The agricultural sector could emerge from the Covid-19 pandemic in a strong position, if certain challenges can be overcome, both in South Africa and throughout the continent, explains Roux Wildenboer of Absa.
The coronavirus has emphasized the importance of the agriculture sector in South Africa and across Africa because of its potential to support economic growth, create and sustain jobs, and boost exports.
At a time when most industries will be reducing employment, it is hoped that agriculture will at least maintain employment in primary activities. Agriculture has kept employment levels going because by nature, it is a labor-intensive sector, employing for example nearly 900,000 people in SA directly. There are many agricultural sectors that are increasing employment now, although seasonal, such as the fruit export sector.
Another reason why agriculture must be emphasized is because of its employment ability – agriculture on a commercial level has a strong employment multiplier. This will assist in alleviating poverty and even the establishment of new businesses and investment.
It is a proven fact that food production and its availability is of strategic importance to any country, but this crisis has shown, meaning the ability to produce the bulk of your own staple food requirements. What is important is not only the production of food but also the logistics and supply chain to make this food available at affordable prices throughout a population. In this regard, the role of the informal sector is being illuminated.
There is a complex supply chain in the informal sector, the importance of which is becoming increasingly apparent. In this respect, future partnerships between formal producers/networks and the informal sector may become increasingly necessary.
Another lesson from the coronavirus crisis is that food consumption patterns are most likely going to change in many African countries. Due to economic hardship, it is expected that expenditure will increasingly be aimed at basic foodstuffs, and more expensive food will on aggregate, represent a smaller portion of the expenditure basket.
This is not an economic benefit of course, but a logical result of economic recession. This phenomenon will be particularly observable in emerging and developing economies. Where countries are not self-sufficient with staples, exchange rate depreciation will make food much more expensive if it must be imported. This makes the production of affordable staple foods such a strategic imperative.
In richer countries (Europe and the United States), the demand for fresh fruit has increased dramatically, and we have already seen the strong price effects of this. There are varied reasons for this, but one is the renewed realization of the importance of healthy diets. Another factor has been smaller harvests in other exporting countries which have created opportunities for South African produce.
For exporters, currency depreciation is positive over the short term. For example, in South Africa, the rand has depreciated more than 20% over the last 30 days. Fruit exporters are going to see the benefit of this over the next 12 months. It is expected that profits over the next six to 12 months are going to be particularly strong, assuming logistics chains are not dramatically disrupted. Whilst there may be an occurrence of diminishing and negative returns beyond a certain level of depreciation – with most inputs in the agri value chain based in the US, for example, fertilizer, shipping costs, machinery, fuel, etc… a depreciated currency also makes exported goods more competitive on international markets.