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Rising Costs To Keep South African Farmers On Their Toes

26 July 2021 – Amid an abundant harvest, high agricultural commodity prices have been an ironic windfall for South African farmers, particularly the grain and oilseed growers. However, farmers should manage their portfolios well, as input costs have also been rising, namely: oil, herbicides, and fertilizer. Such higher costs have the potential to erode these price gains when farmers embark on the 2021/22 production campaign, commencing in October this year.

At the end of the first week of July 2021, Brent crude oil price was up by 72% y/y, trading around US$74 per barrel. The oil price has a close correlation with fertilizer prices and various agrochemical inputs. As such, herbicide prices show similar increases in US dollar terms, with glyphosate up by 144% y/y in June 2021. Importantly, South Africa imports all of its annual agrochemical’ consumption. This means that it is not only the rise in prices that should be a concern, but also the logistics of landing the inputs on the back of disruption in supply chains and continuous reports of container shortages.

The same is true with fertilizer, with potash, urea, monoammonium phosphate (MAP), and diammonium phosphate (DAP) prices, for example, up by 32%, 52%, 67%, and 69% y/y, respectively, in the first week of July 2021.

The tight global supplies, strong demand and geopolitical uncertainties in crucial producing countries have been the primary driver of prices in all these commodities. Recently, OPEC’s failure to reach a deal to increase the global oil production is one factor causing tight oil supplies in the global market and ultimately driving up prices.

The expectation from various analysts globally is that fertilizer prices could remain elevated for some time. Now, South Africa is just three months away from the new season’s planting period, which means that the country’s farmers are unlikely to be spared the higher input costs.

If we consider grain and oilseed farmers, who are the main subject of our discussion; fuel generally accounts for between 11% and 13% of production costs. The consumption of fuel takes place generally throughout the year, with the highest periods being the planting and harvesting periods. In terms of annual fuel usage, it is worth noting that South Africa transports roughly 81% of maize, 76% of wheat, and 69% of soybeans by road. On average, 75% of national grains and oilseeds are transported by road. This means farm managers and agribusinesses will have to plan well for an environment much different from last year when input costs were relatively lower.

South Africa imports about 80% of its annual fertilizer requirements and is a minor player globally, accounting for a mere 0.5% of total global consumption. Hence local prices tend to be influenced by developments in the major producing and consuming countries, such as India, Russia, the USA and Canada. Hence, the higher global fertilizer prices will be experienced in South Africa as well.

Much of the fertilizer imported by South Africa is utilized in maize production, accounting for 41% of total fertilizer consumption in the country, with the second-largest consumer being sugar cane at 18%. Fertilizer constitutes about 35% of grain farmers’ input costs and a substantial share in other agricultural commodities and crops.

In essence, the higher grain prices and harvest might look good on the financial books in the near term, but farmers and agribusinesses will have to maneuver well to tide them over this challenging environment of rising input costs in the coming months. Even worse, if the grain prices could soften somewhat from the current higher levels (which is all too likely on the back of expected sizeable global harvests in the 2021/22 season), then farming margins could be even further squeezed in the coming months.

Another critical factor for the domestic farmers will be the performance of the rand to the US dollar, which is key in determining the prices of production inputs when planting begins in October. As such, although the prevailing higher grain and oilseed prices are a welcome development from a farmer’s perspective, they will need to shrewdly mitigate the primary and knock-on effects of potentially higher input costs in the weeks to come. Source (Wandile Sihlobo.com)