Western Cape water crisis

Transcription

1 Weather and Water Western Cape water crisis The macroeconomic impact of the drought The Western Cape has experienced below-average rainfall for the past three years, which has left agriculture reeling and dam levels dangerously low. The City of Cape Town currently estimates Day Zero, the day on which the taps run dry, to be sometime in 2019, pushed out from their most recent estimate of 15 July One good rainy season can see average dam levels increase by over 50% of the total provincial capacity in the Western Cape. If the 2018 rains deliver above-average rainfall, we could see average dam levels recover from approximately 15% by the beginning of the rainy season to 65% by the end of the rainy season. It is very unlikely that the dams could return to full capacity in just one good rainy season, although not impossible. At this stage, our macroeconomic forecasts are mainly incorporating the impact of the Western Cape drought via the direct impact on its agricultural sector. This, however, is premised on the current water restrictions and drought impact, and assumes that Day Zero, which would have a disproportionately big impact on economic activity, is avoided. The agricultural sector and the food and beverages industry in the manufacturing sector constitute around 3% and 6.3% respectively of the Western Cape s GDP, while the Western Cape constitutes around 14% of national GDP. From contributing around 0.4ppt to economic growth in 2017, we expect a negative contribution from the agricultural sector in We are at this stage incorporating a negative contribution from the Western Cape to aggregate economic growth of around 0.25ppt in Food-related products constitute around 48% of total Western Cape goods 1 exports, and in turn constitutes around 5.4% of SA s total exports. These (Western Cape food) exports (Figure 14) are dominated by (raw and prepared) fruit and nuts (26.6% of its exports), beverages (9.5%), and fish (4.5%). The impact of the drought on export volumes will be affected not only by the smaller crop, but also by the negative impact of the drought on the quality of select produce, which may mean that they don t meet export standards. Canola and barley producers were also severely affected. At this stage, we incorporate a negative impact on the trade account of 0.3% of GDP due to the Western Cape drought. This, along with the forecasted recovery in domestic demand and possibly the import-intensity of demand, is one of the reasons why we expect the current account deficit to widen by around 0.8% of GDP in We expect food inflation to average around 4.3% in 2018, from 7.0% in We do not expect the drought in the Western Cape to put upward pressure on food prices, except perhaps in the case of vegetables. Grain prices remain relatively subdued, suppressed partly by rand strength. Wheat prices are not influenced by the increase in imports; an expected decline in the wheat import duty should provide some relief. While maize production has declined, a large carry-over crop means that imports will not have to increase, and prices therefore do not have to rise nearer import parity. 1 These numbers only include goods exports, not services. Research Analyst Penny Byrne Penny.Byrne@standardbank.co.za Economist Elna Moolman Elna.Moolman@standardbank.co.za This material is "non-independent research". Non-independent research is a "marketing communication" as defined in the UK FCA Handbook. It has not been prepared in accordance with the full legal requirements designed to promote independence of research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Analyst certifications and important disclosures are in the disclosure appendix. For other important disclosures, please refer to the disclosure & disclaimer at the end of this document.

2 January February March April May June July August September October November December mm Standard Bank Western Cape water crisis Different types of drought There are four different types of drought: 1) Meteorological drought an extended period of below-average rainfall over a region. 2) Hydrological drought reduced water resources as a result of below-average rainfall. 3) Agricultural drought a reduction in water availability that results in reduced yields and impaired crop growth. 4) Socio-economic drought the impact on human activities when demand for water exceeds supply. The Western Cape is currently experiencing all four types of drought. Three years of below-average rainfall The Western Cape has experienced below-average rainfall for the past three years The Western Cape has experienced below-average rainfall for the past three years, which has left agriculture reeling and dam levels dangerously low (Figure 1). Figure 1 shows the monthly accumulated rainfall over the Western Cape in the last three years, along with the average and a band of one standard deviation around the average. This demonstrates that not only were these three years below average, but two of them were almost one standard deviation below average, while 2017 rainfall was closer to 2 standard deviations below average. Figure 1: Western Cape cumulative monthly rainfall Source: South African Weather Service, Standard Bank Research Average Dam levels in the Western Cape currently around 20.4% There are six major dams in the Western Cape that provide 99.6% of the region s water supply at a combined capacity of million cubic meters. The current average capacity of these six dams is 23.2%, while the provincial average dam levels are 20.4%. 1

