Trading climate gets nod from agrifirms

22.09.2016

THE South African agricultural sector is still battling with the aftermath of the 2015-16 drought. However, there is some light at the end of the tunnel. The recent Agbiz/IDC Agribusiness Confidence Index suggests that in the third quarter of 2016, South African agribusinesses had a relatively positive view of business conditions in the country.

After remaining below 50 index points for five consecutive quarters, the index recovered significantly, by 13 index points to 60, in the third quarter. It is the highest reading since the third quarter of 2014.

An index above 50 indicates expansion in agribusiness activity.

The index covers the 10 most important aspects or sub-indices influencing business activity in the agricultural sector: turnover, net operating income, market share, employment, capital investment, export volumes, economic growth, general agricultural conditions, debtor-provision for bad debt and financing costs.

The third quarter provides hope, but it is important to highlight that the recovery was not supported by a broad improvement in all sub-indices. Seven out of the 10 showed contraction, with the exception of economic growth prospects, agricultural conditions and employment - the drivers of the rebound.

The respondents completed the survey questionnaire after the release of the second-quarter GDP figures, which might have influenced their view regarding the country's economic growth prospects.

In the second quarter, the GDP figures showed the economy grew a seasonally adjusted annualised rate of 3.3% quarter-on-quarter, after a 1.2% first-quarter contraction. Therefore, one should remain cautious - the respondents' views could easily change in the coming quarter.

The optimism about agricultural conditions is supported by the expected La-Niña occurrence, as well as favourable winter wheat crop conditions in the Western Cape. In fact, SA's 2016 wheat production is estimated at 1.7-million tonnes, 17% higher year-on-year.

Perceptions about employment in the sector improved marginally due to the fact that the sector is approaching the production season, so activity will increase and generate seasonal job opportunities.

On the downside, the turnover subindex dropped four points to 75 in the third quarter from the previous one, which suggests some agribusinesses are making losses, particularly the ones operating in grain-producing areas.

Lower production means lower storage and handling income for agribusiness.

In line with the turnover sub-index, confidence about the net operating income subindex dropped 10 index points to 65, as agribusinesses continue to suffer the effects of the 2015-16 drought season.

Moreover, the market share of the business sub-index was down seven index points to 68, reflecting the sentiment expressed in the aforementioned sub-indices.

Confidence regarding capital investment dropped seven index points to 60, which we suspect is linked to growing concerns about SA's political and policy uncertainty. As expected, confidence in export volumes dropped 17 index points to 33, the lowest level since the first quarter of 2006. It is largely due to lower crop production.

Summer crop production is set to reach 8.93-million tonnes, 25% down on last season's, which was already 28% lower than in 2014.

Confidence concerning the debtor provision for bad debt sub-index declined 43 points to 32 following the 2015-16 drought season, and the financing costs subindex dropped 61 points to 31, which is probably linked to concerns that interest rates will rise before the end of the year.

Overall, policy uncertainty remains the key risk and could potentially discourage investment in the agricultural sector.


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