Farming sector growth bucks trend of falling confidence
Conflicting data over the past few days about the agricultural sector’s performance stems from two measures: the agricultural economy and confidence levels in the sector.
The Agbiz/IDC Agribusiness Confidence Index has proven to be a good indicator of how the agricultural sector will perform in future. Data from both variables show a disconnect lately. Confidence among agribusiness is deteriorating, while the agricultural economy (GDP) shows robust growth.
After registering 38.7% quarter-on-quarter growth in the second quarter of 2017, the agricultural economy grew 44.2% in the third quarter. This was much higher than market expectations of relatively modest growth of about 20%. Good agricultural output in the 2016-17 production season, which in turn boosted trade, may have caused it.
After deteriorating to 54 points in the third quarter, the confidence index declined to 49 in the fourth quarter. A reading of less than 50 points indicates contraction in agribusiness activity, which means agribusinesses are cautious about business conditions.
The index covers the 10 major aspects influencing a business in the sector: turnover, net operating income, market share, employment, capital investment, export volumes, economic growth, general agricultural conditions, debtor provision for bad debt and financing costs.
The employment, capital investment, economic conditions and general agricultural conditions subindices were behind the overall decline in confidence in the last quarter of 2017.
Factors that drove the sentiment in these subindices included unfavourable weather conditions in the Western Cape and uncertainty regarding land reform policy. Most striking was a sharp decline in capital investment confidence. The subindex fell 20 points from the third quarter to 44, the lowest level since the first quarter of 2010. Such gloom among agribusinesses is not surprising given the talk of expropriation without compensation, along with other controversial land reform statements from political circles.
This despondency could have serious long-term implications for investment, which is on a declining trend.
Agricultural investments are about 24% of the total value added, down from 34% in 2013. If uncertainty over land reform policies continues to linger, investments and growth could be undermined in the long term.
The agricultural economic data may not yet have fully priced in the Western Cape drought, and it continues to weigh on the emotions of farmers and farming businesses. Confidence about agricultural conditions deteriorated 20 index points from the third quarter to 28 in the fourth quarter.
The province is the key producer of wheat, horticultural products and wine. It contributes the lion’s share of just more than 20% of agricultural GDP. With harvesting under way in wheat-and grape-producing areas, a clearer indication of the drought implications should emerge early in 2018.
Weather forecasts suggest summer crop growing areas could receive above-normal rainfall in December and January, increasing the chance of another good crop. The agricultural sector could remain on a positive growth path as farmers intend to increase the summer crop planting area in the 2017-18 season by 43,400 hectares year on year to 4.03-million hectares.
The discrepancy between the qualitative metric and the hard data will most likely narrow when there is positive policy certainty regarding land reform. The lingering uncertainty will hopefully not have notable implications for agribusiness investment.