Here is Sihlobo...

See PODCAST below

He says the rising fuel price and a slowdown in the demand for South African agriculture products on an international level could be contributing factors to an already uncertain local agricultural sector. Oil prices were under pressure since the start of March this year, following a dispute between Saudi Arabia and Russia, which led to both countries increasing their oil production. This was, however, beneficial to import countries such as South Africa, which over the same period saw a drastic weakening of the Rand. In the absence of increased global oil production, the weakening domestic currency would have resulted in notable increases in oil prices, and in return, fuel prices, which are a key input in the agricultural and agribusiness sector.  

This should be considered a factor in the grain sector, which is approaching its harvest season. Fuel accounts for 11% of South Africa’s grain production costs. The fuel price would be notable in this regard. Together with that, agribusiness, which is in the logistics business, could feel a similar impact. About 80% of South Africa’s grain is transported by road and also a greater volume of other agricultural products. 

South Africa is therefore not completely out of the woods, given that the aforementioned conditions which had necessitated lower oil production have changed. The Organization of the Petroleum Exporting Countries (OPEC) agreed to reduce oil production by 9.7 million barrels a day in May and June, which roughly equates to 10% of global supply. Moreover, there is a commitment to continue oil reductions until April 2022. This means that the decline we saw in oil prices could soon be reversed, and the impact of that could begin to appear in domestic fuel prices from May this year.  This is a month where the summer grain harvest will be commencing, and the citrus harvest will be in full swing. Meanwhile, the winter grain planting season will be at the early stages. All these processes require more fuel consumption at a time where prices will potentially be higher than the current levels of R12.69 per litre of diesel (0.05%).   

He adds the prospects of slowing demand for South Africa’s agricultural exports is no longer a possibility limited to the European and Asian markets, which on their own are key markets accounting for 50% of South Africa’s agricultural exports of R142 billion in 2019. The African market which generally accounts for 40% of South Africa’s agricultural exports could also experience a slowing demand in 2020. This might be the case, notwithstanding the potential food shortage in various African countries this year.  

While the rate of confirmed COVID-19 cases is currently low in the African continent, except in South Africa, various factors could be the key contributing factors to a possibility of slowing demand. Chief amongst them is the relative weakness of currencies across the region amid COVID-19, which in return could lead to rising food prices, says Sihlobo.

That was Wandile Sihlobo, chief economist, at the Agricultural Business Chamber of South Africa, Agbiz, only on Agri Hour.

OFM News