Autumn Edition
AgriTrends 2023
All data in this document is the intellectual property of Absa Bank. Although everything has been done to ensure the accuracy of the information, Absa Bank takes no responsibility for actions or losses that might occur due to the use of this information.
04
CHINA'S EMERGENCE FROM ZERO-COVID
02 INTRODUCTION AND OVERVIEW
05. Will Chinese economic recovery serve as an injection for global growth in 2023 and beyond? 08. What could be the possible effect of China's re-emergence on global marcoeconomic factors? 10. What do the dynamics discussed imply for South African macroeconomic variables? 12. What are the implications for South African Agriculture? 14. Taking a long-term view
About this report
How will local and global conditions impact the agricultural industry? AgriTrends offers insight from industry experts, enabling agribusiness stakeholders to navigate the future. The AgriTrends 2023 Autumn Edition looks at the impact of renewed Chinese growth, shifts in consumer spending, persistently high production costs, the effects of load-shedding, and the need for renewable energy. Through shared insight, the industry can continue to navigate disruptions and uncertainties and grow a stable future for South African agriculture.
52 SOLAR SOLUTIONS PROVIDE RESILIENCE
16 LIVESTOCK AND GRAINS
52. The effect of load-shedding on agriculture 56. Increasing costs of running businesses
38 HIGH-VALUE EXPORT INDUSTRIES
18. Beef market dynamics 20. Beef look ahead 22. Lamb market dynamics 24. Lamb look ahead 26. Pork market dynamics 28. Pork look ahead 30. Poultry market dynamics and look ahead
38. Overview 44. Avocado look ahead 46. Citrus look ahead 48. Blueberries look ahead 49. Macadamias look ahead 50. Table grapes look ahead
32. A view on grains 37. Grains look ahead
Introduction and overview
prices. At the lower end of the meat protein price spectrum,
poultry products are however still
showing firm prices. This is on the back of higher world prices and a weakening
exchange rate. These divergent price trends in meat products are bound to result in short-term consumption shifts as consumers seek bang for their buck. Such consumption shifts were also apparent in 2022 when pork made inroads in the market share of the broader meat complex in the months in which pork was more affordable than chicken. Uncertainty in meat and livestock markets will also be
Since the previous edition of our AgriTrends in October 2022, the environment and markets in which we operate have changed drastically and sentiments within the South African agricultural industry have turned negative. Globally, the lift of the Chinese zero-COVID policy has resulted in a more positive outlook for global economic growth, whilst locally, more frequent and elevated stages of load-shedding have complicated the way we do business and depressed economic prospects for the year, with economic growth likely to be below 1%. In this version of AgriTrends, we devote our first chapter to the coverage of the implications of higher Chinese growth and touch on what this could mean
further amplified by supply factors. Most notable here is the effect of load-shedding on production throughput and cost, where our intelligence shows back- logs at abattoirs. This will result in longer feeding times and fewer production cycles within a year for subsectors
for agricultural commodity markets and roleplayers in South African agriculture specifically. In Chapter 2, we consider the effect of high-interest rates on the consumption of meat in South Africa as pressures on consumers' disposable income are weighing on red meat
2
between different value chain stakeholders are key, and it is in this spirit that we share our AgriTrends insights. All stakeholders in the various nodes of the agricultural value chains stand to benefit from nurturing business relationships through time. At Absa AgriBusiness, we also implement these principles in our business through longstanding relationships with key industry partners and service providers. We are excited to extend this culture to our customers and also cement long-term relationships with them.
such as poultry. Positives related to livestock production are that feed prices are easing and in this regard, our section covering grains explores how the current factors at play could affect the timing and quantum of downward trends in wheat and maize prices. Chapter 3 considers some of the ongoing realities that producers and value chain players in high-value export crops need to deal with and explores how current issues can persist into the future. The effect of load-shedding on operating costs combined with the associated risks that go along with prolonged electricity disruptions makes investment in renewables essential. To further enhance the business case for this, we show how increasing electricity costs in South Africa
affect the economics of renewable energy investments in Chapter 4.
The chapters covered here all highlight that the industry would continue to navigate disruptions and uncertainties over the coming months. Our experience is that in uncertain times, partnerships, long-standing relationships, and communication
3
CHINA’S EMERGENCE FROM ZERO-COVID There is increasing evidence that agriculture is a key contributor to the environmental issues of our time. These include a loss of biodiversity, water and soil pollution, and the emission of greenhouse gasses. The latter is also the cause of what is colloquially referred to as global warming and although consumer and investor pressures are mounting to address the broader problems related to Environment, Social, and Governance (ESG) issues, the climate agenda has played center stage in this. This section, therefore, deals with climate change. More specifically, we consider how it is defined and regulated and what the risks and opportunities associated with it are for South African agricultural producers. How China’s emergence from zero-COVID can shape economies and markets over the coming months What happens in China does not stay in China. This was clear from global economic recoveries over the past decade. China played a key role in getting global growth out of the doldrums after the 2008 financial crisis and the global commodity price downturn in 2015. It also served as the catalyst for rapidly increasing commodity prices in 2021 and 2022, as the Western world’s demand for Chinese manufactured goods increased as pandemic lockdowns in the West eased. In light of this, and with China emerging from its zero-COVID policy after three years, we explore the following questions: What are the implications of this for agricultural markets around the globe and in South Africa? What is the effect of this on global and local macroeconomic variables? Will the Chinese economic recovery after COVID-19, again serve as an injection for global growth?
