The impact of the current drought on the South African economy

The impact of the current drought on the South African economy

Paul Makube, Senior Agricultural Economist at FNB

South Africa is now in its second year of below optimal crop production conditions with the current season being the worst on record. The country’s average rainfall for 2015 was the lowest since 1904, according to the South African Weather Service. Temperatures and the amount of rainfall (intensity and distribution) are critical for agricultural production and the security of domestic food supplies.

Although primary agriculture’s contribution to the national GDP has declined over time to just under 3%, the sector’s influence on the upstream and downstream sectors of the economy cannot be understated. It is estimated that agriculture’s contribution could be over 10% if one considers its backward and forward linkages to primary and secondary sectors.

The performance of the agricultural sector is influenced by a number of factors including global and domestic supply and demand, the exchange rate and commodity prices. South African agriculture is divided into three main subsectors, namely livestock (which accounts for 46% of the gross producer value), field crops (28%) and horticulture (26%).

The impact of the drought differs across sectors, but it is particularly severe in the two largest subsectors due to their dependence on dry land grain production.

Livestock production is dependent on grazing and plant-derived feed which are largely produced under dry land conditions. Although some maize is produced under irrigation, it currently accounts for only 24% of the total. In contrast, the horticulture sector is largely dependent on irrigation. The impact of the drought would therefore be less than on the other two subsectors.

The immediate impact of the drought on agriculture and the economy

  • Livestock under extensive production systems has been severely affected as it is largely dependent on grazing. Some producers have lost their stock, particularly in the emerging sector, while others had to cull and reduce their herds. Some of the animals had lost condition and realised lower returns during sales, leading to losses for farmers.
  • The cash flow impact is that there will be less or no income, low cash reserves due to high feed prices, and production and farm expenses to account for as producers start rebuilding their herds. For intensive livestock production systems such as poultry and pork, the impact of higher feeding costs is immediate and margins come under pressure.

However, given the shorter production cycles, there is flexibility to reduce production and rebound later when conditions improve.

    • On the back of reduced production volumes, South Africa might become a net importer of food and this will negatively affect the trade balance. Sectors such as maize and sugar, which would normally contribute to the sector’s positive trade balance, will shift to a negative net trade position in 2016. Recent estimates are that more than 5 million tons of grains such as maize and wheat have been imported which could easily cost more than R22 billion. This is a revenue loss both to the industry and the country.
    • The reduced production volumes and planted areas in the case of grains and oilseed crops will result in serious financial losses for input suppliers due to lower demand for seed, fertilizers, pesticides and herbicides.
    • At a food manufacturing level, the shortage of grains and higher prices will result in higher production costs. Moreover, maize has to be imported due to reduced availability domestically.
    • It is estimated that over 2.9 million households continue to depend on agricultural production and their finances and food security will be severely affected.

How does the consumer fare in this situation?

  • South Africa’s growth outlook has deteriorated with rising inflation and interest rates, a weaker rand and high unemployment. Recently, Treasury has cut the growth outlook to less than 1%. Consumers have been burdened with increased taxes, such as a 30 cent fuel levy and ‘sin’ taxes.
  • The rise in food prices is inevitable given the current shortages and the need to import. The weaker rand is exacerbating the situation as it raises the prices of imported commodities.
  • It is therefore expected that consumers will face hard times in 2016 as food scarcity drives prices higher.
  • The price hikes for certain food commodities will, however, be constrained by affordability, given consumers’ reduced disposable incomes and debt pressures.

What can be done?

While short-term solutions are currently being crafted, the present drought will not only affect this production season, but might also have long-term financial and debt implications for farm businesses.

There are efforts underway to facilitate grain imports and identify external supply sources. While these efforts are short term, the opportunity must be seized to propel agriculture to the next level. The country’s productive capacity must be fully exploited to ensure that we not only produce a surplus but export the grain as well.

Some of the long term strategies that could be adopted include:

    • Supporting farmers with feed, production and labour subsidies in order to keep them on the land.
    • Improving irrigation infrastructure to ensure increased production and sustainability of supplies.
    • Encouraging diversification to ensure alternative sources of income.
    • Exploring crop insurance programmes that can act as safeguards for producers in the future.
    • Identifying and bringing unused high potential land into production, such as that in the Eastern Cape.