by Ernst Janovsky – Ernst.Janovsky@absa.co.za
Absa bank het al die afgelope 100 jaar in landbou belê en sien uit na die volgende 100 jaar saam met ons boere. Bekende name in die landboubedryf gaan verskillende vooruitsigte soos die ekonomie, die weer, gewasse, groente, vee ens vir 2017 bespreek. Hou ons webblad dop om almal te lees.
International economic outlook
There are three major factors to consider when determining the potential demand for food in the future, namely the growth in population, the potential growth in demand in terms of people’s nutritional needs, as well as the impact of economic prosperity on the demand for food. All of the above are influenced by technological advances that are changing production and demand trends, as well as the economic well-being of the consumer who is changing his or her consumption behaviour. One therefore needs a more holistic, long-term approach in considering the impact of these factors on agriculture as an investment opportunity as they will have a direct effect on demand and supply trends.
World population growth to slow down
According to the latest predictions the world population is expected to increase from 7,3 billion people in 2015 to 9,7 billion in 2060. The economic wellbeing of the consumer is also relevant, since population growth tends to decline as the consumer’s economic well-being improves. On its own, and all things being equal, this implies a growth in the demand for food of 32,4% over the next 45 years (Africa 2,3%; North America 0,9%; South America 1,0%; Asia 0,4%; Europe -0,1%; and Oceania 1,1% per annum). From the graphs indicating growth trends in world population, it is clear that Europe’s population is expected to decline; the graphs also indicate a slow-down in the growth in Asia’s population. Some argue that Europe’s population will grow due to an influx of immigrants. In principle migration just means a movement of people. One can also argue that Asia’s population will increase as China relaxes its regulations on one child per family. Population growth normally tends to decline as consumers get richer and the trend of urbanisation increases. Maybe not so clear, is that Africa’s population growth is also showing signs of slowing down because of improvements in consumers’ economic well-being over the past decade.
Per capita food consumption to slow down
Consumer awareness about healthy living and excessive food consumption has led to realities about how much food is needed to sustain life. The FAO recommends a threshold of approximately 2 900 kilocalories per person per day. At present there are only two continents that do not consume at least this minimum amount of food, namely Asia and Africa, although they are very close to reaching the recommended threshold after opening up their borders for imports and exports. Improved production efficiencies resulting from new technologies such as precision farming and genetics are also having the required effect. The slowdown in the consumption of calories can be observed in Northern America in particular as the realities of obesity hit home and a more healthy lifestyle is promoted. This levelling off of the amount of calories needed to sustain life will therefore also have a major impact on the future need for food. Combining population growth trends with the potential levelling off of the intake of calories implies that growth in the demand for food, based on the above two trends, is expected to slow towards the second half of this century. This, combined with new production technologies, can have a profound effect on agricultural commodity prices in the long run and therefore needs to be considered before a long-term investment is made in agriculture.
World economic growth to remain sluggish
Given the turmoil in almost all the major world economies, it is unlikely that the world economy will spark another major growth phase that will drive commodity prices higher. Europe (GDP growth expectation 1,7%) is struggling with an influx of migrants and all the concomitant political ramifications. Furthermore, they still need to deal with Britain’s exit from the EU. This, combined with Europe’s slow population growth, implies that consumer demand will remain sluggish. The US (GDP growth expectation 2,5%) is showing signs of economic recovery, although demand remains sluggish while inflation remains low. The US Federal Reserve’s preoccupation with hiking interest rates in order to protect the dollar might even worsen the situation, leaving the consumer with empty pockets. The bulk of sub-Saharan countries in Africa (GDP growth expectation 3%) are currently burdened with high debt levels and are still trying to recover from low commodity prices and droughts. Growth expectations remain low with consumers experiencing difficulty meeting their obligations. Lower international commodity prices have led to lower export revenue earnings, impacting negatively on the balance of payments of especially commodity-exporting countries such as South Africa, Angola, Nigeria, Botswana, and Zambia. This has led to the erosion of exchange rates and higher inflation, which has had a negative impact on consumers.
Asia’s economy (GDP growth expectation 6,1%) is also suffering from the consequences of creating overcapacity during the commodity boom, which was evident from 2000 to 2011. Asian countries now need to realign their economies and focus on their own consumers to become more consumer driven. Surplus production capacity implies that commodity prices will remain under pressure. In view of all of the above, world economic growth will remain fairly sluggish. There is every expectation that commodity prices will remain under pressure and that they will tend to move sideways. This is important to note as it also has a direct correlation with agricultural commodity prices.
South African economic outlook
South Africa’s GDP growth is forecast to range from 0% to 1,5%, depending on a range of factors varying from a poor investment policy environment resulting from political power plays and corruption, to poor service delivery and poorly maintained infrastructure. However, during 2016 two major events – the Constitutional Court case against President Zuma instigated by the Public Protector and the local government elections – reshaped the political and economic landscape of South Africa. These developments should lead to a more sustainable future and a more investment-friendly economic environment.
- Constitutional Court case
Although South Africa is supposedly a constitutional state, government has been treating the country largely as a governmental state without necessarily considering its constitutional responsibilities to the citizens of South Africa. This has led to a great deal of uncertainty and doubtful investment policies, or laws, being drawn up. In a definitive court case in 2016 the Constitutional Court once again confirmed, in no uncertain terms, that South Africa is a constitutional state. Consequently it warned government to be more mindful of the Constitution and the rights South African citizens are entitled to. This implies that government has to do everything in its power to improve service delivery to its citizens and to stimulate the economy by passing sound and sustainable investment policies. This, combined with the outcome of more equal representation in the local government elections, implies better checks and balances with better service delivery to its citizens. And the winner is South Africa.
