‘From July we could see food price inflation cooling off’

FIFI PETERS: The agriculture sector has been one of the brightest sectors in the economy for the past two years, growing despite the broader slowdown in the rest of the economy. But the resilience of the sector could soon be fading and it could soon be tested, given the fact that we have reports of lower harvest expectations for some crops. There’s the additional challenge from foot-and-mouth disease, as well as the swine flu outbreaks.

To discuss how much slower the agricultural sector could grow by this year I’m joined by Wandile Sihlobo, the chief economist at the Agricultural Business Chamber of South Africa, Agbiz. Wandile, I’m assuming growth here – let me know if that assumption is wrong. Given that the agricultural sector grew by 3.6% in the first quarter, when you are talking about challenges on the horizon and the prospects of a slow down just how slow will it go this year?

WANDILE SIHLOBO: Thanks for having me on, Fifi. I actually think this year the numbers are going to look bad. We are looking at a contraction of anywhere between 3% and 5% for the sector. I think much of it is what you have highlighted. One of the key crops, when we think about growth in the gross value added in agriculture, is maize. That is down 10% on a year-on-year basis.

The livestock industry is being hammered by the foot and mouth disease, and when you think about the agriculture and the economy, the livestock sector makes up roughly half of that. If it’s not in good shape, and you have the challenges also within the field crops sugar and maize, that is going to give us that contraction that we are seeing this year.

FIFI PETERS: That’s quite a material turnaround from the growth that we have seen in the past two years, the growth that we’ve seen so far at the start of 2022. So let’s just break down some of those factors, beginning with what is happening with lower harvests. I mean, what has this to do with the Russia/Ukraine war, or other factors like load shedding?

WANDILE SIHLOBO: I think one of the key things that I should add to the factors that I’ve mentioned is the fact that we have the base-effect story that is going to be a mix onto this, because we’ve had agriculture growing solidly for two consecutive years. Now, coming out of that solid growth and expecting this contraction in some of the summer crops like maize, sorghum and the others, it’s not that the harvest per se is in worse conditions because, while I speak about maize declining by 10% on a year-or-year basis, if you think about it on a long-term basis to say, okay, the harvest that we are expecting this year, for example, which is about 14.7 million tons of maize – how does it compare to the long-term average?

The long-term average is about 12.8 million tons. So we’re well above those levels. But statistically, when we look at last year and this year, of course, we’re going to be seeing that contraction.

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In addition to that, you will remember that in the KZN area those devastating rainfalls caused a bit of a disruption in the sugar industry. And of course in the livestock industry at the start of the year we saw had some foot-and-mouth outbreaks but, as we speak today, it’s at a record level where we have roughly six provinces or so with this outbreak. Of course this negatively affects our ability to export. Some of the factors are the ones that are related to the higher feed costs to the sector and the poultry industry.

So it’s a combination of all of those things that makes us a bit more pessimistic about the growth conditions of this sector this year.

FIFI PETERS: What is it about this year’s foot-and-mouth disease outbreak? I see that it has gone beyond the traditional areas in which it was known to be found. You did speak about the impact on our exports; just flesh out the detail a little more there in terms of who now doesn’t want our meat because of this.

WANDILE SIHLOBO: I think the key thing that’s well for us to highlight is that there is this foot and mouth disease in the country, but this doesn’t mean that now we are at risk or shouldn’t be touching beef or anything of that sort. Also it doesn’t mean that it’s spreading per se as a wildfire across all of the farms. But what has happened is we’ve seen this outbreak happening at certain feedlots or certain farms, and all of those that have been identified have been quarantined now.

But in line with international regulations, the moment there are some of these outbreaks, you tend to be outside the export markets for a certain period.

For example, this could be anywhere – eight months or a year. And of course, some of those exports then unfortunately are indiscriminate, in a sense that you find that even on new exports, in countries like China place a temporary ban on that. And that rural…… industry is suffering as we speak, because China is one of the biggest markets, taking up about 70% of our rural exports, for example.

In the beef industry we’ve been growing our exports progressively, particularly in the Middle East and the Far East area over the past couple of years. But now with this temporary ban, it does mean that we could see a bit of heat on the exports as far that is concerned. So it’s really those dynamics. But the safety and the availability of the red meat in the country – that is still, as always, available and consumers will continue to enjoy that. It’s just the heat on the producer side.