4
Growth in the Chinese economy is expected to be a key contributor to global growth in 2023. In its January release of global growth prospects for 2023, the International Monetary Fund adjusted their views on global economic growth from 2.7% in October 2022, to 2.9%, largely underpinned by an improvement in Chinese growth prospects from 4.4% to 5.2% for 2023.
The features underpinning current growth in China are however likely to result in more modest growth than in previous economic recoveries (2008 and 2015). It is also likely to have a smaller global effect compared to previous booms.
Will Chinese economic recovery
serve as an injection for global growth in 2023 and beyond?
The reason for this is centred around the type of spending
that is anticipated as China emerges from lockdown. Over the past three years, household savings have increased substantially. The figure below shows what Chinese savings in 2022 was compared to what they would have been if a trend savings rate was applied over the past 10 years. In this regard, analysts estimate that excess savings in China have amounted to USD 2.5 trillion during COVID.
5
The anticipation is that these excess savings will lead to increase household consumption which will, in turn, lead to a more spontaneous recovery than in previous economic up-turns. Chinese economic recoveries in 2008 and 2015 were driven by investment expenditures from the Chinese government. This time around, higher savings and pent-up demand from Chinese consumers are anticipated to lead to higher consumption expenditure on goods and services within China. This is likely to support more robust Chinese economic growth, but the spillover effects of this to the rest of the world are likely to be more muted than during previous periods of economic recovery where China relied on much of the emerging world for hard commodities in the use of infrastructural expansion. Another consideration is possible parallels between China and the West in terms of emergence from the pandemic. During 2021 and 2022 we saw strong demand for goods from countries such as the US, as Western countries eased their lockdowns.
Analysts note that excess savings in China amounted to USD 2.5 trillion during COVID
This resulted in supply chain disruptions and elevated levels of inflation. Could China’s emergence from a three-year lockdown have a similar effect? Our view on this is that Chinese household spending throughout 2023 might be more subdued than the spending emergence from the pandemic in the West. In this regard, Chinese pent-up demand is comprised of saved household income, whilst in Western countries such as the US, the increased demand was a result of enormous stimulus packages given
6
through government transfers to support economic recovery. The Chinese population might therefore be more reluctant to spend hard-earned savings as opposed to the “easy money” that was given out in the West. Data from a recent quarterly survey done by the People’s Bank of China seems to support this notion and showed that 22.8% of respondents indicated that they will increase their spending as opposed to 58% who noted that they would like to save more in the near future.
Lockdown-induced household savings in China
10
9
8
7
6
Gap between actual and trend savings in China in 2022
5
4
3 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Source: World Bank and Own Calculations
The Chinese population might therefore be more reluctant to spend hard-earned savings
7
As mentioned above, the International Monetary fund adjusted its January projections for global growth upwards. This was predominantly driven by the re-opening of the Chinese economy.
What could be the possible effect of China’s re-emergence on global macroeconomic factors?
Higher growth would however also have implications for other macroeconomic metrics such as inflation. Considering the prevalent role that inflation has played in economies and markets during 2022, it is worthwhile considering what inflation could look like over the coming years within the context of higher Chinese and global growth. This is explored in the figures below.
Inflation is expected to ease in most countries in 2023 and 2024, but views differ
PwC
OECD
IMF
PwC
OECD
2023
2024
6,0
2024
8,0 7,0 6,0 5,0 4,0 3,0 2,0 1,0 0,0
2023
5,1
4,9
6,9
5,0
6,6
4,4
4,3
5,9
4,0
5,5
4,0
5,4
5,1
4,7
4,5
4,2
3,9
3,0
3,8
3,5
2,5 2,6
2,3
2,2
2,0
2,0
2,2
2,2
2,1
1,0
0,0
EU US South Africa
China Brazil
EU US South Africa
China Brazil
OECD PwC IMF
OECD PwC
Source: OECD, IMF, and PwC, 2023
8
The figures show that inflation is expected to decrease in 2023 and 2024 in all markets considered here, except Brazil, and that the consensus seems to be that China’s emergence from COVID-19 would not induce a secondary wave of Chinese or global inflation. What is however noteworthy is that there are marked differences between the views of different institutions for the EU specifically, both for 2023 and 2024. This is mainly underpinned by high energy prices in the EU and has implications for the Eurozone’s main trading partners. In this regard, the Eurozone is China’s greatest trading partner with bilateral trade in 2022 amounting to almost USD 850 billion. From an agricultural perspective, the EU and Brazil are the main exporters to China, followed by the US. Significant production cost pressures in markets such as the EU or Brazil could fuel food inflation in China and provide upside risk to the modest inflationary outlook shared for China. A more likely outcome is however that some trade patterns and trends, apparent over the last few years might change. Historically, the US was the main agricultural supplier to China. They were however recently overtaken by the EU. In light of the above, China might resort to US agricultural imports, yet again, as cost pressures in the EU continue to hold. Renewed trade tensions between China and the US, on the back of the US noting that China did not fulfill their side of the Phase 1 trade deal, could however upset this view. Changes in trade patterns can also provide opportunities for countries such as South Africa to increase exports to China. To capitalise on opportunities that result from changes in trade flows hinges on requirements that we can address issues such as animal disease outbreaks which have been affecting our access to Chinese markets.