- The potential further downgrading of South Africa’s investment status
The bulk of South Africa’s public corporations have already been downgraded to below-investment grade status, making it difficult for these corporations to draw investments to create the capacity needed to grow the economy. This, coupled with these corporations being poorly managed due to political managerial appointments and injudicious tender practices, have strained economic growth. (For example, Eskom has been unable to provide enough electricity for the country’s needs.) This difficult situation was highlighted by the rating agencies downgrading South Africa’s investment status to one grade above investment grade. The effects of political intervention in terms of stimulating the economy became clear when South Africa’s president appointed a new Minister of Finance who was perceived to favour the state capture of the Department of Finance. South Africa’s exchange rate fell precipitously and the president had to reverse his decision under huge pressure from the international and domestic community. This implies that government is under huge pressure to improve its policies so that they will stimulate the economy and attract investments to South Africa, thereby avoiding a further downgrade by the rating agencies.
Unfortunately, there is still a drive from the ruling party to control the Minister of Finance, putting strain on the relations between the Department of Finance, other departments and state-owned corporations. This implies that the battle has not yet been won, but is at least for the interim moving in the right direction. It is therefore not anticipated that South Africa will be downgraded by the rating agencies at the end of 2016, which gives us some leeway in drawing in the much-needed investments to stimulate South Africa’s economy. Economic growth expectations will therefore remain under pressure, with little improvement in consumer wellbeing; demand will therefore remain subdued.
- Exchange rate expectations
South Africa’s competitiveness is largely determined by its exchange rate. As South Africa’s exchange rate is determined by our balance of payments (net difference between our current account and our capital account) and given that we have a deficit on our current account (we import more than we export in rand terms), we need to draw investments into South Africa to balance our deficit on our current account. In view of the effect of current government policies on our ability to draw investments into South Africa, our exchange rate is expected to continue weakening over the longer term.
- Cost of capital
Over the past year South Africa has experienced a slow but steady increase in interest rates due to inflationary pressure. This was, first, a result of higher commodity prices because of the drought, especially those of food commodities. Second, commodity prices were higher following the decline in the value of the rand in December 2015 when the President announced the new Minister of Finance. However, inflationary pressures are expected to dissipate given the prediction of a better production season for agriculture and a recovery of the exchange rate after the reappointment of a previous Minister of Finance. This implies that the pressure to further increase interest rates due to inflationary pressure is showing signs of dissipation. With the consumer experiencing pain, the growth in money in circulation is also below the target set by the Reserve Bank, which is not expected to contribute to further increases in interest rates. The only factor, in view of the deficit on our current account, which might lead to an increase in interest rates, is the need to reward investors with a real interest rate that will encourage them to invest in South Africa.
However, it should be noted that the cost of capital has actually increased by almost 3% over the past 15 years. This is mainly due to a decline in the availability of investment funds across the world as baby boomers withdraw their savings and go on pension. In 1950 there was one retiree for every 15 workers contributing to a pension fund. In 2050 there are expected to be only two contributors to every retiree. The availability of investment funds in the world is expected to continue declining. The net effect of this is that in the early 2000s one could easily get a 100% bond at prime minus 3%. Today one would need a deposit of 20% to 30% and one would struggle to get a loan below prime. This implies an increase of approximately 3% in the cost of capital. Expectations are that the cost of capital will continue to increase as the world population continues to age, leaving industry and governments with more expensive money for capital expansion.
South Africa’s agricultural well-being
South Africa and the surrounding countries have over the past four years been caught in a progressing drought with below-average rainfall. In the first year of a drought one would normally use one’s own surplus resources, in the second year of drought one uses spare capacity in the surrounding area. In the third year of drought one normally utilises one’s financial resources to support oneself. In the fourth year of drought water resources also start to give in and the country as a whole feels the pain with wide-spread crop and animal production failure.
The drought of 2016 is comparable to the droughts of 1967 and 1983, with one major difference. This was the first drought that South Africa experienced within a totally free agricultural market. The net result is a drop in volumes of approximately 30%, while prices compensated and increased by approximately 60%. This implies that in terms of revenue, the net effect of the drought was cancelled out by an increase in price. Of course, this would not be true for all farmers as some did suffer total crop failure, but given the net effect on agriculture as a whole, these individuals could largely be accommodated through the normal financial systems with no major drought relief programme needed in the commercial agricultural sector. However, in the communal agricultural sector of South Africa, it is a totally different picture and a drought relief programme and disaster fund is urgently needed to ensure recovery. Rainfall predictions for the coming season have improved substantially and early indications are that the drought will soon be something of the past.
Agricultural production and marketing revolution
New technologies are changing the agricultural production and marketing environment.
- Marketing technologies
For the first time agriculture has the opportunity to recapture the consumer’s business and deal directly with him or her, and not through the supermarket. This will be done by using and delivering more efficient and personalised distribution channels to the consumer, such as online buying and delivery through something like Uber Fresh.
Supermarkets are expected to become smaller and direct personalised marketing will instead become the norm. This will create major opportunities for farmers to deal directly with consumers in future, especially the new generation of consumer who is technologically savvy, so marginalising the middleman. To succeed, farmers would have to invest in technology and also develop new ways of reaching the consumer by adding a story to their product so as to showcase its unique features.
- New production technologies
New production technologies are reshaping the future of production, which is due to move into buildings, either through the vertical production of vegetables, the microbiological production of energy products or the artificial production of meat. This implies that instead of production out in the rural areas, production will move towards urban areas. This will eliminate the need to transport bulky products over long distances. These new production and marketing technologies pose a huge threat to the bulk of especially African economies which are mainly agriculturally driven, as there will no longer be the need for vast tracks of land to be used for agriculture.
Source: ABSA agricultural outlook 2017