April Input prices

Transcription

1 April 2014 This document gives insights into agricultural input (irrigation tariffs, fertiliser and fuel prices, electricity tariffs and minimum wages) and output prices (for selected grains, livestock and vegetables). It concludes with details on the overall agricultural industry s performance (terms of trade and gross income discussions). Input prices The agricultural industry is characterised by lower margins and volatility in prices. This environment makes farmers vulnerable and emphasises the importance of operational efficiency and risk mitigation to ensure sustainability. Weather forecast and dam levels The Seasonal Climate Watch forecasting system indicates weak probabilities for abovenormal rainfall for most parts of the summer rainfall region for late summer (February and March), with drier conditions over the eastern parts of the country moving into autumn. In the late summer, above normal maximum and minimum temperatures are predicted for the south-western half of the country. The other half of the country is expected to be cooler than normal in autumn. The quality of the minimum temperature forecasts, as measured by the Relative Operating Characteristic (ROC), is low for the larger part of South Africa. There is some improvement for maximum temperatures with the eastern half of South Africa indicating good performance, especially for mid-winter. 1 Meaning there will not be extremely hot conditions; temperatures will range between below and normal temperatures. 1 Seasonal Climate Watch, February to June

2 Dam levels week-on-week 2 All dams are over 100% full, with only the Barrage Reservoir and the Woodstock Dam between 90% and 100%. This could result in many of the dams having to open multiple gates to relieve pressure on weighed down banks

3 International fertiliser prices and the strength of the South African rand have an effect on local fertiliser prices. Because the rand is trading somewhat stronger a slight decrease in local fertiliser prices should be expected. On the other hand, due to the demand in the United States (currently undergoing planting season) an upward price trend is reflected in local fertiliser prices. Upward pressures are driven by increasing world demand, mainly the US. International urea prices decreased by 8% month-on-month, causing a four-month low of R3 404/ton. Prices also decreased year-on-year by 5%. Year-on-year, global MAP prices fell by 17%, reaching R3 131/ton. On the domestic side, MAP prices increased by 11% year-on-year, a strong increase compared to the international price. Urea prices increased by 6% year-on-year from R6 456/ton in April The market is currently volatile, so it is difficult to predict future movements. Economists expect the rand to weaken to an average of R11against the US dollar by the end of the second quarter of

4 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Rand/Litre US$/barrel R15 Fuel Prices 140 R13 R11 R9 R R5 0 Reef Unleaded 95 Coast Unleaded 95 Reef 0.05% Coast 0.05% Coast Brent crude oil (RHS) Source: AA and Index mundi, 2014 Fluctuations in the local currency have a direct impact on fuel prices. The strengthening of the rand is contributing to the over recovery of domestic fuel prices. On 2 April 2014, transport-related costs increased by 20 cents a litre (due to the implementation of a fuel and road accident fund levy announced in the 2014 Budget), neutralising the decrease in international Brent crude oil prices. As a result, the petrol price increased by 7 cents a litre (unleaded 95 octane), while diesel decreased by 9 cents a litre. Gauteng consumers will now have to pay R14.39/litre for 95 grade petrol. In the first four months of 2014, the price of petrol has increased by 82 cents. 4

5 There have been large increases in the price of electricity over the past few years. This has put a lot of pressure on producer margins. South Africa had the largest electricity price increase worldwide in 2009, at 34%. Although we do not have the most expensive electricity, during 2013 we had the third-highest increase compared to the rest of the 5

6 Rand/month Rand/hour world, at 12%. The highest increases were in Germany, at 18%, and Australia, at 13.6%. A tip for farmers is to use Ruraflex by irrigating their fields during off-peak times. Minimum wages R2 600 R2 400 R2 200 R2 000 R1 800 R1 600 R1 400 R1 200 R1 000 R800 R Area A Area B Area (RHS) Area B (RHS) Source: NAMC, There has been positive incremental growth in minimum wages over time. In 2014, minimum wages have increased by 4.9%. This increase is based on the consumer price index (CPI) published by Statistics South Africa on 11 December The Sectoral Determination demands a wage increase by the CPI figure for quintile %. This means a 6.4% increase is applicable in terms of the new minimum wage from 1 March The new minimum wage is set at R a day (working nine hours a day), which is a R6.72 increase from the previous year. According to the Basic Conditions of Employment Act No.75 of 1997, a female farm worker is entitled to at least four consecutive months maternity leave. In terms of overtime, it is to be paid at the rate of one and a half times the employee s normal wage. Furthermore, a farm worker may not work more than 15 hours overtime a week, and not more than 12 hours on any day, including overtime. 3 For area definition, please contact Economic Insights. Contacts are available at the end of the document. 6

