Agricultural Resilience: Can It Continue Into 2023?

It is appropriate to view the 2023 prospects through a retrospective lens that extends wider than just 2022 but includes 2020 and 2021 and provides a fuller picture. We can then conclude 2022 and ask if the resilience we saw may extend into 2023. There have been two tumultuous external events that impacted agriculture during this period.

The first was of course the COVID-19 pandemic, who’s aftereffects extended well into 2022. The South African agricultural sector managed through 2020 with flying colours and we witnessed how fast our client base adjusted to the various measures with little immediate impact on production. Civil and public structures, logistics chains, wholesalers and retailers held hands with the agricultural sector in a manner that ensured that disruption to the food supply chain was as minimal as possible. The agricultural production circumstances were also benevolent, which resulted in the sector outperforming various other sectors in the economy by a wide margin.

2021 continued much the same, with agricultural production holding steadfast and yielding terrific results in the grains and food export sector. At the end of 2021 we saw signs of the serious disruption that COVID-19 caused in international logistics chains, showing its considerable impact in 2022.

Our food exporters experienced severe increases in logistical costs last year. This coincided with Transnet Port logjams, resulting in a substantial proportion of food exporters (specifically grapes and citrus producers) incurring losses. Absa’s client base, some of whom usually experienced the best results in the sector, turned into loss making concerns in 2022. After engaging with many of these clients, the feedback is clear: the greatest threats to cash flows in 2023 will continue to be shipping logistical costs which in some cases increased 300% in 2022. Not only the costs but availability of shipping remains a concern.  The international shipping scenario is exacerbated by South Africa’s port logjams and inefficiencies, with dire results to perishable product exports.

For staple foods, mostly grains, 2022 was fortunately an outstanding year. Grain farmers made good use of the favorable production conditions and produced approximately 16 million tons of maize, with the soybean harvest also reaching a new record. South Africa being self-sufficient in grain production is of utmost importance as the USD import parity prices of these products would make food security more difficult to attain. Our grain production capabilities are indeed a strategic asset for South Africa, as is our agricultural sector.

This brings us to the second tumultuous event, the Russian war on Ukraine. Just as we hoped in the first quarter of 2022 that the disruptions brought about by COVID-19 would dissipate and normalise, this tragedy ensued. There was a direct impact on world food prices, with grains and vegetable oil prices which spiked immediately due to the importance of Russia and Ukraine as exporters of wheat, maize, sunflower and soya. This was of course immediately negative for consumers as food inflation increased drastically across the globe. Consider that this followed the drastic increases in shipping costs around the globe.  In SA we expected grain prices to move sideways from the end of 2021. In  reality it had spiked by the third quarter of 2022 to very unaffordable levels. Whilst this was good for producers, a very real threat to them is the sharp increase in fertilizer prices, of which Russia is a critical exporter, and other inputs such as fuel, energy and chemicals. The long-term impact of higher fertilizer prices bodes ill for food production in Africa, where the bulk of fertilizer imports are financed by governments with obvious fiscal constraints. Whilst South Africa  fertilizer imports are structured differently and mostly facilitated by the private sector, there is a very realistic expectation that chemical and fertilizer prices will lead to reduced production margins in 2023.

The above events were the most important external and international events thrust on South African agricultural producers. Notwithstanding these headwinds, South African producers tried to be nimble and adaptable and remain in production. This brings us to the beginning of 2023, where we must ask if these events are going to normalise during the year. Whilst commodity prices have shown retraction from the highs in 2022, we can expect that they will remain higher than three and four years ago. This will have mixed results for the fortunes of producers and consumers.

Whilst the effects of COVID-19 may be further diluted in 2023 and hope that the Russian war will end , local factors will pose equally significant challenges to South African producers, placing new strain on the country’s agricultural resilience in 2023. In the next article  we will be looking at these challenges.