9
As mentioned, an uptick in Chinese manufacturing and investment has resulted in currency gains for South Africa in 2021 and 2022. It also resulted in a smaller fiscal deficit for South Africa, due to the windfall taxes generated from the high earnings of hard commodity exports. Given the expected consumption-led recovery as mentioned above, combined with the current dire state of the Chinese property sector, strong growth in Chinese demand for hard commodities this time around seems unlikely. News
headlines have noted that around half of the Chinese developers listed on the Hong Kong stock exchange
What do the dynamics discussed above imply for South African macroeconomic variables?
have defaulted since 2021 and all players in the Chinese property sector are struggling to get access to new funds.
We, therefore, expect that the ZAR will be shaped by factors, not necessarily related to Chinese growth, in the year to come. In this regard, the trajectory of US interest rates is likely to continue to play a role in local currency dynamics, but its effect would likely dissipate towards the end of 2023 as global interest rate decisions moderate. Locally, issues such as load-shedding frequency and intensity, the political landscape before the 2024 general elections, and the recent South African greylisting would also affect currency movements. These issues are explored in more detail to the right:
10
Load-shedding Absa Strategy research has found that ZAR typically sells off by 0.8c per stage per day and since the start of 2023, frequent load-shedding of stage 4 and above have resulted, in part, in a rapid depreciation of the local currency. All signs are pointing to this being a reality, at least for the next 12-24 months, and as a result currently, analysts are of the view that the ZAR continues to trade close to or above R18.00 to the USD. During winter times, South Africa’s energy requirements are also roughly 20% more than in summer times. This could contribute to more frequent/ higher stages of load-shedding during colder months, which would keep the currency under pressure. South African political landscape General elections in South Africa in 2024 are bound to add to volatility in the ZAR as political uncertainty filters through to currency markets. A drop below 50% for the ruling party in 2024, would require governing through coalitions. This could further add to limbo in policy decisions and implementation and affect the currency negatively over the medium term. Greylisting In the third week of February, South Africa was greylisted by the global anti-money laundering watchdog. This puts South Africa in the company of countries such as Mozambique, Syria, and Yemen. The impact of greylisting is that South Africans and South African companies will face higher due diligence when transacting with parties abroad, which implies a higher cost associated with international transactions. Analyst views vary on the impact of this on the local currency. Some note that this has already been priced into currency levels, whilst others are of the view that this could add additional pressure on the ZAR over the months to come.
11
In terms of the possible benefits of the re-opening of the Chinese economy on South African agriculture, the effects could be direct and indirect. Direct benefits would stem from increased opportunities for the products that we export a sizable share of to China. Indirect benefits would arise out of an increase in global agricultural commodity prices underpinned by strong demand from What are the for South African implications agriculture?
China, even though direct trade between China and South Africa for those specific products might be limited. Here two examples would be corn and soybeans.
Exports of agricultural products to China are dominated by horticultural products (% of value) likely to benefit from pent-up demand
15.6
Maize
0.2
Other
2.5
Citrus
39.5
5.2
Table Grapes
7.4
Beef
Nuts
Apples
29.5
Citrus Nuts Beef Table Grapes Apples Maize Other
Source: Trademap, 2023
12
Pork prices in China have been noted to have bitcoin-like volatility over the past four years. Rapid expansion in production capacity, combined with a state reserve program and three years of lockdowns have all contributed to this erratic move in prices. Current pork prices are on a declining trend. Analysts also note that slaughter numbers are decreasing, which could signal that Chinese pork production could soon reach the bottom of the cycle and start with expansion again. It should however be noted that post-2018 herd rebuilding resulted in a structural change in pork production in China that resulted in more input-intensive systems. With this change in place, future expansion cycles in the Chinese hog cycle are likely to have a much smaller effect on corn and soybeans than they did in 2020/2021. Our view is therefore that the effects of China’s economic re-emergence will likely only have a small effect on global agricultural commodity prices over the next 18 months.
