Weather, price fluctuations cause sector volatility

10th May 2013

By: Chantelle Kotze

  

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Financial services provider Standard Bank is advising farmers to protect themselves against sharp fluctuations in grain production volumes and prices, owing to market volatility caused by weather and input cost fluctuations.

“Weather patterns are likely to be unpredict- able for some years to come and global commodity markets are fluctuating quite sharply as the world emerges from the recession. Consumer preferences are also shifting strongly towards environment-friendly production methods,” says Standard Bank Agribusiness head Willie du Plessis.

“This means that the uncertainty that normally faces agriculture will become more pronounced over the next few years. Therefore, farmers need to ensure they are prepared.”

In light of this, Du Plessis says South Africa’s total grain crop estimation in February of 12.4-million tons is not likely to be achieved, with potential record yields impacted on by the late summer drought in the northern and western Free State and in the North West. Grain prices are expected to remain higher than R2 000/t.

Since last year, sharp grain price fluctuations in South Africa have also been a result of the tight supply stock and droughts that were experienced internationally.

He says Southern Africa staple food prices will continue to increase in the remainder of this year, owing to tight regional supplies because of localised production shortfalls, strong export and institutional demand, which has put upward pressure on prices.

Internationally, economists remain unsure about the maize prices in the northern parts of the world, but economists believe that international maize prices are likely to remain stable in the coming months, driven by their expectations of North and South American maize production being good this year.

Further, Du Plessis says global maize stocks, production levels and exports in 2013/14 are expected to increase, compared with the results of 2012/13, and that maize prices will begin to fall when there is more certainty around the maize production exports in key exporting countries.

This trend will be confirmed in the next quarter of this year, pending the weather conditions in key maize-exporting countries.

The past few seasons of good crops and good prices might tempt farmers to take a speculative approach to production by either not insuring their next planting or holding back on selling their entire crop until the end of the season in the hopes of bigger profits. However, Du Plessis cautions that the unusual combination of present factors make this approach too risky.


The outcome of fluctuating grain prices makes it difficult for farmers to budget. “It is important for farmers to consider ways of miti- gating the production and price risk and, in turn, undertake the risk-management procedure of building a stress test scenario into their budget- ing process,” says Du Plessis.

Farmers can also incorporate a hedging strategy or fixed pricing strategy to ensure that they earn predicted revenues and are protected against the negative outcomes of events.

“To better prepare themselves for weather and price fluctuations, farmers can also insure their crops. Although crop insurance is expensive, it is important for farmers to mitigate any potential risk that may negatively affect their business,” notes Du Plessis.

Besides the impact on farmers, grain consumers and specialist grain consumers, such as the poultry and pig feed industries, are also affected.

Specialist grain consumers also need to ensure that they put the necessary hedging strategies in place to mitigate grain price fluctuations that could negatively affect business profitability.

Consumers are affected, owing to increased food prices. High grain prices also have an inflationary effect on the economy as a whole and have a particularly negative effect on disadvantaged members of the population, says Du Plessis.

According to the National Agricultural Marketing Council, the amount of monthly income spent on food by the poorest 30% of the population increased from 38%, in January 2012, to 40.4% in January 2013.

Meanwhile, grain farmers in South Africa also face the challenge of continuing increases in input costs, limited available arable land and higher production risks in drier areas, as well as reduced water supply and water quality, which puts strain on producers.

Farmers must, therefore, consider ways of reducing their costs, improving their productivity and making do with less through using improved technologies.

“South African farmers tend to undertake conventional farming, but a trend towards more environment-friendly farming, as a way to reduce production costs, has been noted.

Environment-friendly farming approaches, such as low tillage, can also be used to a business’s advantage instead of being only a way to mitigate risk. These approaches cut costs, boost yields and make the produce ethically more attractive to consumers.

“Farmers who are continuously refining their operations and farming at the cutting edge become flexible and can respond more easily to market shifts and weather challenges,” says Du Plessis.

The volatility not only affects one’s business but also creates business opportunities, he says, adding that farmers and agribusinesses should be smart when diversifying their businesses, entering new markets and using production techniques, such as precision farming, to increase yields and reduce operating costs.

“As an industry, collectively, we can make a significant difference to reducing poverty in South Africa by running agricultural operations more efficiently, thereby making food more affordable without losing our own profitability,” says Du Plessis.

Standard Bank has several solutions to help the grain industry do more with less and adopt new technologies and processes.

Its long-standing strategic partnership with South African grain producers association, Grain SA, includes collaborative involvement in the Grain SA Congress, Nampo, and agriculture youth networking forum Young Leaders Devel- opment – all aimed at ensuring the transformation and sustainability of the industry.

Standard Bank’s Third Party Fund Admini- stration transactional support initiative enables Grain SA to easily administer all individual grants awarded by the Department of Rural Development and Land Reform to emerging farmers capable of producing 250 t/y of grain.

Standard Bank’s stand at Nampo Harvest Day 2013 will feature a temporary branch, where visitors can draw or deposit money. A hospitality area will also be available to enable visitors to engage with banking specialists on agriculture funding solutions and products, which will be on display.

“Our commitment to the grain sector is not just about funding growth, it’s also about fostering talent, business acumen, innovation capability and stakeholder unity that will ensure South Africa’s food security in the long term,” concludes Du Plessis.

Edited by Tracy Hancock
Creamer Media Contributing Editor

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