The Agricultural Business Chamber (Agbiz) and the Industrial Development Corporation (IDC) Agribusiness Confidence Index (ACI) declined from 46 points in the third quarter of this year to 44 index points in the fourth quarter.
This level below the 50-point neutral mark, Agbiz chief economist Wandile Sihlobo told media on Thursday, implied that agribusinesses were still downbeat about business conditions in South Africa.
The ACI has remained below the 50-point neutral mark for six consecutive quarters, marking its longest stretch of sub-50 index points since 2010.
This lagging growth has been underpinned by the unfavourable agricultural policy environment and weather conditions, Agbiz pointed out.
Unfortunately, both challenges could persist into 2020 and possibly result in further underperformance of South Africa’s agricultural economy.
Speaking at an Agbiz media day, Sihlobo explained that the composite index comprised ten subindices, most of which were still generally subdued, not only compared with the previous quarter, but also with the long-term average levels since the index’s inception in 2001.
According to a statement on Thursday, six of the ten subindices that make up the composite index drove the decline in sentiment in the fourth quarter.
The decline in the ACI was mainly underpinned by net operating income, employment, the volume of exports, economic conditions, general agricultural conditions and debtor provision for bad debt subindices.
Confidence regarding net operating income of agribusiness fell by just one point from the third quarter of this year to 44 in the fourth quarter. This downbeat sentiment was largely among firms operating in field crop producing areas and livestock, which suggested that the poor harvest in the 2018/19 summer crop production season and the 2019/20 winter crop production season had weighed negatively on sentiment.
In the case of livestock, however, reports of another foot-and-mouth disease (FMD) outbreak in the country had also weighed on sentiment as this affected the trading of livestock products and profitability of firms and farms, Sihlobo lamented.
The employment subindex, meanwhile, deteriorated by five points to 53. The subsector that was relatively pessimistic about employment conditions was the field crop sector, which could partly be explained by fears that the current drought could lead to reduced plantings in the 2019/20 season and thereafter activity on farms, according to the statement.
Further, the subindex measuring the volume of exports fell from 50 points in the third quarter of the year to 39 in the fourth quarter. This was consistent with the fears of drought, which could lead to poor crop production, and affect exports.
This, Sihlobo said, was not only a factor in the 2019/20 production season but also the 2018/19 season where major grain harvests fell by double-digit levels from the previous season.
In addition, fears that the new FMD outbreak could lead to another wide-scale livestock products exports ban also weighed negatively on sentiments about exports.
The perception regarding general economic conditions in the country fell by 15 points to nine in the fourth quarter, marking the lowest level since the second quarter of 2016, and “goes to show that agribusinesses are not enthused about the economic outlook”. Coupled with this, the recent gross domestic product (GDP) data for the third quarter of this year, which showed a 0.6% quarter-on-quarter seasonally adjusted and annualised rate contraction, corroborated this sentiment.
After recovering from 31 points in the second quarter to 42 in the third when there were still prospects of good summer rains in 2019 going into 2020, confidence regarding general agricultural conditions slipped back to 31 in the last quarter of the year.
Meanwhile, the debtor provision for bad debt and financing costs subindices are interpreted differently from the above-mentioned indices, where a decline is viewed as a favourable development. While an uptick is not a desirable outcome as it shows that agribusinesses are financially constrained, the sentiment regarding the debtor provision for bad debt increased by four points to 34.
Not all indices showed declines in the fourth quarter, where sentiment regarding the turnover, market share of agribusiness, capital investment and financing costs of agribusiness improved somewhat in the fourth quarter. The sentiment regarding financing costs remained unchanged from the third quarter at 44 points, which Sihlobo said could “possibly reflect the stable interest rate environment over the period”.
The turnover subindex confidence lifted from 56 in the third quarter to 75, which was the highest level since the first quarter of 2018.
The market share of agribusinesses subindex was at 62 points in the fourth quarter, up from 58 in the previous quarter, and the capital investments confidence subindex remained flat at 50 points.
Like the previous quarters, Sihlobo said the consistent view in the agricultural industry was that the lack of clarity regarding land reform and water rights, as well as biosecurity challenges and poor port infrastructure remained an overhang that could constrain the potential expansion in fixed investments, as well as growth in South Africa’s agriculture sector.
Further, while South Africa’s agricultural policy environment, specifically land reform and water regulations, remained “unsatisfactory”, Sihlobo lamented the unfavourable weather conditions and biosecurity conditions, describing these as “pressing matters” that could constrain agricultural economic fortunes.
Additionally, he added that the recession that South Africa’s agricultural economy found itself in was caused by these very same factors, and could potentially spill over to 2020.
While recent rain conditions had somewhat improved soil conditions, the industry’s challenges did not seem to have caused disinvestment in the South African agriculture industry so far, Sihlobo said.
However, going into 2020, near-term challenges will continue to affect the industry.
In a separate presentation on Thursday, Agbiz CEO Dr John Purchase said the agricultural industry would continue to be affected by the slowdown in global GDP growth – now at less than 2.5%.
However, for South Africa in particular, he said the lack of GDP growth and the decline in competitiveness, as well as State capability, would remain concerns for the country’s economy and the agricultural industry.
Going forward, Purchase said land and water reform would be at the centre of the country’s focus, and would remain a real concern, lamenting that food-based violence could, potentially, “be the worst of all” if the challenges were not addressed.