3 Standard Bank Table 1: Capacity and levels of the 6 major dams in the Western Cape Full storage capacity % of total capacity This week Last week Last year Berg River Dam % 49.6% 51.3% 39.3% Steenbras Dam-Lower % 35.2% 35.2% 34.8% Steenbras Dam-Upper % 91.8% 90.8% 56.2% Theewaterskloof Dam % 10.7% 10.8% 26.3% Voelvlei Dam % 15.5% 16.2% 31.5% Wemmershoek Dam % 44.7% 46.4% 36.5% Total % 23.2% 23.7% 31.2% Source: Department of Water and Sanitation, Standard Bank Research We note that the two largest dams, namely Theewaterskloof and Voelvlei Dams, which account for 72% of the total storage capacity in the Western Cape, are currently at only 10.7% and 15.5% capacity respectively. Figure 2 shows where these major six dams are located, while Figure 3 shows the catchment areas that drain into these dams. In Figure 3, the region shaded in pink drains into Theewaterskloof dam, while all five other major dams drain from the region shaded in blue. Figure 2: Location of the 6 major dams Figure 3: Catchment areas for the 6 major dams Source: Wikipedia Source: Department of Water and Sanitation, Mediahack The Western Cape is a winter rainfall region and as such their dam levels rise during winter and fall the rest of the year. The provincial average dam levels are lowest between mid-april and mid-june and peak between mid-august and early October. Drawdowns range between 36% and 56%, and average 44% (Figure 4). We note that the anomalously low drawdown in 2014 of 36% was accompanied by unusual out-ofseason rainfall, which saw dam levels increase periodically through the summer months. Average provincial dam levels in the Western Cape are currently around 20.4%, but the last 10% of dam water is not useable, which means that the province can only draw down 10.4% between now and the beginning of the next rainy season. 2

4 Jan-2012 May-2012 Sep-2012 Jan-2013 May-2013 Sep-2013 Jan-2014 May-2014 Sep-2014 Jan-2015 May-2015 Sep-2015 Jan-2016 May-2016 Sep-2016 Jan-2017 May-2017 Sep-2017 Jan-2018 May-2018 % Standard Bank Figure 4: Western Cape daily dam levels since % 36% 56% 60 45% 40 43% 12% 20 15% 0 Source: City of Cape Town, Standard Bank Research If the 2018 rains deliver aboveaverage rainfall, we could see average dam levels recover, from approximately 15% at the beginning of the rainy season, to 65% by the end of the rainy season During the above-average rainfall years of 2012, 2013, and 2014, the average provincial dam level ended the rainy season at more than 100% capacity. The lowest base off which the dams filled back to full capacity was around 49% before the 2012 rainy season. This indicates that one good rainy season can see average dam levels increase by over 50% of the total capacity. If the 2018 rains deliver above-average rainfall, we could see average dam levels recover, from approximately 15% by the beginning of the rainy season, to 65% by the end of the rainy season. It is very unlikely that the dams could return to full capacity in just one good rainy season, although not impossible. Assuming average rainfall, it could take 3 4 years for the dams to fill and surface water supplies to be replenished. Groundwater sources, however, may be impacted by the current drought for longer than surface water sources in the event that rainfall patterns return to normal. Day Zero The City of Cape Town has just pushed back their estimate for Day Zero to sometime in This has been moved back from 15 July 2018 last week. Each week the City takes the previous week s daily water consumption into account to project when the taps will run dry. The City estimated daily water consumption was around 516 million litres a day last week, down from 526 million litres a day the previous week, which the City estimates will need to fall to 450 million litres in order to avoid Day Zero entirely. The fruit growers of the Groenland Water Users Association (GWUA) in the Western Cape released 10 million cubic meters of private water reserves on 6 February to help Cape Town avoid Day Zero. The water was released into the Palmiet River and will eventually make its way to the Steenbras Dam. This one-off release of private water is expected to give the City an additional 20 days of water. Another factor that has contributed to a later estimated Day Zero is the fact that agricultural use is expected to decline significantly in the coming weeks. Most of the region s agricultural users have already used their allocated water quotas which should see use decline. The amount of water used by the agricultural sector is estimated to halve in March and reduce by a further third in April. Level 6b water restrictions came into effect on 1 February 2018, reducing the amount of daily water useage per person from 87 litres to only 50 litres. Before the new restrictions came into place only 55% of Capetonians were adhering to the 87 litres per 3