FIFI PETERS: And then, as you mentioned, added to this really toxic cocktail for the agricultural sector right now is the swine flu situation and the bird flu outbreaks. Just how much more costly is this for the sector right now? I know it’s not new. It happens quite often, but it is happening against all the other things that are happening at the same time. How costly will it be this time around? That’s the burden – the swine flu?

WANDILE SIHLOBO: The numbers would differ as folks work out some of these things. But I think the most important thing here is that, as we see the frequent occurrence of the biosecurity or animal-diseases issue, it calls [it] into question to say [to] the private sector and the South African government, ‘How do we work together on putting in measures that ensure that when there is an outbreak there are control measures?’

Animals don’t continue to move around the country and potentially spread that – which is somewhat what we are seeing now. But the control measures, as well as the capacity within the state and to an extent within the private side, and the private sector side has not been as attacked as we would’ve liked. But now what is encouraging is that the minister of agriculture and some of the livestock players are beginning to sit down at the table to ask how we resolve this.

There’s a certain report that the minister sent a couple of experts to look into the making up thereafter [of] recommendations on how we control these occurrences of animal diseases going forward. That report has been completed. We expect it to be released. Once the industry engages it, we’ll set up the practical steps of rebuilding our biosecurity side in the livestock industry, and I think we’ll be on a good footing. That’s what we are focusing on from an agri (?) as well as from the livestock sector at this moment.

FIFI PETERS: I’m looking forward to the publishing of that report and engaging you on it at a later stage. But in the meantime we are talking about an agricultural sector that’s going to cool off compared to what we have seen in the past two years. We’ve got challenges on the table that we’ve addressed, like the high feed costs, the lower crop that’s expected for some crops. We’ve got the swine flu, as well as the foot-and-mouth disease. Ultimately, what does this all mean for prices, for the price of my shopping basket, your shopping basket, the listeners’ shopping basket when they go do their groceries at the end of the month?

WANDILE SIHLOBO: I would say to close off on that and move to the prices side, the important point for me is that, although I’ve highlighted these negative things, it doesn’t mean that the agricultural sector is a place that shouldn’t be touched, that is in a bad condition now. But it just clarifies the complexities that we do face in the sector that has been a shining star for quite some time.

As we think about it from a consumer perspective, that message becomes even clearer because South Africa still has sufficient supplies for our consumption and even our neighbouring consumption in various export markets – for example, the maize that I mentioned at the start. We still estimate that we’ll have about 3.2 million tonnes of maize for export markets. And in all of the other commodities that we produce, we have sufficient supplies for ourselves.

But of course what’s inescapable is the price story. We expect food-price inflation to remain elevated until around about July this year. And then from July onwards we could see food-price inflation cooling off towards the end of the year.

The key products that will be leading the cooling-off of the food basket are foods, vegetables and, to a certain extent, meat, while grain-related products and vegetable-oil products will remain elevated for some time.

In our view, food-price inflation could average anywhere just under 6.5% this year, which is in any case not much of a change from last year, where food price inflation averaged about 6.5%. So it’s a cooling off because the main number that we have with us was 7.8% year on year.

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FIFI PETERS: Are you saying that that is the peak, the May number?

WANDILE SIHLOBO: The May number is not the peak. We expect food-price inflation to peak around July, and thereafter we will see a bit of a cooling off. So the next two months or so will still put out some upside pressure. I think the fuel numbers that you saw just earlier today speak to those costs that are still coming. And of course the grain prices that are elevated we are still going to see over the next two or three months of this year.

FIFI PETERS: So that’s beyond 8% in July potentially for food inflation?

WANDILE SIHLOBO: In July you could see a number that just nudges marginally above 8% or [just] 8%, but thereafter you will see a moderation. But I think the most important thing is that for the year we expect food-price inflation in totality to be contained at anywhere just under 6.5%. I think that’s the most important thing. And the fact that for South Africa, unlike the world – whereby you see a general uptick in all of the products, or most of the products in the food-price inflation basket – for South Africa in the second part of the year we expect that basket to show some variation where those fruits, meat and vegetables will soften, while the rest of the products could remain elevated. So not everything that is in your shopping bag would be going up, but of course how you feel and the cost will depend on what you put in your basket when you go shopping.

FIFI PETERS: Sure. Got you. The main message –brace yourselves – is food prices are going to remain high for some time. We could see a peak of just over 8% in July, but we should see that come down and reach an average of around 6.5% for the year. I hope you’re right.

But we’ll leave it there for now. Wandile Sihlobo is the chief economist at the Agricultural Business Chamber of South Africa.