By Dr Thulasizwe Mkhabela
THE GLOBAL Agri-food sector has highly integrated value chains spanning from upstream farming to food processing downstream, including both alcoholic and non-alcoholic beverages.
Agri-food manufacturing is set to occupy an important position in the agenda for the decades ahead, given its important contribution to both economic and social welfare of nations.
This is particularly important when the overall contribution of the sector is taken into consideration, beyond the narrow contribution to gross domestic product (GDP) as it is currently conventionally measured. This approach ignores the contribution of agriculture beyond the production of primary farm products and ascribed any further contribution of the sector to the GDP to other sectors such as manufacturing, services, etc. The fundamental challenge remains meeting global demand amid supply chain bottlenecks along with the powerful downstream retail sector.
Historically, agri-food has rarely suffered from any sudden increase in levels of uncertainty because of its steady consumption nature since food is a necessity hence its always in demand, and driven by the rise in global population and disposable income, with the latter influencing changing tastes and preferences. After three poor performing years going into the pandemic, agriculture has been benefiting from the recovery in food commodity prices, especially cereals and oilseeds.
However, new trends are shifting how the agri-food sector functions, and where the strategic priorities lay. Consumer preferences are moving towards more locally produced products, putting a strain on food producers and manufacturers as they need to address shortening the value chains, curbing carbon miles and labour shortages especially across Europe.
However, labour shortages are not an issue in the African and South African agri-food sectors because there is high unemployment. Thus, the sector presents an opportunity for labour absorption in the rural areas where food is produced, and the smaller towns and peri-urban areas where manufacture often takes place.
Farmers who are the primary producers, and downstream packaged food companies keep on struggling with limited pricing power and the surge in transport costs which the retail outlets adamantly refuse to absorb. This situation of asymmetric price transmission in the agri-food sector has been exacerbated by the conflict in the Black Sea as the Russian-Ukraine war rages on.
E-commerce is an emerging mega trend also impacting the agri-food sector. The online distribution channel is gaining popularity among final consumers, and this was given impetus by the restrictions on people movement imposed during the lockdown in response to the Covid-19 pandemic.
Climate change considerations and ensuing adaptation may weigh on crop yields, as pressures on land and water are not fading away. This presents an incentive for farmers to adopt climate smart agricultural practises which include, but are not limited to, adoption of drought tolerant and shorter-season cultivars.
Obviously, (there has to be) increased investments, especially public expenditure, in research and development in order to provide continuous throughput of the necessary technologies and farming practices. Ongoing lockdowns implemented to stop the Omicron, and other emergent variants, spread around the globe have put agri-food supply chains under strain, notably across both the alcoholic and non-alcoholic beverage segment.
It is worth reiterating that the ongoing conflict between Russia and Ukraine is adding major upside pressures on the international price of some key agricultural commodities as well as on production costs (energy, fertilisers, pesticides and herbicides).
The Covid-19 pandemic has had a dual impact on the industry: online food deliveries have been skyrocketing whereas the sector is grappling with the hardship of away-from-home food services. Yet, agri-food players remain confident in the upcoming pent-up demand.
As agri-food players address the trade-off between efficiency and resilience to the economic ebbs, they continue to seek reshoring food processing activities for food and beverage products. The agri-food sector should remain under control in 2022, thanks to substitution effects between products on both the demand and supply side. However, those directly affected by Russia's invasion of Ukraine will find 2022 a challenging year, if not complicated, as effects would be found on grain commodity prices as well as fertilisers, energy and shipping costs.
While agri-food upstream segment commands high selling prices there is fierce price competition in the mass retailing for food makers. Food safety concerns in relation to changing food supply and demand dynamics locally and abroad will continue to be a mega trend that players in the sector should watch for. Environmental concerns related to excessive use of pesticides and water as well as reduction of greenhouse gas (GHG) emissions in the upstream will also continue to feature strongly in the agri-food discourse.
The limited pricing power of farmers and food processors against wholesalers and retailers is the Archilles tendon of the sector. Resilience to periods of supply chain disruptions as vaccination campaigns continue to roll out, and bright demand outlook for niche markets such as organic food and responsible farming principles provide good prospects for the sector.
However, despite the rosy picture painted thus far, there are some few caveats: The likelihood of social tension - and food security issues - in major grain importing countries is a reality. Furthermore, the recent floods and heavy rains experienced in KwaZulu-Natal and parts of the Eastern Cape in South Africa magnified this risk and need to be aptly mitigated.
The impact of climate change on crop production in the long run is an ever-present risk. The strong contestations within the African National Congress (ANC) leading up to its December elective conference may shift the focus of policy makers away from important issues, such as fortifying the agri-food sector and ensuring food security. Finally, the resumption of trade wars between Europe, the Americas and Asia over agri-food tariffs as aggravated by the Russian invasion of Ukraine and the concomitant sanctions against is another risk to watch-out for in 2022.
Dr Thulasizwe Mkhabela is an agricultural economist and is currently senior partner at Agriculture House ([email protected]), and Managing Director at Outcome Mapping ([email protected]).