5 Standard Bank day restriction, up from 41% the previous week. The City will update their estimate of compliance now that the new water targets are in place. The extra water supplied by the fruit growers of the GWUA, the expected reduction in agriculture water use, and a reduction in the previous week s daily water consumption has all contributed to the City pushing Day Zero back in the last few weeks. Plans to supply the City with more water The City of Cape Town is busy building three temporary small-scale desalination plants and is going ahead with plans for aquifer extraction which could deliver 150 million litres of water a day to the city. The process to set up aquifer extraction is lengthy and will optimistically only be completed by July Of the three temporary desalination plants, the Strandfontein and Monwabisi plants are behind schedule but already more than two-thirds completed, while the V&A Waterfront plant is 77% complete and on schedule. The plants at Strandfontein and Monwabisi are expected to start delivering 2 million litres a day to the city in March, reaching their full capacity of 7 million litres a day from each plant by April. The V&A Waterfront plant is expected to produce 2 million litres of water a day in March. The Southern Annular Mode or Antarctic Oscillation The Southern Annular Mode (SAM), also called the Antarctic Oscillation (AAO), is the principal low-frequency mode of atmospheric variability in the southern hemisphere consisting of an oscillation in atmospheric pressure between the Antarctic region and the southern mid-latitudes. A positive (negative) event is characterised by anomalously low (high) pressure over Antarctica and anomalously high (low) pressure over the midlatitudes of the southern hemisphere. Figure 5 shows the SAM in positive phase which occurs when there is anomalously low pressure over Antarctica and anomalously high pressure in the mid-latitudes. The increased pressure gradient results in stronger polar westerly winds. Figure 5: The Southern Annular Mode (positive phase) Source: Arctic Sea Ice Forum A positive phase of the SAM and the strengthening of the polar vortex are often associated with warmer and drier conditions over the winter-rainfall region of South Africa, while a negative phase of the SAM is associated with wetter conditions over the Western Cape. 4

6 Standard Bank Figure 6 shows that the SAM has been in positive mode for much of the last three years, during which time the Western Cape experienced below-average rainfall. Figure 6: Daily SAM for the last three years Source: NOAA, CPC, Standard Bank Research However, we note that this system is not predictable on a seasonal timescale, and so cannot assist in the assessment of the coming rainfall season over the Western Cape. Why Western Cape rainfall is so difficult to predict The 2016 and 2017 droughts in the Western Cape occurred during an El Niño and La Niña respectively One of the reasons it is easier to predict rainfall over the rest of South Africa is partly due to the correlation between ENSO (El Niño and La Niña) and rainfall over most of the country. We are able to predict ENSO a few months in advance, which helps modellers forecast rainfall over most of South Africa. This gives a fairly reliable leading indicator of rainfall conditions, which is not available for the Western Cape that has a weak and inconsistent relationship with ENSO. In particular, the 2016 and 2017 winter rainfall droughts occurred during an El Niño and La Niña respectively. There are climate models that can be used to predict seasonal rainfall, but these models are not equally skilled over all regions. A number of climate models failed to predict the 2017 drought in the Western Cape, including the South African Weather Service, the European Centre for Medium-Range Weather Forecasts, as well as the International Research Institute for Climate and Society. The reason for the low skill of forecasts over this region is that rainfall over the Western Cape is modulated by the passage of cold fronts originating in the Southern Ocean. As global weather systems move northward in the winter months, more fronts reach the southern parts of the African continent. The cold fronts that bring rainfall to the Western Cape form part of a highly variable eastward propagating wave pattern of air flow over the Southern Ocean, which makes them very difficult to predict. 5

