Damages caused by drought and fires, the current state of ...growinggreatness.co.za/wp-content/uploads/2016/02/... · •South Africa is particularly vulnerable to the effects of

Damages caused by drought and fires, the current state of agriculture and how these

natural disasters impact on the industry and possible job losses.

Briefing of the Standing Committee on Economic

Opportunities, Tourism and Agriculture

3 February 2016

Climatic conditions and seasonal outlook

• The South African Weather Service (SAWS) indicates that most models are currently showing the continuation of a strong El Niño episode towards the late-summer season, despite widespread rainfall in the past two weeks.

• It is expected that this episode will gradually start to subside during autumn and early winter seasons.

• As a result, it is highly likely that South Africa will continue to experience consistently dry and hot conditions towards the late-summer season.

Conditions in other provinces

• Drought continues in many provinces. It is reported that veld and livestock conditions in the majority of areas remain poor.

• It is further reported that irrigated crops are currently under stress due to a lack of sufficient water and high temperatures. The levels of major dams are generally low with restrictions being imposed on irrigation in a number of areas. • In most areas, many dry-land farmers could not begin planting during the normal planting window due to a lack of soil moisture.

• An increase in the number of fires has been reported in the Free State, Limpopo, Northern Cape, North West, Mpumalanga and Western Cape provinces.

• Significant livestock mortalities have been reported in KwaZulu-Natal, Limpopo, North West and the Free State.

Broad impact of the drought

• The agricultural sector remains a key player in the country’s economy.

• Drought shocks have a range of second-round effects given the strong linkages between the agricultural and other sectors.

• Consequences of the drought will also have adverse effects on the financial position of producers, government, consumers, organisations that do business with producers and those that rely on the agricultural sector for key inputs. These linkages are summarised in Figure 2.

Economic impact of the drought

Effect of the drought on agricultural output

and production expectations

• South Africa is particularly vulnerable to the effects of drought as a result of the importance of dry-land agricultural production.

• The SAWS reported that with a recorded annual total rainfall of 403 millimetres, 2015 represented the driest year for South Africa since 1904.

• Below-normal rainfall and temperatures above the norm are expected to continue into the rest of the summer rainfall season.

• As has been widely reported, these conditions in the summer rainfall regions have adversely affected crop production, noting that 83% of South Africa’s maize, 53% of the country’s wheat crop and 73% of sugarcane are produced under dry-land conditions.

Effect on maize production • Area of maize planted: 25% lower than area planted in previous season. 47% below 10 year

average area planted (2006/07-2015/16). • With above-average temperatures expected for the rest of the production season and

continued dry conditions, Grain SA foresees a negative impact on maize crop yields. • All these factors will result in an estimated total maize harvest of 7.4 million tons in the

2016/17 season, which is 25,2% lower than the already drought-suppressed maize crop of 2015/16.

• Figure 3 provides a comparison between the estimated maize harvest for 2016/17 and the average tonnage of maize harvested over the past 10 seasons.

Effect on livestock production

(beef and sheep) • Below-normal rainfall has almost depleted natural grazing veld, placing feed supplies

for the upcoming winter season in a precarious position.

• Producers attempt to keep nucleus herds alive amidst escalating feed prices.

• There are currently no accurate statistics on beef and sheep losses, but the Red Meat Producers’ Organisation (RPO) estimates that over 40 000 cattle had died by the end of 2015 in KZN alone.

• According to the Red Meat Industry Forum (RMIF), increases in the red meat slaughter rates of 23% (cattle), 37% (sheep) and 12% (pigs) were reported from November 2015 to December 2015.

• The drastically reduced plantings of summer crops means livestock producers will remain in a tight position as fodder is likely to be in short-supply in the winter months.


(beef and sheep) in the Western Cape

WESTERN CAPE’S RED MEAT PRODUCTION AREAS:

1. Southern Cape/Overberg region, which contains about 49% of the province's animals (had a good rainy season)

2. Koeberg/Swartland and West Coast/Namakwaland region with about 29% of the animals:

• Areas north and west of Piketberg form part of this region that had under average to very poor grain harvests with little or no summer grazing or crop residues available.

