The negative effects of the Western Cape drought are evident in the first quarter GDP data, which showed that South Africa’s agricultural economy contracted by 24.2% quarter over quarter (q/q). This far exceeds our expectations of a modest contraction of about 11% q/q. The bulk of the winter crops such as wheat, barley and canola, together with summer fruits (stone and grapes) are typically harvested in the period between November and March, which somewhat coincides with the first quarter GDP data. These crops are dominantly produced in the Western Cape and took a huge knock in the recent harvest due to drought, which ultimately explains the negative GDP reading this morning (5 June 2018).
The agricultural economy will underperform in the first part of 2018 owing to a 19% year-on-year (y/y) decline in winter wheat production to 1.54 million tons, 14% y/y decline in barley production to 307 000 tons, 11% y/y decline in canola production to 93 500 tons, and a decline in stone and grapes fruit production, particularly in the Western Cape. Most importantly, the aforementioned fruits are key drivers of agricultural exports, which implies that a decline in production also negatively affects export activity.
It is also worth noting that in the past few years, the Agbiz/IDC Agribusiness Confidence Index proved to be a good leading indicator of agricultural GDP performance (see Chart 1). However, the recent notable uptick in confidence was not immediately followed by a similar magnitude of an increase in agricultural GDP, as factors driving each variable are quite distinct at the moment.
Confidence is mainly supported by broader positive sentiment following recent political developments in the country. Meanwhile, the agricultural economy is suppressed by tail-end effects of the 2017 Western Cape drought. –Agbiz press release