoots used by the pharmaceutical industry – is seen as a huge opportunity in Lesotho, where economic development is limited and jobs are scarce.
The government has had a legislative framework in place since 2017 and has awarded about 50 licences to develop the crop.
However, the awarding of licences was haphazard, with many being dished out to pals and people without the commercial wherewithal to develop scalable projects.
“Many licences have not been operationalised or commercialised,” says Zahra Rawjee, transaction advisor at Uzenzele. Of those awarded, four are now operational, three are under construction and three are at the level of Canna-Q – in other words, actively seeking investors and off-take partners, she says.
The regulatory regime is also being tightened, with the Lesotho Department of Health actively working to improve control and coordination of the process.
Lesotho was the first country in Africa to issue licences for the production of medical cannabis. Licences are valid for ten years and currently cover the full spectrum of activities from planting, harvesting and processing to export, though this may change.
The result of this regulatory framework was an influx of foreign investment, largely Canadian, into established projects which will export medical cannabis to clients around the world.
The partners at Uzenzele are aware that finding suitable partners and investors during the Covid-19 crisis and anticipated global recession may be difficult, but they remain positive.
“We think we have a good investment case. The upfront project implementation cost is R230-million with a further R10-million to be invested over years three to five,” says Rawjee.
According to the business plan, 4.7 tons of the plant will be harvested in year one, earning R261.5-million before interest and tax; and 19 tons in year five, earning a breathtaking R1.1-billion.
“Raising funds is only part of our mandate,” says Nadia Rawjee, sister to Zahra and a director at Uzenzele.
“To ensure the sustainability of the project, we need to secure high-quality off-take agreements and strategic partnerships in the export market, and identify businesses operating in the fields of medical and pharmaceutical cannabis who are looking for high-quality suppliers. Otherwise, we risk creating a white elephant.”
The cannabis market is still maturing and pricing is not clear, distribution channels are not nailed down and product specifications aren’t yet completely known, making credible investors and off-take partners with a long term approach, technical experience and established distribution channels – specifically into Europe – essential.
The company is also sensitive to the requirements of the Lesotho government, which does not want to see raw material simply exported from the country.
“Drying and extraction must take place in Lesotho, which will ensure additional benefit for the country,” says Moosa. “We have had discussions with the likes of Verve Dynamics, which is a large extraction plant in Lesotho.”
Research by Barclays Bank puts the global market for medical cannabis at an estimated $150-billion, potentially reaching $272-billion in 2028.
This represents a significant new opportunity for countries that create the enabling environment for investment, as well as high-quality suppliers and manufacturing operations willing to seize the opportunity.
Would-be investors in South Africa are forced to watch, largely from the sidelines, as the government vacillates on a policy framework which is yet to be properly developed and implemented.
https://www.dailymaverick.co.za/article/2020-04-29-lesotho-cannabis-producer-seeks-global-partners/?tl_inbound=1&tl_groups[0]=80895&tl_period_type=3&utm_medium=email&utm_campaign=Business%20Maverick%20Thursday%20April%2030%202020&utm_content=Business%20Maverick%20Thursday%20April%2030%202020+CID_128c22317c915036bde8229891425f16&utm_source=TouchBasePro&utm_term=Lesotho%20Cannabis%20producer%20seeks%20global%20partners