7 Standard Bank Figure 7: Summer pattern of Southern Ocean fronts Figure 8: Winter pattern of Southern Ocean fronts Source: Manual of Synoptic Satellite Meteorology - Conceptual Models Source: Manual of Synoptic Satellite Meteorology - Conceptual Models The South African Weather Service s January seasonal climate watch does not foresee significant rainfall over the Western Cape during the 2018 autumn season. Reliable seasonal forecasts will only be available in April and May this year. The likely impact of climate change The Western Cape in particular is expected to become relatively drier in future Most studies looking at the impact of climate change on South Africa suggest an increase in the frequency and intensity of extreme weather events. The Western Cape in particular is expected to become relatively drier in future as a poleward shift in the westerly winds south of the continent could block cold fronts from reaching the winter rainfall region. The drier conditions are also likely to see an increase in fires in the region. Impact of the drought on agriculture At this stage, our macroeconomic forecasts are mainly incorporating the impact of the Western Cape drought via the direct impact on its agricultural sector. This, however, is premised on the current water restrictions and drought impact, and assumes that Day Zero, which would have a disproportionately big impact on economic activity, is avoided. The socio-economic impact is also bigger than the estimated impact on the GDP would suggest, with the Western Cape government, for example, estimating that there are around 50,000 poor households that depend on irrigated backyard gardening for their subsistence, which may not be able to produce any food during the drought. The Western Cape government expects an average 14% decline in fruit production volumes, 20% in vegetables, and 37% in grains in FY17/18 from FY16/17 as a result of the drought. The major agricultural produce of the Western Cape includes fruit, grains and vegetables. The Western Cape government expects an average 14% decline in fruit production volumes, 20% in vegetables, and 37% in grains in FY17/18 from FY16/17 as a result of the drought. Fruit that will likely be the worst affected include grapes, apples, and pears, which constitute the bulk of the total area planted with deciduous fruit. The Western Cape continues to dominate SA s production of deciduous fruit despite the increased contributions from the Northern Cape, Eastern Cape, and Limpopo provinces in recent years; total (national) exports of all three fruits are thus expected to fall in 2017/18 due to lower production and some fruit (of which the quality is negatively affected by the drought) not meeting the export requirements. Fruit that falls short of export standards will be channelled to the domestic market instead, which add to the pressure on the trade balance but should help to contain domestic price pressure. The drought has also had a negative impact on wine grape production, with the South African Wine Industry Information and Systems (Sawis) group estimating production of only 1.43 million tons of wine grapes in 2017, which is expected to fall further in 6

8 Wine Grapes Table Grapes Pome Fruit Stone Fruit Citrus Alternative Fruit Major Vegetables Grains % y/y 2010Q1 2010Q3 2011Q1 2011Q3 2012Q1 2012Q3 2013Q1 2013Q3 2014Q1 2014Q3 2015Q1 2015Q3 2016Q1 2016Q3 2017Q1 2017Q3 4Q07 2Q08 4Q08 2Q09 4Q09 2Q10 4Q10 2Q11 4Q11 2Q12 4Q12 2Q13 4Q13 2Q14 4Q14 2Q15 4Q15 2Q16 4Q16 2Q17 R m Index Standard Bank The Western Cape Department of Agriculture estimates that wine grape production will fall by around 20% y/y in FY17/18. We expect a negative contribution from the agricultural sector to GDP in 2018 The agricultural sector and the food and beverages industry in the manufacturing sector constitute around 3% and 6.3% respectively of the Western Cape s GDP, while the Western Cape constitutes around 14% of national GDP. From contributing around 0.4ppt to economic growth in 2017, we expect a negative contribution from the agricultural sector in We are at this stage incorporating a negative contribution from the Western Cape to aggregate economic growth of around 0.25ppt in Figure 9: Food exports Figure 10: GDP by sector % % % 46% % % % Agric Mining Manuf Utilities Construction Trade Western Cape Total Western Cape (% of total, RHS) Source: Quantec, Standard Bank Research Transport Fin, bus. service Personal service Govt Source: SARB, Standard Bank Research Figure 11: Western Cape food-related exports (% of SA total, 2016) Figure 12: Estimated production impact of the drought Cereals Vegetable products n.e.c. Sugars Milled products Live animals Animal fats Cocoa Coffee, tea, spices Meat Edible products n.e.c. Prepared cereals Edible vegetables Dairy, eggs, honey Animal products, n.e.c. Live plants Oil seeds Vegetable extracts Prepared meat and fish Prepared fruit, nuts Fruit and nuts Beverages, spirits, vinegar Fish 3.8% 6.1% 7.9% 8.4% 9.0% 11.6% 15.6% 22.2% 22.2% 22.4% 23.1% 24.1% 26.3% 37.8% 39.4% 48.6% 50.2% 57.9% 62.5% 63.6% 65.4% 84.9% % 20% 40% 60% 80% 100% Western Cape (% of SA exports) Source: Quantec, Standard Bank Research Source: Western Cape Government 7

