After remaining below 50 index points for five consecutive quarters, the Agbiz/Industrial Development Corporation (IDC) Agribusiness Confidence Index recovered significantly by 13 index points to 60 in the third quarter of this year.

This is the highest reading since the third quarter of 2014. An index point above 50 indicates expansion in the South African agribusiness activity, which shows that despite the debilitating drought the local sector experienced over the last few months, agribusinesses are holding an optimistic view regarding business conditions in the country.

While these results offer some hope about the sector’s activity, the recovery is not supported by broad improvement in all subindices.

Seven out of ten subindices of the survey contracted, with the exception of the economic growth prospects, agricultural conditions and employment subindices, which were the key drivers of the rebound.

Respondents also completed the questionnaire after the release of the second-quarter gross domestic product figures, which to some extent, might have influenced their view on the country’s economy.

The optimism about agricultural conditions is largely supported by the expected La Niña occurrence later in the year, as well as favourable winter crop conditions in the Western Cape.

The turnover subindex dropped by four points to 75 in the third quarter, 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 subindex, the net operating income subindex dropped by ten index points to 65, as agribusinesses continue to suffer the effects of the 2015/16 drought season.

Moreover, the market share of the business subindex was down by seven index points to 68, reflective of the sentiment expressed in the aforementioned subindices.

Respondents’ perceptions regarding employment in the agribusiness sector improved by nine points to 63 in the third quarter. This recovery is partially linked to the fact that the sector is approaching the production season, therefore, activity might increase, which, in turn, could lead to seasonal job opportunities.

Confidence regarding capital investment dropped by seven index points to 60.

Agbiz and the IDC believe the decrease is linked to growing concerns about South Africa’s political and policy uncertainty.

As expected, confidence in export volumes dropped by 17 index points from the second quarter to 33, which is the lowest level since the first quarter in 2006. This is largely as a result of lower crop production. Summer crop production is set to reach 8.93-million tons, down by 25% from last season, which was already 28% lower than in the 2014 season.

Surprisingly, confidence regarding South Africa’s economic growth rebounded by 26 index points to 30 from the second quarter of 2016.

“We believe this improvement was influenced by the recovery in South Africa’s real gross domestic product figures, which showed that the economy grew by an adjusted, annualised rate of 3.3% quarter-on-quarter, following a quarter-on-quarter contraction of 1.2% in the first quarter of the year. Therefore, we remain cautious that the respondents’ views could easily change in the coming quarter,” the companies said in a statement.

South African agribusinesses’ confidence around general agricultural conditions improved by 33 index points to 55 from the previous quarter. This year’s wheat production is estimated at 1.7-million tonnes, up 17% year-on-year.

The debtor provision for bad debt subindex declined by 43 points to 32, following the 2015/16 drought season. However, higher commodity prices have, to some extent, compensated for lower production volumes in some areas. Thus, improving farmers’ ability to meet their obligations.

Additionally, the financing costs subindex dropped by 61 points to 31. This could be linked to the growing sentiment that interest rates could be lifted again before the end of the year, which will then increase agriculture’s financing costs.