While it is too early to make a definitive assessment, one can argue that South Africa’s agricultural sector has been relatively more insulated from the COVID-19 pandemic than the other sectors of the economy that are on complete lockdown.
The food production value chains are operational, albeit not at optimal levels, as take-aways, ready-made meals, meal deliveries and informal traders selling cooked food on sidewalks are still prohibited. The subsectors that are still in complete lockdown from a trading perspective are wool and mohair, cotton, tobacco, wine and alcoholic beverages, and floriculture (flowers), among others.
The harvesting and storage of primary agricultural produce to prevent wastage are permitted under strict health regulations. With that said, without trading, the farming businesses that have been adversely affected by lockdown restrictions could experience short-term cash flow challenges.
Easing financial pressures
Over the past few weeks there have been two major policy interventions that may help to ease financial pressures in the agricultural sector.
The first, which was not directed specifically at the agriculture sector, is that the South African Reserve Bank has cut interest rates by a cumulative 225 basis points for the year to date. For a sector that has a record debt of R168 billion, the relief that lower interest rates could bring is substantial. Assuming that all the debt is on flexible interest rates, the lower interest rates could bring estimated savings in debt-service costs of about R3,8 billion for farmers over 12 months.
Second, the Department of Agriculture, Land Reform and Rural Development has ringfenced R1,2 billion for financially distressed small-scale farmers. This prioritises the poultry sector, livestock and vegetables, amongst other agricultural commodities that will be selected on a case-by-case basis. The farmers within the Proactive Land Acquisition Strategy programme are also included in this package.
Strategic assessment is necessary
While it is crucial to assist small-scale farmers that were already struggling prior to the COVID-19 pandemic, it is important to also continuously assess the impact of the pandemic on established farmers to ensure that national food security is maintained. To this effect, the way the department evaluates the impact of the COVID-19 regulations on these specific farmers and the mechanisms on how the funds will be disbursed has to balance the need for transformative disbursements and food security.
An assessment of farmers’ financial conditions and the ability to produce over the coming months could be helpful in strategically selecting the beneficiaries for this fund. Ultimately, the goal should be to assist those who have been negatively affected by either weak demand and struggling to proceed into the next production cycle, or those whose farming businesses were hard hit by regulations. For this process, a longer timeframe than the one currently stipulated by the government, i.e. 8 to 22 April 2020, is required.
Easing regulations in the agricultural sector
What’s more, it is plausible to argue that regulatory easing in the agricultural sector could be more effective than financial interventions. As we approach the end of the lockdown, currently set for 30 April, policymakers will have to devise strategies to gradually ease trading conditions in the currently prohibited subsectors of the agricultural sector.
Some of these subsectors, such as the wool and mohair industry, support several small-scale farmers in the rural Eastern Cape. We are at a point where global wool demand is set to recover somewhat as China, which imports 70% of South Africa’s wool, is reopening operations after months of closure due to COVID-19.
The wine industry is also among the key job-creating industries, with roughly 43 000 employees. The same is true for all the aforementioned industries in terms of economic and job-creating importance in the rural economy.
Monitoring regulations of South Africa’s trading partners
Overall, the recent policy interventions are a welcome relief on easing the financial conditions of indebted farmers. The financial support to small-scale farmers will need further refinement on the criteria as well as the timing of the release of the finance. Ultimately, the easing of the lockdown restrictions, with strict adherence to health regulations, could have a more positive impact on the sector.
In the process, however, it would be important to monitor the regulations of South Africa’s trading partners as those could ultimately influence business conditions domestically. Global supply chains will likely take months to normalise, even after the lockdown restrictions around the world start to ease. South Africa’s agricultural sector is export-dependent, with exports accounting for nearly half of the production in value terms. The key markets are illustrated in Exhibit 1. – Wandile Sihlobo, Agbiz
Wandile Sihlobo, chief economist at Agbiz, shares highlights in his update on agricultural commodity markets. Click here for the full report on agricultural markets for the major commodities.