• Lambing season can lead to problems if enough high quality feed is not available. • Many cattle and sheep producers have reduced their herds/ sold them completely. • Namakwaland area: herds are also damaged by problem causing animals. Producers

are under pressure to maintain their herds with expensive feed. • A crisis that may arise is if the availability of drinking water for animals and humans

run out. Reports of wells that have dried up and empty dams have been received.

NAMAQUALAND AND WEST COAST REGION: • Many small scale producers with limited capital are experiencing difficulties to

survive. • They don’t always have the infrastructure to produce feed or transport it over long

distances.

3. CENTRAL KAROO WITH ABOUT 22% OF ANIMALS. • Certain parts in the Central Karoo (has both winter and summer rainfall areas),

are also experiencing disaster drought conditions. • The transport of food and water is a major cost item. Damages caused by

problem animals and stock theft are making huge demands on producers’ management capabilities.

• Shortages pose a threat to the sustainable provision of established branded products. Consumers must to learn to acquire these brands on a seasonal basis in future.

• Prices will also increase due to shortages in the supply.





WHAT WILL THE SUPPLY AND PRICES OF RED MEAT LOOK LIKE IN THE NEW YEAR?

• Supply and demand determine the average price that is also influenced by the

export of large quantities of beef. • The current poor exchange rate and low mutton prices affect the potential

import of mutton to fill shortages in this sector. • In the central and northern cattle grazing areas of RSA and some sheep grazing

areas, many herds have been reduced (slaughtered or sold). • The remaining female animals will not produce the normal calf and lambing

percentages because of the lack of feed during mating season. • The end result is a shortage of lamb and weaners for feedlots.

FEEDLOTS • Feedlots are under pressure due to shortages of maize products & high prices. • Additional costs will lead to an increase in A-grade beef prices. • If SA gets good rainfall in the near future, producers can begin to rebuild their

herds. • Female tailings C-grade animals mainly slaughtered for factory meat, will

become very rare. • Due to shortages prices will increase. • Any possible increase in milk prices of producers in the near future, can also

cause the slaughter cattle from this sector to decrease drastically, putting further pressure on the factory meat prices.

All above factors point to increased consumer and producer prices, especially in the second half of the year due to shortages on the supply side.

It is possible that consumer resistance can increase, especially if alternative sources of protein are available



FACTORS IMPACTING ON SUSTAINABILITY OF WESTERN

CAPE POTATO PRODUCTION: SANDVELD REGION

• The two largest potato production regions in the WC: Sandveld and Ceres Valley. • Combined are responsible for ±16% of the total potato area planted nationally. • Both regions rely mainly on irrigation to water their crops, supplemented with rainfall. • The Sandveld relies on underground water for irrigation. • Ceres Valley relies on rainfall and snow during winter to fill their catchment dams.

WHAT HAPPENED IN 2015: • Sandveld: poor 2015 rainfall, areas north of Malmesbury recorded lowest rainfall in 74 years. • Producers north of Clanwilliam get their water supply from the Clanwilliam dam. Producers'

water quotas of 30% have been reduced as a result of low dam levels. • Ceres also received very little rainfall and snow resulting in low water levels in catchment

dams. • This forced producers to reallocate available water. In Ceres producers prioritised water for

established orchards. • Number of hectares planted in Ceres region declined by 300 hectares, a decline of 27%. • Current estimates: total potato crop in Ceres will decline by 25%. • Sandveld region: total potato area planted decreased by 8% for their summer crop.

THE EFFECT OF HEAT • Sandveld and Ceres experienced severe heat conditions between Nov 2015 and Jan 2016.

Temperatures of 40°C degrees and higher persisted for two weeks during January 2016. • Potatoes are cool weather crops, optimal growth and yields are achieved between 18°C -

24°C. • At 28°C, plants start to experience stress. Portion of energy generated is used to manage

stress. • The higher the temperature, the more energy is required to manage heat stress. At

temperatures of ˃35°C very little energy is converted to producing potatoes. • Under prolonged conditions of temperatures >30°C, a reduction in yields of between 8% and

25% can be expected. • Heat stress also affects the size distribution of the crop harvested. • In many cases growers harvested 20% more small potatoes compared to a year with normal

temperatures. • The price per 10 kg bag of small potatoes is on average 52% lower than the price per 10 kg bag

of medium large and large potatoes. • Except for decline in yield, sub-optimal size distribution significantly affects the income of

growers.