9 Standard Bank Impact of the drought on the Western Cape and SA economies As alluded to above, the impact of the drought on export volumes will be affected not only by the smaller crop, but also by the negative impact of the drought on the quality of select produce, which may mean that they won t meet export standards. Food-related products constitute around 48% of total Western Cape goods 2 exports, and in turn constitutes around 5.4% of SA s total exports. These (Western Cape food) exports (Figure 14) are dominated by (raw and processed) fruit and nuts (26.6% of its exports), beverages (9.5%), and fish (4.5%). As alluded to above, the impact of the drought on export volumes will be affected not only by the smaller crop, but also by the negative impact of the drought on the quality of select produce, which may mean that they won t meet export standards. Canola and barley producers were also severely affected. In addition to the trade balance pressure from lower food-related exports, there is also likely to be pressure from higher imports. The Western Cape wheat crop is an estimated 47% y/y smaller; the Agricultural Business Chamber estimates that wheat imports could rise by up to R4bn as a result of the Western Cape drought. While maize production is expected to fall, a large carry-over crop from last year is expected to be sufficient to prevent an increase in maize imports. At this stage, we incorporate a negative impact on the trade account of 0.3% of GDP due to the Western Cape drought. This, along with the forecasted recovery in domestic demand and possibly the import-intensity of demand, is one of the reasons why we expect the current account deficit to widen by around 0.8% of GDP in 2018, from an estimated shortfall or just more than 2% of GDP in Figure 13: Western Cape GDP composition % of total Agriculture, forestry, fishing 3,9% Agriculture 3,1% Mining 0,3% Manufacturing 15,2% Food and beverages 6,3% Electricity 2,8% Construction 5,7% Trade 17,9% Transport 11,0% Finance 24,7% Community services 18,5% Figure 14: Western Cape food-related exports (% of Western Cape total exports, 2016) Vegetable products n.e.c. Live animals Vegetable extracts Animal products, n.e.c. Cocoa Cereals Milled products Sugars Coffee, tea, spices Live plants Animal fats Prepared cereals Edible vegetables Dairy, eggs, honey Meat Prepared meat and fish Oil seeds Edible products n.e.c. Prepared fruit, nuts Fish Beverages, spirits, vinegar Fruit and nuts 0% 5% 10% 15% 20% 25% % of Western Cape exports Source: IHS, Standard Bank Research Source: Quantec, Standard Bank Research There are few official economic time series available on a provincial basis, which makes it difficult to monitor the state of the Western Cape economy to assess how the risks to our estimates of the macroeconomic impact of the drought evolve. The latest available data is somewhat mixed but, arguably tentatively, suggests that the risks are biased to the larger side of our estimates of the economic impact of the drought. Despite clear pressure on agricultural employment in the Western Cape (falling 23% y/y), the province s overall employment remained relatively resilient up to 4Q17 (with 106,000 jobs created y/y and 92,000 q/q). Measures of demand are clearly under pressure, with both new car sales and building plans passed weaker than the rest of the country (see charts below). However, encouragingly, electricity consumption has not weakened relative to the national average (we therefore interpret the absolute weakness as possibly reflective of factors such as improved energy efficiency or private generation rather than necessarily reflecting weak(er) economic activity). A downside risk is the 2 These numbers only include goods exports, not services. 8

10 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-12 Jun-12 Nov-12 Apr-13 Sep-13 Feb-14 Jul-14 Dec-14 May-15 Oct-15 Mar-16 Aug-16 Jan-17 Jun-17 Nov-17 % y/y % % y/y, 3m avg % y/y, 3m avg 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 Thousands % Thousands Standard Bank noticeable slowdown in total and international tourist arrivals (by air) in the Western Cape (albeit still higher on a y/y basis), which could pose a risk to the estimated impact on GDP and the current account. We will monitor this closely in the coming months. Figure 15: Western Cape employment Figure 16: Western Cape employment % 80% 60% 40% 20% 0% -20% % 250 Agriculture Private households Finance Trade Construction Agriculture (RHS) Transport Community and social services Manufacturing Source: Stats SA, Standard Bank Research Source: Stats SA, Standard Bank Research Figure 17: Western Cape new car sales in context Figure 18: Western Cape tourist arrivals (by air) 30% 16.5% 35% 15% 20% 16.0% 15.5% 30% 25% 10% 10% 15.0% 20% 0% -10% -20% -30% 14.5% 14.0% 13.5% 13.0% 12.5% 15% 10% 5% 0% -5% -10% 5% 0% -5% -15% -10% Western Cape dealer/day (% YoY) SA dealer/day (% YoY) Western Cape % of total (3m avg, RHS) International arrivals Total arrivals (RHS) Source: NAAMSA, Standard Bank Research Source: ACSA 9

11 Jan-09 Jun-09 Nov-09 Apr-10 Sep-10 Feb-11 Jul-11 Dec-11 May-12 Oct-12 Mar-13 Aug-13 Jan-14 Jun-14 Nov-14 Apr-15 Sep-15 Feb-16 Jul-16 Dec-16 May-17 Oct-17 Mar-18 Aug-18 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 % y/y Index Sep-03 May-04 Jan-05 Sep-05 May-06 Jan-07 Sep-07 May-08 Jan-09 Sep-09 May-10 Jan-11 Sep-11 May-12 Jan-13 Sep-13 May-14 Jan-15 Sep-15 May-16 Jan-17 Sep-17 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Standard Bank Figure 19: Building plans passed Western Cape Figure 20: Electricity consumption Western Cape 35% 80% 10% 11.0% 33% 31% 29% 27% 25% 23% 21% 19% 17% 60% 40% 20% 0% -20% -40% 8% 6% 4% 2% 0% -2% -4% -6% 10.5% 10.0% 9.5% 9.0% 15% -60% -8% 8.5% Ratio to national % YoY (RHS) % YoY % of total (RHS) Source: Stats SA Source: Stats SA South Africa food inflation set to ease We expect food inflation to average 4.3% in 2018 We expect food inflation to average around 4.3% in 2018, from 7.0% in At this stage, we do not expect the drought in the Western Cape to put upward pressure on food prices, except perhaps in the case of vegetables. Grain prices remain relatively subdued, suppressed partly by rand strength. Wheat prices are not influenced by the increase in imports; an expected decline in the wheat import duty should provide some relief. While maize production has declined, a large carry-over crop means that imports will not have to increase, and prices therefore does not have to rise closer towards import parity. We also expect that red meat inflation to start to moderate due to the gradual increase in supply (although supply is still well below the historical average). This seems to be mainly owing to a gradual increase in slaughtering numbers (albeit still well below average) as part of a post-drought normalisation of supply, although a drought-induced increase in slaughtering in the Western Cape is also playing a role. Figure 21: Food inflation forecasts (CPI) Figure 22: Meat prices (CPI) Food Grain products Meat Beef Pork Lamb Weighted average Source: Stats SA, Standard Bank Research Source: Stats SA, Standard Bank Research 10

12 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Index Standard Bank Figure 23: Poultry prices (retail) Index Figure 24: Fruit and vegetable prices Fresh, whole Fresh, portions Frozen, portions Source: Stats SA, Standard Bank Research Source: Stats SA, Standard Bank Research Fruit and nuts Vegetables Despite earlier concerns about the potential impact of Avian flu on poultry stocks, the impact disproportionately affected egg layers rather than broilers, with around 91% of the birds that died or were culled being egg layers (and only a very small proportion of broilers affected). It therefore had a bigger impact on egg than poultry prices. Relatively contained feed costs (given the aforementioned subdued grain price trends), however, is the key reason why we expect limited increases in poultry prices. The ratio between poultry prices and feed costs has increased materially given the decline in grain prices (feed costs). As discussed above, the Western Cape drought may weigh on fruit prices, if a droughtrelated deterioration in quality necessitates a redirection of exports to the domestic market. Vegetable prices, however, is one of the exceptions in which prices may be supported by the decline in production. 11

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