In 2021, the export of South African agricultural products to China amounted to approximately ZAR 8 billion. This is roughly 7% of the total value of our agricultural exports and was dominated by horticultural products and beef (see figure to the left). Our view is that the reopening of the Chinese economy would result in firmer demand for products such as nuts, which are usually consumed during festive seasons. These festivities and consumption around them were limited during COVID times. Increased tourist and entertainment activities, as a result of pent-up demand, are also likely to lead to strong meat, protein, and citrus demand which could affect beef export prices favourably. As far as global agricultural commodity prices are concerned, corn and soybean prices have benefitted from the rebuilding and structural changes associated with the Chinese pig herd, over the past 5 years. Given that increased economic activity is bound to benefit meat consumption, strong pork demand could be seen as a fundamental factor supporting global agricultural commodity prices yet again.
13
Taking a long-term view
Journalists, analysts, and economists have long been saying that China will get old before it gets rich. During January, this was reiterated when China recorded its first population decline in 60 years, and although it is still a country of around 1.4 billion people, UN population estimates show that it could decline to 800 million by 2100. In terms of age, the Chinese population is skewed towards the older side of the spectrum. It is estimated that by 2035, roughly 400 million people, or almost 30% of the population will be above sixty. This will put immense pressure on (state) pension pools which some policymakers in China already highlight as too little to support the increasing numbers of pensioners. By around 2079, the dependency ratio within China is expected to breach 1. This means that there will be more Chinese citizens that are not of working age than there are in the bracket 15-64 years, resulting in negative effects on disposable income. This is likely to affect demand for non-essential/luxuries such as fruits, nuts, and red meat. China as a destination for South African exports
Over the past two decades, rising income levels and urbanisation have resulted in China becoming the world’s largest agricultural importer. This has also resulted in China being a strong market focus for South African industries such as Red Meat, Table Grapes, Nuts, Beef, and Citrus. Considering the demographical dynamics explained above, combined with current obstacles in our traditional export markets such as the EU, new and fast-growing markets such as India and Sub-Saharan Africa must be developed. Recent experience, with the negotiation of the protocol for lemons into China, has however shown that it can take up to 15 years to gain access to a new market. In our view, traction on the African Continental Free Trade Agreement (AfCFTA) provides opportunities. This and access to fast-growing markets such as India needs to be prioritised. To this end, the table to the right indicates current tariff and non-tariff barriers in selected fast- growing markets. These markets could provide lucrative alternative market opportunities if export requirements into these markets are understood and constraints on exports into these markets are addressed or included in negotiations.
14
Tariffs and non-tariff barriers in a fast-growing market remain high
Table 1.1
Apples
Pears
Table Grapes Macadamias
Importer
Citrus
Tariff in 2022 (%)
Nigeria
20
20
20
20
20
Senegal
20
20
20
20
20
Kenya
25
35
25
25
35
Ghana
20
20
20
20
20
Cameroon
30
30
30
30
30
Cote D’ lvoire
20
20
20
20
20
India
30
30
15
15
30
Nigeria
Number of Non-Tariff measures applicable
Nigeria
16
16
NA
16
NA
Ghana
20
20
NA
20
NA
31
31
31
31
31
Cameroon
Cote D’ lvoire
3
3
3
3
3
66
64
62
62
63
India
Source: Trademap, 2023
15
LIVESTOCK AND GRAINS
Income pressures are front and centre in livestock trends – consumers want bang for their beef
Since the start of 2023, red meat prices have been under pressure. Our view is that this is a symptom of increased pressure on consumers' disposable income. In contrast to this, chicken prices have continued to hold firm. These divergent trends cause shifts in relative prices of meat products, which, in turn, also affects short-term spending patterns. Figure 2.1 shows price changes within the meat complex over the past eight years. In the figure, a price index for each product group has been created for ease of comparison between the different products, with December 2018 as the base period. Observations from this figure are the following: • Beef and chicken prices have followed the most consistent upward trend, with the trend for beef only losing momentum during 2019 as FMD issues emerged.
• Seasonal peaks in lamb prices have increased over the past three years.
• Large swings in pork prices continue to be a feature of the South African meat landscape.
16
In 2022, the importance of relative price differences between meat products became apparent when pork traded below chicken in selected months and captured increased market share in the meat complex. There was also firmer demand for Class C beef which caused the price differential between Class A and Class C beef to shirk somewhat. Our view is that these shifts were underpinned by a consumer under pressure where ongoing income pressures made consumers more receptive to relative price changes than would normally be the case. Within this context, we explore what livestock market prices could look like over the months to come.
Price indices in the meat and livestock complex over time
Beef Class A Index Beef Class C Index Lamb Index
Porker Index
IQF Index
160 150 140 130 120 110 100
90 80 70 60
Beef Class A Index
Beef Class C Index
Lamb Index
Porker Index
IQF Index
Source: Absa AgriBusiness, 2023
17
Beef market dynamics Beef prices have followed an upward trend since 2019 and from 2021, rising beef prices have benefitted from persistently lower slaughter numbers that were underpinned by rising grain prices and elevated disease risk. From a consumption perspective, lower interest rates during 2020 supported beef consumption during the first part of the pandemic, but as the world emerged from COVID-19 and its associated lock- downs, inflationary pressures induced monetary policymakers around the globe to implement a rapidly increasing interest rate cycle. Higher interest rates combined with pressures such as energy
Beef Market Dynamics
and food costs weighing on consumers' disposable income have contributed to decreases in the carcass and calf prices apparent since the start of the year. In this regard, average A2/ A3 carcass prices have decreased by around 4% between January and February, whilst calf prices decreased
by around 6% in response to this.
