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Farming Sector Growth Bucks Trend of Falling Confidence

By Wandile SihloboCommoditiesDec 07, 2017 12:38
za.investing.com/analysis/farming-sector-growth-bucks-trend-of-falling-condence-200196376
Farming Sector Growth Bucks Trend of Falling Confidence
By Wandile Sihlobo   |  Dec 07, 2017 12:38
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Over the past couple of days, we’ve had conflicting data about the performance of the South African agricultural sector. This stems from two different measures; the agricultural economy, as well as the confidence levels in the sector. Historically, the Agbiz/IDC Agribusiness Confidence Index has proven to be a good indicator of how the South African agricultural sector is to perform in the succeeding quarters. However, of late the incoming data from both the aforementioned variables shows a complete disconnect. Confidence amongst agribusiness is deteriorating, whilst agricultural economy (GDP) shows robust growth.

After registering a 38.7% quarter-on-quarter (q/q) growth rate in the second quarter of this year, the agricultural economy grew by 44.2% q/q in the third quarter. This was much higher than market expectations of relatively modest growth of around 20% q/q. One way of explaining this continued strong growth is the good agricultural output in the 2016/17 production season, which in turn boosted trade.

Meanwhile, after deteriorating to 54 points in the third quarter of this year, the Agbiz/IDC Agribusiness Confidence Index declined further to 49 points in the fourth quarter of this year. A reading below the 50-point mark indicates contraction in South Africa’s agribusiness activity, which means that agribusinesses are currently cautious about business conditions in the country.

The Index covers ten most important aspects influencing a business in the agricultural sector, which is the turnover, net operating income, market share, employment, capital investment, export volumes, economic growth, general agricultural conditions, debtor provision for bad debt and financing cost.

Amongst these, the employment, capital investment, economic conditions and general agricultural conditions sub-indices were behind the overall decline in confidence in the last quarter of 2017. Driving the sentiment in these particular sub-indices were the unfavourable weather conditions in the Western Cape province and uncertainty regarding land reform policy, amongst other factors.

More striking to me was a sharp decline in capital investment confidence. The sub-index fell by 20 points from the third quarter to 44. This is the lowest level since the first quarter of 2010. However, such gloom amongst agribusinesses is not surprising given the rise of a notion of expropriation without compensation, along with other controversial land reform statements from political circles. This despondency in sentiment might have serious implications on investments in the long term, which are already on a declining trend. The agricultural investments are currently around 24% of the total value added, down from levels of 34% in 2013. Obviously, one cannot draw conclusions from one data point, but if uncertainty regarding land reform policies continues to linger, then investments and growth in the sector could be undermined in the long term.

While the agricultural economic data might have not yet fully priced-in the Western Cape drought, this drought continues to weigh on the emotions of farmers and farming businesses. Confidence regarding agricultural conditions deteriorated by 20 index points from the third quarter to 28 in the fourth quarter. The province is the key producer of wheat, horticultural products and wine. As a result, it contributes the lion’s share of just above 20% to South Africa’s agricultural GDP. With the harvest process currently underway in wheat and grape producing areas, we should get a clearer indication of the drought implications early next year.

With that said, the weather forecasts suggest that the summer crop growing areas of the country could receive above normal rainfall between December 2017 and January 2018. This increases the chance of yet another good crop. Apart from the aforementioned developments, the agricultural sector could remain on a positive growth path for some time, as farmers intend to increase the area planted to summer crops in the 2017/18 production season by 43 400 hectares year-on-year to 4.03 million hectares. Overall, the discrepancy between the qualitative metric and the hard data will most likely narrow when there is positive policy certainty regarding land reform. In the meantime, let us hope that the lingering uncertainty will not have notable implications for agribusiness investment.

Farming Sector Growth Bucks Trend of Falling Confidence
 

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Farming Sector Growth Bucks Trend of Falling Confidence

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