THE EFFECT ON COST OF PRODUCTION • The cost to produce potatoes in the Sandveld amounts to around R134 620 per hectare

(production cost survey for 2015). • This is a substantial annual investment if compared to other field crops (see Figure 1).

Potatoes are a rotational crop that can only be planted on the same field every 4 – 5 years. • At an average yield of 47 tons per hectare in the Sandveld, a producer must realise an

average price (all classes) of at least R28.60 per 10 kg bag of potatoes to cover direct production costs.

• A survey in the Sandveld shows that up to 20% more small potatoes was harvested compared to normal harvesting conditions.

• Small potatoes sold at between R4 and R8 per 10 kg bag over the last 2 months. • Severe heat conditions resulted in the loss of 230 hectares newly planted potatoes. • The decline in yields and lower average price due to a sub-optimal size distribution of the

harvest, had a negative impact on the sustainability of production in the Sandveld.





• Study by BFAP and Potato South Africa investigated the impact of

increasing input costs on the financial feasibility of potato production in the Sandveld.

• In order to illustrate the impact of increasing input costs, the return on investment (ROI) for a potato producer in the Sandveld region was calculated.

• The ROI can then be compared to alternative investments in terms of risk and returns and give an indication of the sustainability of potato production in the Sandveld.



Table 1: ROI for different scenarios on input cost increases

Different input cost increase scenario's Estimated ROI

2016 2017

a) Baseline 6.73% 6.29%

b) Irrigation cost shock 6.38% 5.94%

c) Labour shock 4.77% 4.30%

d) Combined effect (labour & irrigation) 4.43% 3.95%

• The ROI of potato production in the Sandveld (not taking into account the effect on income due to the lower yields, differences in size distribution and lower quality of crop as a result of the drought and heat) is estimated at 6.73% for 2016.

• If the increase in irrigation and labour costs is taken into account, the ROI will decrease to 4.43% in 2016 and 3.95% in 2017.

• This is significantly lower than the current CPI of 5.2%. • Thus, in real terms the production of potatoes will become increasingly unsustainable in the

Sandveld due to possible increases in administered costs, over and above the impact of climate conditions that producers have to weather.

Effect of drought on sales of inputs to

agricultural sector

• The agri sector is an important buyer of products/services from other sectors, which contribute to the manufacturing aspect of GDP.

• Manufacturers of feed, seeds, fertilisers, insecticides and chemicals, are reliant on the agri sector.

• DAFF estimates that producers spent R118.2 billion on intermediate goods and services in the period July 2014 to June 2015. Sales of tractors, agricultural machinery and other implements amounted to R10.6 billion during the same period.

• The decline in agricultural production as a result of the drought will inevitably influence activity in these input sectors. The South African Agricultural Machinery Association (SAAMA) reported that yearly tractor sales were down 12% and sales of combine harvesters declined by 37% at December 2015.

Effect of drought on export volumes

• South Africa is currently a net exporter of agricultural products. • The sector is an important earner of foreign exchange. • The estimated value of agricultural imports for 2014/15 amounted to R62.6

billion. • The value of exports reached R82.8 billion in the same period. • South Africa’s main export crops are citrus fruit, wine, table grapes and

apples, pears and quinces, all of which are largely produced under irrigation conditions.

• Exports of these commodities are expected to remain strong in the coming year, provided that water restrictions that limit the availability of irrigation water are not imposed in key production areas and normal temperatures prevail.

• Exports of these commodities will be further boosted by the current weak Rand against major currencies.

Effect of the drought on inflation

• At an aggregate level, Barclays Africa estimates an average food price inflation of 8.1% in 2016, with a peak of approximately 10% year on year by the end of the year, noting that crop prices may cause food inflation to edge upwards as the year progresses.

• Given that the prices of food and non-alcoholic beverages represent 15% in the CPI weighting structure, changes in the prices of food and non-alcoholic beverages have an important impact on the CPI.

The effect of the drought on employment

• The agricultural sector is the main employer in rural areas. • Employs 897 000 people, which represents 5.6% of the SA labour force. • The sector is labour intensive as agriculture employs more people per unit

of value created than the mining and manufacturing sectors. • While this bodes well for job creation in good production years, it also

means that the sector will shed more labour per unit decrease in the value of production.

• The horticultural, wine, animal production and sugar industries of the Western Cape, Limpopo and KwaZulu-Natal employs the majority of workers in the sector.

