The previous five parts of this series focused on the livestock market, which included production and price trends. This article looks at producers and the economic environment in which the SA cattle and sheep market operate.
According to the 2017 Census of Commercial Agriculture, there are 40 122 commercial farms in South Africa. However, these farms only include those registered for VAT. Of these 6,5% are classified as large enterprises (income of more than R22,5 million), 4,6% as medium enterprises (income between R13,5 million and R22,5 million), 26,7% as small enterprises (income between R2,25 million and R13,5 million) and 62,2% as micro enterprises (income below R2,25 million).
Livestock production was found to be the largest farm type (33,9%). These farms also contributed the greatest share to commercial farming income (36,2%). When one compares the gross farm income (GFI) in the different provinces (Table 1), it is clear that animals and animal products are the most crucial income generator in the majority of provinces.
Table 1: Commodity contributions to gross income by province.
However, South Africa does not only consist of VAT-registered commercial farms and other commercial farms. Small and subsistence farmers should also be considered. Estimates show that, apart from the 40 122 commercial farmers in the 2017 census, there are some 30 000 other commercial farmers, 280 000 small-scale farmers and 700 000 subsistence farmers (Kirsten and Sihlobo, 2019).
The economic reality producers face
The agricultural sector, especially livestock producers, went through a challenging number of years due to various reasons.
Producer prices for animal products (Figure 1) remained stable from 2017 to 2018, before declining in 2019. Although the prices of field crops and horticulture increased in 2019, the weighted average cost for all products decreased by 0,9% due to the weighted average decrease of 6% in animal products.
Figure 1: Producer price indices for 2015 and 2019. (Source: Department of Agriculture, Land Reform and Rural Development [DALRRD], 2020)
In terms of quantity, the production of animal products remained relatively stable from 2018 to 2019. However, due to the decrease in prices the gross farming income (Figure 2) from animal products, as well as the agricultural sector in its entirety, decreased year-on-year.
Figure 2: Gross farming income from 2015 to 2019. (Source: DALRRD, 2020)
In terms of nett farming income (NFI) (Figure 3), it is evident that it decreased from 2017 to 2018, and again in 2019 in terms of total NFI as well as NFI as a percentage of the GFI. This decrease in NFI can mainly be ascribed to the increases in expenditure on intermediate goods and services (Figure 4 and 5). Spending on farm feed, which comprises the largest share of intermediate goods and services (28,3%), increased by 4,1% from 2018 to 2019.
Figure 3: Nett farming income from 2015 to 2019. (Source: DALRRD, 2020)
Figure 4: Expenditure on intermediate goods and services from 2015 to 2019. (Source: DALRRD, 2020)
Figure 5: Price indices of intermediate goods from 2015 to 2019. (Source: DALRRD, 2020)
Lower farm income and higher expenditure on requisites caused the domestic terms of trade for animal production to decrease year-on-year (Figure 6). The terms of trade indicate the extent to which producer prices received by farmers kept pace with expenses paid for farming requisites. While the total terms of trade for agriculture only decreased by 3,8% from 2018 to 2019, the decrease in terms of trade for animal production was 9,9%
Figure 6: Terms of trade in agriculture from 2015 to 2019. (Source: DALRRD, 2020)
Since farming income cannot keep up with costs, the difference must be financed from alternative sources. Agricultural debt is on a steep increasing slope, having increased by 11,3% from 2018 to 2019 (Figure 7). Debt as a percentage of assets also increases year-on-year.
Figure 7: Agricultural debt from 2015 to 2019. (Source: DALRRD, 2020)
Farmers’ cash flow (Figure 8) decreased significantly by 14,4% from 2018 to 2019, mainly due to low terms of trade concerning animal production.
Figure 8: Cash flow of farmers from 2015 to 2019. (Source: DALRRD, 2020)
A final thought
The economic situation of agricultural producers, and especially livestock producers, deteriorated over the past few years. External factors such as the drought and weak economy had a drastic influence on demand and supply. It caused the market to react differently than during ‘normal times’ (whatever that means now, given the turmoil of the recent past).
Decreasing terms of trade, increasing debt and deteriorating cash flow make it very difficult for agricultural producers to meet their short- and medium-term obligations. There is evidence that costs are cut to the bone and crucial risk mitigation measures, such as short-term insurance, are cancelled. Currently, many producers are balancing on a knifepoint, and a slight push from any unforeseen factor such as a veld fire, low conception rate, and sharp drop in market prices can tip them over.
Nevertheless, this situation is not unique to South Africa. In the next article South African livestock producers will be benchmarked against other countries. – Dr Frikkie Maré, Department of Agricultural Economics, UFS.