18
Rapidly increasing interest rates are starting to bite This is likely to persist into the future. Class A Price Repo Rate
8
65.0
60.0
7
55.0
6
50.0
45.0
5
40.0
4
35.0
30.0
3
25.0
20.0
2
Class A Price
Repo Rate
Source: South African Reserve Bank, Absa AgriBusiness, and Absa Strategic Research, 2023 (Forecast respresented by dashed line).
Higher interest rates combined with pressures such as
energy and food costs
decreases in the carcass and calf prices weighing on consumers' disposable income have contributed to
19
These include: – Ongoing herd-rebuilding initiatives could result in the firming supply of calves over the next 24 months. – Lower feed costs could provide scope for increased feedlot
Looking Ahead The big question that emerges from this is: Are livestock and beef prices set for a downward price trend over the months to come or was the recent price drop simply a blip in a more persistent upward trend? Our view is that carcass prices are likely to remain under pressure due to constrained demand over the coming 12 months. This is also likely to filter through and result in lower calf prices. Fundamentally these views are underpinned by: • High-interest rates are likely to persist, although there might be marginal decreases over the next 24 months (see the dashed line in Figure 2.2 above). This will depress retail demand and, as mentioned above, filter through to lower calf demand from feedlots. • Fuel and food inflation is likely to moderate but it is unlikely that this will free up disposable income for red meat consumers. Price levels for fuel and food are expected to remain elevated due to exchange rate dynamics and cost pressures in food value chains. In the case of the latter,
stocking rates which would add to downward momentum in prices (see grain section below).
Notwithstanding the fundamental issues noted above, the South African livestock market is currently characterised by high levels of uncertainty and erratic price movements. This is centred around disease issues that have, over the past year, resulted in bans on animal movement, cautious bilateral exports, and supply gluts when infected animals, that have been quarantined, are cleared
for slaughter and enter the local wholesale and retail markets.
The South African livestock market is currently characterised by high levels of uncertainty and erratic price movements Global beef market dynamics could provide opportunities and upside scope to our view above, with key markets such as the US, having lower supply due to herd liquidation over the past seasons. The US is a key supplier to markets to which South Africa is also supplying under bilateral agreements. These include China and the Middle East. Over the outer months of the outlook period, room for upward price scope could therefore come from growth in exports, higher global prices, and exchange rate dynamics, but to exploit the opportunities that tighter global markets could bring, disease management in South Africa would have to be on par.
the most notable of these pressures is the increased costs and risks associated with load-shedding.
• Supply-side dynamics could also add to the scope for lower beef prices over the coming months.
20
Average carcass and weaner calf prices (2019-2022) and price forecasts (2023-2025)
Table 2.1
Class A (R/kg)
Weaner Calf (R/kg)
Class C (R/kg)
2019 2020 2021 2022
43.94 46.41 52.48 59.60
37.63 40.30 45.41 48.20
28.18 33.00 38.77 37.90
Forecasts
2023 2024 2025
58.60 58.35 61.35
43.90 46.90 49.90
34.30 36.40 38.40
Source: Absa AgriBusiness, 2023
21
Lamb and mutton prices have been on a decreasing trend since the middle of 2022. As with beef, this is driven by persistent and increasing strain on consumers' disposable income. In addition to this, improved veld conditions in key lamb production areas have also likely started to contribute to an increase in supply. The shining star of the sheep meat sector has however been the growth Lamb and mutton market dynamics
in exports, especially to Middle Eastern markets (see Figure 2.3 to the right). This is likely to continue to provide some price support over the coming months. With currency pressures building, lamb exports are looking increasingly positive but the rapid growth apparent over the past years could be limited by the logistical capacity to move carcasses to export markets.
22
A lucrative Middle East export market is likely to limit local price declines
UAE
Qatar
Kuwait
Rest of World
4 500
Growth in lamb and mutton exports has increased substantially over the last four years
4 000
3 500
3 000
2 500
2 000
1 500
1 000
500
0
2017
2018
2019
2020
2021
2022
UAE Qatar
Kuwait Rest of World
Source: Trademap, 2023
23
Our view is that lamb and mutton prices are likely to remain under pressure over the coming months due to weaker local demand underpinned by high-interest rates and cost of living pressures. As we move into 2024, interest rates are expected to
ease somewhat which could provide upward support for prices over the medium term. This could, however, be offset by increased supply
Looking Ahead
due to more favourable production conditions, as mentioned above. Increased lamb exports provide an upside scope for this view but would likely be limited by logistical capacity.
