*This column first appeared in Business Day on 17 August 2017 

Whilst the discussion in South Africa’s agricultural sector has been dominated by the record grain harvest, the discussion has been steadily shifting towards weather related issues and production strategies. The fast-approaching 2017/18 production season poses challenges as farmers will have to decide on best mix of crops and they will need to apply better price risk management strategies, given the low prices of most agricultural commodities at the moment.

Farmers in the eastern regions of the country will start preparing soils for the 2017/18 production season as early as the end of September 2017. This is because the optimal planting window for crops such as yellow maize opens around 15 October and closes around 15 November. Meanwhile, the optimal planting window in the western regions, which predominately produce white maize, opens around 15 November and closes around mid-December.

Unlike other seasons where farmers normally focus on technical production strategies and input prices, amongst other things, the coming production season will require careful planning due to two major challenges.

Firstly, the 2016/17 record harvest led to widespread losses in maize prices, thus reducing farmer’s profitability levels. At the time of writing, white maize spot price traded around R1 820 per tonne on the Johannesburg Stock Exchange, which is 56% lower than the levels seen in the same period last year and 17% lower than the long term average price of R2 200 per tonne. Also worth noting is that farmers do not necessarily receive the R1 820 per tonne traded price for their grain. There is a subtraction due to location differentials which reduces the farmer’s price by roughly R300 per tonne, to R1 520 per tonne (depending on the region).

Although all grain and oilseeds prices declined due to the large harvest, white maize prices experienced the biggest decline of all grains and could remain under pressure for some time due to weak demand on the world market. Meanwhile, other crops such as yellow maize, soybeans and sunflower seed experienced relatively lower losses and could soon recover owing to strong demand in both the domestic and world markets.

Secondly, the fact that input costs are increasing faster than producer prices presents a challenge, more so as farmers are mere price-takers, with limited means of recouping the costs, other than through higher production volumes, and better price risk management practices such as hedging. The increase in input costs can partly be attributed to the volatile domestic currency. South Africa’s agricultural sector imports a significant amount of its inputs – 80% of annual fertiliser consumption, 98% of annual agrochemicals consumption, as well as fuel, machinery and capital equipment. All of which have a direct impact on farmers’ input costs. For example, fertiliser costs constitute roughly 35% and fuel 11% of grain production costs.

More importantly, even for farmers that managed to make some profits this season, it is not all rosy due to higher debt levels following two successive drought years. In 2016, the overall agricultural debt was at a record level of R145 billion in a dataset starting from 1980. Initially there were concerns that high levels of carryover debt from the 2015/16 drought would negatively affect farmers’ ability to finance their inputs in the 2016/17 production season.

However, farmers were able to fully utilize the favourable weather conditions after the drought, thanks to the agribusiness and finance sectors’ support which facilitated carry over debt and further extension of credit. As a result of this, Agbiz estimates the 2017 total farm debt to levels around R160 billion. This means that the profits that might have been made in some regions this year will largely be used to service the debt.

Overall, a greater part of the aforementioned challenges is beyond the farmer’s control, but they need to be managed through careful planning. One way would be to achieve the best crop mix of maize and oilseeds as oilseeds are expected to offer better returns relative to maize in the next season. This would have to take into consideration the agronomic conditions, as well as farm implements.

In terms of the weather outlook, South Africa could have a normal season with neither La Niña nor El Niño. The South African Weather Service, in its Seasonal Climate Watch report for August 2017, indicated that the 2017/18 summer season will remain favourable with normal rainfall. All other things being equal, South Africa should have a good crop in the 2017/18 season.

The international observers such as the United States Department of Agriculture and the International Grains Council already project South Africa’s 2017/18 maize production at 12.5 million tonnes, which is a 21% annual decline. However, this is well above the country’s annual maize requirement of 10.5 million tonnes and this is quite in line with long term average production.

Whatever decisions farmers make in the coming months, they will most likely have a limited impact in the short-to-medium term on food prices, as the country still has large carry-over stocks from the 2016/17 production season which should last until the first half of 2018.

Wandile Sihlobo
wandile@agbiz.co.za