7 July- 11 Aug- 11 Sept- 11 Oct- 11 Nov- 11 Dec- 11 Jan- 12 Feb-12 Mar- 12 Apr- 12 May- 12 Jun- 12 Jul- 12 Aug- 12 Sept- 12 Oct- 12 Nov- 12 Dec- 12 Jan- 13 Feb- 13 Mar- 13 Apr- 13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Rand/Ton R7,000 Field crops Average Monthly Prices R6,000 R5,000 R4,000 R3,000 R2,000 R1,000 Yellow maize White maize Soybeans Wheat Sunflower Source: GrainSA, 2014 Table 1: Monthly price movements in grains Table 2: Shows production forecasts 7

8 The latest Crop Estimates Committee (CEC) details released on 27 March 2014, indicate that 2.68 million hectares (ha) were planted to maize in the 2014 season. This is a marginal year-on-year drop of 3.5% compared to Producers planted million ha to white maize. They plan to plant million ha to yellow maize. The National Agricultural Marketing Council (NAMC) projects total white maize production for the 2014/15 season at 7.0 million tons, including tons opening stock (1 May 2014). Yellow maize total supply for the 2014/15 season is projected at 5.8 million tons, including opening stock of tons. An increase in maize production is anticipated following recent good rains in major production areas. The latest forecast for sunflower seed, by the CEC, reflects a 6.0% increase in total tonnage, to reach tons. This is as a result of farmers switching to sunflower, before recent rains, as it produces well under dry conditions. The area planted to sunflower increased by 16% from ha to ha at a yield of 1.38t/ha. Soybeans are expected to reach tons, which is a 4.2% increase on the previous year. The weekly South African maize export figures for the week ending 28 March indicate that tons of maize has been exported. This brings cumulative maize exports for the season to date to million tons, comprising of tons of white maize and million tons of yellow maize. In international markets, the forecaster Informa Economics raised its estimates for the 2013/14 Brazilian maize crop harvest by 3 million to 68 million tons, citing increased plantings of winter corn. Argentine maize crop estimates were also raised from 22.6 million to 23 million tons. Ukraine s maize production forecast for the 2014/15 marketing year was raised by 3 million to 26 million tons. According to the Food and Agriculture Organization of the United Nations (FAO), maize production conditions in Argentina are positive but unfavourable weather conditions in Brazil could have a negative impact on first maize crop production. Recent excessive rains in Mato Grosso have resulted in the postponement of maize 8

9 replanting, which could impact harvesting in May. All maize planting regions in Brazil planted less than the five-year average with Mato Grosso du Sul (a state South of Mato Grosso) the only state that planted ahead of the average. Despite political unrest in the Ukraine, the country is set to become the fourth largest exporter of maize, with demand picking up from China. Total exports from Ukraine to China could reach tons for the entire year 4. US maize prices posted good gains, which were largely supported by lower than expected stocks and new crop area estimates, pushing the market above the recent highs. Further support came from the ongoing strong export progress, despite more cancellations out of China. Consequently, the strong demand for US maize exports could be pressuring the 2013/14 ending stock. The graph below indicates the strength of US maize exports. 4 Reuters article, China rejects more U.S. corn due to GMO as state sales approach, 25 Mar