24
Average lamb/mutton carcass and feeder lamb prices (2019-2022) and price forecasts (2023-2025)
Table 2.2
Class A (R/kg)
Feeder Lamb (R/kg)
Class C (R/kg)
2019 2020 2021 2022
66.69 81.07 86.98 94.00
49.64 58.93 69.14 72.26
33.83 39.81 44.76 45.55
Forecasts
2023 2024 2025
92.60 93.90 95.30
71.70 72.80 73.85
44.80 45.50 46.20
Source: Absa AgriBusiness, 2023
25
Pork market dynamics
26
Since our last AgriTrends, pork prices have shot the lights out and the future view that we generated for our October 2022 report proved to be too conservative around the effect of supply-side factors on prices. Rapidly declining
profits during the end of 2021 and the first months of 2022 initiated herd liquidation in the pork industry. This led to increased supply (see Figure 2.4 with slaughter numbers) which further depressed prices. Herd liquidation supply contracted during the third and fourth quarters of 2022 resulting in rapid price increases. In fact, between March 2022, which recorded the lowest turning point in prices over the last three years, and January 2023, where prices
Herd liquidation supply contracted during the third and fourth quarters of 2022 resulted in rapid price increases
peaked, the price difference amounted to almost 50%. Since reaching highs of R38.50 in the first week of January, prices have however started to ease. Given the large swing in prices and profitability over the past three years, the question is what we can expect for the months and years to come.
Herd liquidation induced price surges in pork towards the end of 2022 Pig Slaughters
Pork to Maize
Elevated slaughter numbers
11,0
360 000
340 000
10,0
320 000
9,0
300 000
8,0
280 000
7,0
260 000
6,0
240 000
5,0
220 000
200 000
4,0
Pig Slaughters
Pork to Maize
Source: Absa AgriBusiness, 2023
27
Looking Ahead
Our view is that average yearly prices could increase over the coming three years, although this could be associated with notable variations around these averages. Global analysts of pork/hog cycles note that large swings in pork prices are typically associated with limited
processing capacity and as the share processing capacity increases relative to the size of the herd, herd cycles become less variable. In the South African context, an additional factor to consider is that pork consumption is highly sensitive to price variations in pork itself, but also relative to prices of other meat. Given this context, our upward trend over the coming years is driven by:
• Firmer poultry prices due to exchange rate movements, likely to create price momentum in pork. • The effect of higher poultry prices are however likely to be offset, at least to some extent, by pressure on red meat prices over the coming months. • Feed costs are also projected to ease as global grain and oilseed production responds to high agricultural commodity prices. But local cost pressures related to load-shedding, specifically, could counter this. Although feed costs are declining, the cost of load-shedding is keeping production costs elevated
28
Average porker and baconer prices (2019-2022) and price forecasts (2023-2025)
Table 2.3
Porker (R/kg) Baconer (R/kg)
2019 2020 2021 2022
26.00 26.47 29.64 29.40
24.90 25.28 28.00 28.40
Pork consumption is highly sensitive to price variations in pork itself, but also relative
Forecasts
to prices of other meat
2023 2024 2025
33.10 33.80 34.30
31.80 32.30 32.70
Source: Absa AgriBusiness, 2022 Source: Absa AgriBusiness, 2023
29
Poultry market dynamics
There has been a rapid increase in poultry prices around the globe as demand was strong on the back of a robust post-COVID recovery in the developed world. Disease outbreaks in key exporting countries also curbed supply and trade. Analysts are however expecting global poultry production and trade to expand during 2023, which could weigh on international prices. In the South African context, poultry product prices have recorded rapid price runs over the past years. This was underpinned by the mentioned higher global prices, depreciating exchange rates, and a substantial increase in production costs. Looking Ahead
With global prices expected to come down, local price growth over the coming months could slow but will most likely be supported by a weak ZAR. This will be amplified by higher production costs and lower production associated with load-shedding, specifically. This should however be seen in the context of declining red meat prices which would limit the degree and rate with which poultry product prices can increase over the coming months.
30
Average poultry prices (2019-2022) and price forecasts (2023-2025)
Table 2.4
Frozen Whole Bird (R/kg)
Fresh Whole Bird (R/kg)
IQF (R/kg)
2019 2020 2021 2022
25.60 25.47 29.22 32.30
26.71 26.17 29.66 32.60
23.82 23.95 25.40 29.00
Forecasts
33.30 33.95 34.30
33.50 34.20 34.50
30.80 31.15 31.55
2023 2024 2025
Source: Absa AgriBusiness, 2023
Poultry product prices have recorded rapid price runs over the past years
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A view on grains
South African grain price dynamics are shaped by global factors, and local markets have benefitted from higher global prices over the past three years. During 2022, global grain prices surged. This was driven by a range of factors such as drought in key exporting regions, the Ukraine war, high energy
Local markets have benefited from higher global prices over the past three years
and input costs, and strong speculative demand from non-agricultural market players such as hedge funds.
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Record wheat and maize prices in 2022 were the symptoms of war and drought
SAFEX Price
CBOT Wheat
540.00 490.00 440.00 390.00 340.00 290.00 240.00 190.00 140.00
9 200
8 200
7 200
6 200
5 200
4 200
3 200
SAFEX price
CBOT Wheat
CBOT Corn
YMAZ
350.00
300.00
250.00
200.00
150.00
100.00
CBOT corn
YMAZ
Source: Reuters, 2023
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Analysts estimate that from 2017 to 2021, 29% of global exports of barley, corn, and wheat were supplied by Ukraine and Russia. The effect of the war in Ukraine
Australia, the war, as mentioned above, and relatively low global stock to use ratios, have contributed to elevated risk being priced into grain price levels. Taking a future perspective, there is a saying amongst market analysts that the cure to high prices is high prices. This notion seems to be supported by views from institutions such as the Food and Agricultural Policy Research Institute at the University of Missouri, which project that wheat and corn prices will follow a downward trend over the coming years (consider Table 2.5 to the right) on the back of higher production induced by current high prices.
Dry conditions in key exporting markets have also played a pivotal role in the price runs in 2022
has however resulted in disruption in grain exports from the Black Sea region. In an attempt to mitigate the effect of the war on trade flows and global food prices, the Black Sea Grain deal was
brokered by the United Nations and an agreement to continue with trade from the region was reached in July and further renewed in November 2022. Despite this, the share of global exports from the Black Sea region dropped to 22% of global trade in 2022. Dry conditions in key exporting markets have also played a pivotal role in the price runs in 2022. Three years of La Niña have led to unfavourable production conditions in South America and the Western Plains of the US and although for commodities such as wheat, this was offset by good production conditions in Russia and
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US SRW gulf port price
Table 2.5
Price projections for global prices follow a downward trend
USD/ metric ton
% Change
2021 2022
334 275
35.2 -17.7
Forecasts
2023 2024 2025
295 268 251
7.3 -9.2 -6.3
Source: FAPRI, 2023
US corn gulf port price
USD/ metric ton
% Change
2021 2022
301 294
25.9 -2.3
Forecasts
2023 2024 2025
245 220 218
-16.7 -10.2 -0.9
Source: Absa Strategy Research, 2023
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Local prices will also be impacted by exchange rate dynamics. Absa Strategy Research forecasts the following average exchange rate levels over the next 24 months.
ZAR/USD Exchange rate (Period Average)
Table 2.6
% Change
ZAR/USD
2021 2022 2023
14.78 16.37 18.19
-4.6 10.8 11.1
Forecasts
2024 2025
18.82 19.52
3.5 3.7
Source: Absa Strategy Research, 2023
Based on the above we expect the price trajectories in Table 2.7 for wheat and maize over the coming years.
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The forecasted trends to the right are underpinned by the following fundamental factors: • Global wheat prices are likely to come down over the medium term due to expected improved production conditions for the US and Argentina. This is also expected to improve stock-to- use levels. • Global wheat price decreases are also underpinned by optimism regarding the extension of the Ukraine-Russia grain deal for 2023 with Ukraine seeking a longer term for the agreement and additional ports. Talks during March did result in an extension, but clarity around the term of the extension is uncertain. Ukraine notes a negotiated extension of 120 days, whilst Russia says it is only for 60 days. • Exchange rate depreciation is expected to offset some of the effects of global wheat price decreases in the local market. As a result, our local price projections also follow Looking Ahead
Local grain prices are projected to ease over the coming years
Table 2.7
Yellow Maize
Wheat
2019 2020 2021 2022
R 4 500 R 5 171 R 5 430 R 7 015
R 2 6963 R 2 921 R 3 428 R 4 351
Forecasts
R 3 900 R 3 745 R 3 895
R 6 400 R 6 175 R 5 990
2023 2024 2025
Source: Absa AgriBusiness, 2023
• A favourable supply response is already apparent in Brazil, where a record crop is expected and exports from this region have significantly increased over the past weeks. • Locally, yet another bumper crop of around 15.5 million is expected for the current season. • This expectation has pushed local prices below parity levels. With high production expected in most of our traditional regional trading partners, deep sea exports would be required to work away excess production. Capacity for deep sea exports is only around 350 000 tons per month and as a result of this bottleneck, prices have dipped below export parity levels at the end of February.
a downward trend but it is more modest compared to global price trajectories.
• In terms of yellow maize, global prices are expected to ease on the back of the positive supply response to high global prices over the medium term.
The continued flow of corn exports from the Black Sea could also lead to global price easing.
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HIGH-VALUE EXPORT INDUSTRIES
Challenging times for fruit trade as the world emerged from the pandemic Over the past two years, high-value export industries were affected by a myriad of adverse events, ranging from high shipping cost and production input costs to floods, labour unrest and export claims on producers due to quality concerns. The single biggest issue weighing on producer returns was substantially elevated shipping costs. During the first months of 2023, there are however indications that reefer shipping costs are abating, with some global market stakeholders noting drops of around 20% from the peaks that occurred in the third quarter of 2022. This is also reflected in the Drewry Reefer Shipping Index, which shows average reefer shipping costs over time. As shown in Figure 3.1, reefer prices have surged over the past three years but the orange bars, which represent an estimation of possible decreases, suggest that some cost relief could be on its way. Reefer cost from South African ports has however not decreased notably and stakeholders in the industry have varying views on how global cost reductions could filter through to the local context. Our view is that reefer shipping costs will decrease over the next 12 months but the reduction would be smaller than what is apparent in global averages. This is largely the effect of a high concentration in shipping liners servicing South Africa and inefficiencies in South African ports.
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Drewry reefer shipping cost increases show that shipping costs are easing
8 000
7 000
6 000
5 000
4 000
3 000
2 000
1 000
Source: Drewry (2022) and Absa AgriBusiness (2023)
As mentioned, the quality of export products was also a major issue in 2022. In the case of grapes, this was underpinned by high yields, where analysts noted that these higher yields came at the expense of lower quality. Other issues that weighed on quality were extended shipping times and wet weather during harvesting times. 2022/23 did however see significant quality improvements in products such as grapes, although producers still noted an elevated level of pest and disease risk.
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The tides are turning, but elevated risks bring new challenges
The discussions above point to some relief in the most pressing issues that affected returns in 2022, although the extent to which shipping costs can significantly decrease still remains uncertain. New factors are however emerging that are bound to make 2023 another challenging year in the horticultural production and export space. Here we would like to highlight two factors:
Broad-based cost increases
Broad-based cost increases – Stats SA PPI for agriculture for January 2023 recorded 11.6% year-on-year cost increase. The underlying line items driving these
costs include increased wages, higher packaging costs, increased cost of capital, and chemical and fertiliser costs combined with higher pest and disease risk as mentioned above. Table 3.1 to the right shows the annual increase in costs in different components between 2021 and 2022, and what we estimate the cost increase for these components could look like in 2023. Here, we include labour costs, although not an estimation, as the minister of labour announced a minimum wage increase of 9.6% on the 1st of March. From the table it is clear that some relief is expected to come from easing diesel and fertiliser prices. This is mainly a
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result of crude oil and natural gas prices expected to trade slightly lower compared to 2022 levels. This is expected to drive global fertiliser prices lower. Locally, this is however offset, to some extent, by a weaker Rand with the reality that, despite some cost pres- sures easing, we are still trading far above pre-pandemic levels.
Input costs forecasts for 2023 show a mixed bag
Table 3.1
2022 Year-on-year % change
2023 (Estimations) Year-on-year % change
60.5%
Diesel
-8.2%
Labour
6.9%
9.6%*
Chemicals and fertiliser
85.2%
-22%
Packaging
22%
8%
9.61%
18.65%
Electricity
Source: Absa AgriBusiness research, 2023 *Actual Value
Access to lucrative export markets remains the lifeblood of the high-value, long-term crop sector in South Africa. In this space, the risk of losing markets is however increasing. As an example, the most notable is certainly oranges exports to the EU. In 2022, a cooling protocol was instituted against orange exports from South Africa which requires oranges to be loaded at 5 degrees Celsius core temperature after which they should be set/shipped at this temperature for 25 days. Since Market access
the start of 2023, an intensified protocol has commenced. This will require oranges to be loaded at a core temperature of 2 degrees Celsius and shipped and stored at this temperature for 20 days. This is concerning because even in times of unconstrained electricity, this protocol would have been difficult to adhere to with the current cooling infrastructure. At the time of writing this issue remained
unresolved and creates significant downside risk for producer returns during the coming season.
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Another example that could affect market risk over the medium-term is non-tariff measures related to environmental concerns. The EU is a trailblazer in their vision and efforts to become the world's first climate-neutral continent. It aims to reach net zero by adopting targets of reducing greenhouse gas emissions by 55% in 2030 compared to 1990 levels, reaching net zero by 2050. Regulatory reforms that drive these ambitions are included in the EU Commission Fit for 55 package which aims to meet the interim target of 55% emission reduction by 2030. The Green Deal, in turn, is the policy framework under which the EU will push to reach net zero by 2050. Under these regulatory frameworks, trade could be impacted by animal welfare, pesticide use, deforestation and carbon considerations, to name a few. With around a third of the total value of fruit exports from South Africa destined for the European Union, South African fruit producers, and exporters would be ill-advised not to take note of policy developments in this region. Lastly, current global geo-political developments are putting South Africa at risk of losing essential markets. During 2022, the challenges associated with shipping fruit to Russia had an impact
on revenue generated from class 2 and class 3 fruit for citrus. This weighed heavily on the profitability of producers. More recently, combined military exercises between Russia and South Africa pose a threat to South African relations with the USA. With the African Growth and Opportunity Act (AGOA) set to expire in 2025, strained relations between the two countries could have an effect on preferential market access of products such as citrus from South Africa when a new round of AGOA is negotiated. Despite the issues mentioned above, opportunities remain. Our view is that the 2023 and 2024 seasons will likely be the turning point where consolidation and a decrease in shipping costs lead to improved export margins.
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