The agricultural sector harbours some good and bad news for the new year as prices for commodities, such as grain and chicken, are expected to remain high, thanks to the increased volatility in food prices.
Grain and meat prices increased considerably last year and saw food inflation rise above the level forecast. Grain SA said inflation was at 32.7 percent year on year. Grain products had risen by as much as 13.4 percent, while maize had risen by up to 60 percent since March last year.
White maize is now fetching around R2 680 a ton and yellow maize just over R2 600 a ton. In 2012, South Africa will go from being an exporter to an importer of grain.
Absa Business Bank’s agricultural outlook said world agricultural and commodity prices would remain elevated, despite a depressed global economy.
Ernst Janovsky, agribusiness head at Absa Business Bank, said most issues that plagued the sector last year were likely to remain prevalent this year, as not much had been done to improve infrastructure and transport costs, that would play a big role in keeping prices in check.
But oil price increases and exchange rates were uncontrollable factors, he said. “To some extent we will experience the same problems as last year.”
Janovsky downplayed the significance of a grain shortage, and maintained there was still enough grain in the silos. Good rains late last year corroborated his views. The only downside would be that consumers would have to pay more as farmers held on to their stocks, waiting for the next price increase.
For 2011, a shortfall of at least 200 000 tons of grain was predicted. In its forecast for 2012, Grain SA said there would be a shortage of 143 000 tons of white maize, largely used for human consumption, and 60 000 tons of yellow maize, used for animal feed. The likely shortfall was blamed on drought and over-exporting.
Agriculture also faced challenges that had to be managed, such as market risk, which included price, storage and production risk, Janovsky said.
He cautioned that South African farmers faced a 60 percent-plus price exposure to the outside world. This scenario would oblige farmers to become players in the global market, which resulted in little control over pricing levels.
There were also factors which influenced prices over which they had no control, such as international production trends and farming subsidies, and import and export tariffs.
But rand strength is likely to provide a cushion by putting a lid on inflationary pressures stemming from imports.
This would create “some leeway for further interest-rate cuts. Interest rates will remain relatively high, if compared to inflation, in a bid to draw capital to South Africa. The exchange rate should tend to soften, especially against the euro, while holding firm against the dollar”.
Investment opportunities exist in agriculture, as interest rates are historically low and machinery can be imported cheaply. But the sector’s outlook will be dictated by what happens to food prices. - Ayanda Mdluli