10 Once again, China has rejected US maize for the presence of MIR 162 (GMO), a total of tons in five months since November. The Chinese government is considering the approval of the GMO strain. US maize export progress 5 South African maize prices posted some gains, however, these were limited by the stronger rand and larger maize production estimates, specifically in terms of white maize. Prices are still under pressure resulting from the latter, limiting buying interest in our market, which has led to very low trading volumes and very little direction. Grain prices are driven by the international market and the exchange rate as well as weather conditions; due to the rand trading stronger against the dollar maize price gains were disappointing compared to those seen in the international markets. The new maize crop was estimated at 12.9 million tons, which was lower than market expectations, which also limited some of the gains in the local market. Very little rainfall is expected in the immediate future in the major growing areas, meaning prices should trade lower in the short to medium term. Total demand for white maize is expected to reach 6.4 million tons of which 4.2 million is for human consumption. Total demand for yellow maize is expected to reach 5.4 million tons, of which 4.8 million tons is for local consumption. 5 UNIgrain, weekly maize report, 09 Apr

11 Table 3: Monthly price movements in livestock Table 4: Monthly volume movements in livestock 11

12 Livestock prices fluctuated during March. The price of beef traded higher than in February, while lamb, pork and baconer prices traded lower. Lamb prices fell by just over 3%, while baconer fell by 2.2%. The increase in beef prices is aligned to Agricultural Marketing Trends (AMT) forecasts, as farmers will buy cattle and hold back existing volumes to rebuild their herds owing to the after effects of the drought experienced in Higher beef prices are expected to linger as a result of high maize prices. Mutton is expected to trade higher during the first three months of 2014 due to low supply, resulting from last year s drought, as farmers attempt to rebuild their herds. Weaner prices moved sideways in 2013, but prices are expected to increase in the coming months owing to the increase in maize prices. Our short-term view is that if rainfall improves grazing conditions as usual from February to April, livestock prices should increase during the second quarter of

13 Note: Latest available data is February 2014 due to technical problems experienced by data supplier. Table 5: Monthly price movements in vegetables Commodity Units Feb 2013 Jan 2014 Feb 2014 Average price Average price Average price Change (m/m) Change (y/y) Onions R R R % 57% Potatoes Rand/Ton R R R % 13% Tomatoes R R R % -8% Table 6: Monthly volume movements in vegetables Commodity Feb 2013 Jan 2014 Feb 2014 Tons Tons Tons Change (m/m) Change (y/y) Onions % -4.6% Potatoes % -0.4% Tomatoes % -4.2% 13

14 Conclusion Using the Farm Requisite Index (FRI) as a proxy for input price inflation, input prices grew at a much slower rate of 7% year-on-year in This is compared to 14% in Based on inflation pressure in 2013, the FRI is expected to follow a similar upward trend. *Terms of trade generally refer to the degree to which price growth in agricultural products keeps up with the price inflation of farm requisites. Thus terms of trade refer to the % increase on both the input and output sides. Above the purple line, the ratio is considered favourable, since farmers earnings are theoretically growing faster than the inflation in their farm requisites. The increase in input prices is greater than general product inflation. In effect, this eats away at profit potential. As most farmers are price takers, it is impossible to pass on the burden of overpriced input costs, which leaves them in a cost-squeeze situation. We expect that this scenario will continue over the medium to long term. This underlines how important it is to improve efficiency and increase productivity. The Department of Agriculture, Fisheries and Forestry s (DAFF) Economic Review for Agriculture in 2012/2013 shows the terms of trade in agriculture decreased by 1.1%, from 0.87 in 2011/12 to 0.86 in 2012/13. The terms of trade indicate the extent to which producer prices received by farmers kept pace with the prices paid for farming requisites. 14

15 Despite increases in input costs, the agricultural sector performed well and kept up relatively good growth. Agricultural gross income grew by 9% in 2013 year-on-year reaching R182.9 billion. Gross income for deciduous and other fruit grew significantly (23.8%) in 2013, reaching R12.8 million. Poultry meat, as the most consumed source of protein, grew its gross income at a significant 12%, reaching R32.9 million. Efficiency is one of the key factors that led to growth in net farm income. Farmers are also using technology and economies of scale to improve their profitability. Poultry, maize and beef remain the biggest industries in terms of value contributed to gross income, contributing 18%, 13% and 10% respectively. 15

16 Sources Grain South Africa National Agricultural Marketing Council Agriculture Marketing Trends Unigrain Department of Agriculture, Fisheries and Forestry Index Mundi Milk Producers Organisation Red Meat Abattoir Association Red Meat Producers Organisation Compiled by: Terleen Oosthuizen Consultant, Economic Insights Tel: