He also provides more information about the latest developments in the agricultural sector. 

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In this week’s insert, Sihlobo talks about rising input costs and the effects that it might have on profits made from higher grain prices.

“At a time of an abundant harvest, the high agricultural commodity prices have been a windfall for South African farmers, particularly the grain and oilseed growers. But farmers shouldn't celebrate and spend too quickly. The rising input costs – oil, herbicides, and fertilizer – could erode these gains when farmers embark on the 2021/22 production season, starting in October this year.

“At the end of the first week of July 2021, Brent crude oil price was up 72% year-on-year (y/y), trading around US$74 per barrel. The oil price has a close correlation with fertilizer prices and various agrochemicals inputs. As such, herbicides prices show similar increases in US dollar terms, with glyphosate up 144% y/y in June 2021. Importantly, South Africa imports all of its annual agrochemicals’ consumption.

“This means that not only the rise in prices should be a concern but also the logistics 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% y/y, 52% y/y, 67% y/y, and 69% y/y, respectively, in the first week of July 2021,” explains Sihlobo.

He further goes on to say that a strong demand and geopolitical uncertainties in crucial producing countries as well as tight global supplies have been the primary driver of prices in all these commodities.

“Recently, OPEC's failure to reach a deal to increase global oil production is one example of factors causing tight oil supplies in the global market and ultimately driving up prices. The expectations from various analysts globally are 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.

“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 is generally throughout the year, with the highest periods being during planting and harvesting.

“In terms of annual fuel usage, it is worth noting that South Africa transports by road roughly 81% of maize, 76% of wheat, and 69% of soybeans. On average, 75% of national grains and oilseeds are transported by road. This means farm managers and agribusinesses will have to plan for an environment different from last year, when input costs were relatively low, increasing cost this time around,” adds Sihlobo.

He explains that South Africa imports about 80% of its annual fertilizer consumption and is a minor player globally, accounting for a mere 0.5%.

“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 a reality here 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, 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 plan for a slightly challenging environment of rising 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 an expected sizeable global harvest in the 2021/22 season, then the farmers' finances could be in an even slightly tighter environment 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 ultimate prices that farmers will pay to their various suppliers of production inputs when planting begins in October. So, the current higher grain prices are a welcome development from a farmers' perspective, but more trouble lies ahead from potentially higher input costs,” concludes Sihlobo.

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