• The maize industries in the Free State and North West are highly mechanised and less reliant on hired farm labour.

• No significant job losses are expected in the horticultural and wine producing industries, provided that irrigation requirements are sustained.

.

Effect of the drought on financial

viability of commercial producers

• Drought increases financial liabilities of farming enterprises to the extent that relief efforts are introduced, putting strain on fiscal resources.

• Total farming debt as at the end of June 2015 amounted to R125 billion. • With many producers in the summer rainfall areas being unable to plant or

facing severe livestock losses, it is likely that liquidity in the sector will deteriorate as a result of the drought.

• Weaker solvency of farming operations, a likely shift from long-term to short-term debt and higher nominal interest rates will also contribute to this financial strain.

• The overall debt to asset ratio, currently at 32% (having increased from 22% in 2005) will likely increase even further as has been observed in previous drought periods.

• During drought periods, producers will experience constrained cash flows as farm revenues are diminished but operating costs remain high.

Effect of the drought on financial

viability of commercial producers

• The decline in farm incomes will result directly in lower government tax revenues.

• Government revenue will be negatively affected (albeit indirectly) by the lower profits of business enterprises related to the agricultural sector (a number of businesses including major food processors have already reported poor quarterly financial results as a result of higher raw material costs – maize).

• Government expenditure on drought relief efforts is expected to rise. Significant fiscal provision will have to be made to aid the sector’s recovery.

• Given SA’s tight fiscal position – in light of already expected lower tax revenues as a result of poor economic performance – the additional allocations towards drought relief will add to SA’s current fiscal strain.

• Depending on how the National Treasury juggles competing priorities, the drought may significantly increase real government expenditure or have a negative impact on the budget deficit.

Drought relief challenges

Recommended actions

RECOMMENDATION 1:

Economic / Financial support

The introduction of Interest rate subsidies and state guarantees Interest rate subsidies and state guarantees have been adopted successfully by numerous fiscally-constrained governments in their disaster relief efforts.

Farmers would require the support of interest rate subsidies and/or state guarantees in two instances: 1. To service carry-over (outstanding) debt incurred as a result of

crop failures. 2. To facilitate affordable production credit in the upcoming season should climatic conditions resume.

RECOMMENDATION 1:

The introduction of Interest rate subsidies and state guarantees

RECOMMENDATION 1:


RECOMMENDATION 1:


RECOMMENDATION 2:

Cash grants for small-scale farmers

• A separate dispensation is proposed for farmers with an average annual turnover (5 years) of less than R100 000. • For these farmers, it is proposed that cash grant based on

historical production (for example 20% of normal annual crop) will be granted to support operating expenses and drought recovery.

RECOMMENDATION 3:

Drawing lessons from other countries and

learning from past experiences with drought relief

• Key lessons may be drawn from other countries around the world that have proven to implement successful drought relief interventions.

• Lessons may also be learned from South Africa’s past experiences

with drought relief, particular with respect to relief efforts introduced in response to the severe drought of the late 1980s and early 1990s.

Recommendation 4:

Climate change / research capacity

• Fast track climate change initiatives

• Funding for alternative product research.

• Improvement of present crops to including changing environment (crop improvement)

• Expanding the Fruitlook program for effective water management

• Additional allocation of funding for fixed assets and equipment investment

• Agriculture Research Council ?????

Recommendation 5:

Water storage

• Revisit policies that are hampering the building of new catchment dams

• Change rules to allow for more on-farm dams

Recommendation 6:

Humanitarian support / social implications

• Develop plans for implementations of humanitarian need for poor and unemployed

people should it arise due to the drought and economic conditions.

• Revisit the use of food stamps

• Supporting of rural communities and towns

Recommendation 7:

Fire protocol

• Revisit and develop new fire protocol

• A separate budget allocation additional to the disaster management budget

• Spotter planes to patrol area when hot spot notifications are received

• Investigate a media campaign to sensitize the public on the economic and social

consequences of fires

Recommendation 8:

Animal health

• The severity of the drought leads to new animal health challenges as well as financial

viability of the livestock industry.

• Animal Health needs:

1. Legal support

2. Additional state veterinarians

3. Fully internationally acceptable laboratory for testing

4. Traceability

THANK YOU

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