AGRICULTURAL ECONOMIC POSITION OF AGRICULTURE IN THE FREE STATE AN OVERVIEW

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AGRICULTURAL ECONOMIC POSITION OF AGRICULTURE IN
THE FREE STATE- AN OVERVIEW

• Free State Agriculture
• Compiled by Prof. J Willemse
• Agricultural Economics (UFS)
• 26 May 2006

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CONTENTS OF OVERVIEW

• Deregulation - Free market since 1996/97
• SA agricultural support
• Macro economic overview SA agriculture
• Commodity price trends
• Import competition import duties
• Asgisa and Agriculture in the Free State
• The way forward

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DEREGULATION SUMMARY OF EVENTS

• Decade of change
• Free market approach since 1994 and opening
  economy / agriculture to trade and competition
• Agricultural economy under severe pressure since
  2002
•  
• 1994 96/97
•         Transforming Government services
•       Land reform
•       Labour reform/minimum wages
•  

4

• 1996 1998
•         Closing down marketing / control boards
•         Linked to implementation of Uruguay
  agreement (GATT) to replace permits with
  import duties (relative low) SA chose low
  tariffs
•  1998 2002
•         Growth period / Mandela goodwill period!
•         Agricultural export markets opened up
•         Rand devaluation
•         Export growth (income)
•         Farming income increased
•         Investments in agriculture increased
•         Land values increased

5

• 2003 2004/05
•        Rand strengthened
•        Import competition increased
•        Producer prices start declining, from
  international competition
•        Farming export income dropped
• (lower prices, to compete)
•        Import duties lowered (wheat, ...)
• SA Agricultural Research and Development in
  continuous decline... (basis for international
  competition)

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• 2004 2005/6
•         Period of coinciding trends
•         Rand continues to strengthen
•         Large world crops and meat trade ban /
  
• prices dropping / bird flu
•         New agricultural exporters emerging
•         Import / export parity prices dropping.
•         SA agriculture producers commodity
  producers, without support,
  with market competition on the
• lowest prices!
•   Requests for higher/appropriate import
  duties turned down - wheat etc.
•   Agricultural Research and Development to
  support international
  competitiveness, continues to erode....
•  

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• 2005 /06Choices to be made..
•    Commodity markets
• o       Lowest production cost
• o       Compete on price
• o       Volatile markets
• o       Compete with export countries (Arg, Braz,
  Ukraine..)
• ?Trade / price competition will increase
  (Doha negotiations too slow) Less and bigger
  farming units needed for economies of scale
  severe rural economic implications or Government
  supportive framework
•   Niche markets supply chain approach, adding
  value in rural areas (growth
  employment)
•   Changing food demand in SA to higher value
• products value adding in FS
• ? High level market intelligence, Research and
  Development support of high calibre needed, in
  Government supportive framework

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South African agricultural exports still based on
commodities - need value adding support in rural
areas.
SA AGRICULTURAL SUPPORT
Agricultural exports processed (01/02)
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Trade continues to grow - SA agriculture needs
to be competitive
Source OECD Policy Overview SA Agriculture 2006
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SA Government support for agriculture-of the
lowest in the world - needs rural growth and new
farmers
Total Government support to agriculture in SA, is
third lowest in OECD study
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OECD Government support as of producer income
(2004)
? Governments support their local products in
various ways to keep them competitive and to
support rural areas
Source Agricultural Policies in OECD countries
(2005)
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MACRO ECONOMIC OVERVIEW SA AGRICULTURE
Nett income as of gross income continues to
drop in agriculture Nett farm income was lower
for the 3rd year in 2005, dropping by 20,9,
continues in 2006? Input prices increases faster
than product prices. Input prices increased by
2,2, product prices decreased by -5,5 in 2005
long run trend - input supply competition?
Source NDA publications, 2006
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Declining profits require increased debts to
keep going
Total Agricultural debt was R34,7 Bn end
2005. Debt asset ratio increases to 32 - above
the save level of 25 .... requiring support
from financiers.
Original source NDA
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Land Bank needed Treasury support to strengthen
capital and to keep solvent
The Land Bank is the main source of funding to
agri business farmers The Land Bank is under
severe financial pressure (increased interest
rates), required support from Treasury in
2005/06 to keep going...
SourceReserve Bank, March 2006
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• A large number of farms are relative small
• 77 farms have an income / turnover below R1
  million
• Will they be forced out of business, for
  economies of scale?

3,78

30 723

1,20







2,21

30
950

1,26







1,77

57 059

1,24







2,99

40 470

1,25









16,3

1,37

69 628

1,25









17,3

0,91

111 209

1,32


Source Agricultural Sensus (2005 Publication)
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On what should we focus on?

• Commercial farming financial pressures
  continues...
• Focus needed on Input costs (labour, taxes,
  input competition). Research innovation /
  flexibility. Government support.

Source Course by J Willemse, Aug
2005 Information gained from workshops in 2005
from ? 700 farmers
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COMMODITY PRICE TRENDS
Maize
The area under maize production declined by 46
as a result of declining prices Maize prices
continue to decline, while input costs continue
to grow
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Production costs Maize
Maize production costs (North West Free State)
Source Grain SA, 2006
The production costs/ton continue to increase
sharply (rising costs) The price/ton farmers
received continues to decline since 01/02 The
yield/ha continues to increase However, the
profit margin disappeared - one of the reasons
that maize plantings dropped by 46 in current
season ? Resulting in 1 Mt imports in 06/07
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Wheat
SA wheat production continues to decline, a
result of declining prices and lowering in the
import duty of wheat wheat imports 1 Mt ....
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Production costs Wheat
Wheat production costs (Eastern Free State)
Source Grain SA, 2006
Production costs continue to increase Producer
price continues to decline Financial losses to
produce wheat continue to increase Yield risk
(weather) also plays a role ? International price
competition is allowed on low quality wheat
import prices
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Oilseeds - Sunflower

• Sunflower seed production continues to decline
  imports of oil meal and vegetable oil continue to
  grow

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Production costs Sunflower seed
Sunflower seed production costs (North West Free
State)
Production costs continue to increase Producer
price peaked in 01/02 and continues to
decline Yields are growing, depending on season -
however disease will limit future plantings
(inadequate research) The profit/ton continues to
decline - reducing cash flow and ability to
absorb further cost increases
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Beef
Although beef prices improved, it is back at the
2002 level, while import prices continue to drop
- with import volumes growing (next slide) Import
quantities are currently limited by BSE/Foot
Mouth in exporting countries to SA
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Beef imports are growing, while domestic demand
grows and domestic slaughter declines, requiring
increasing imports......
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Sheep/mutton
Sheep herd numbers continue to decline as a
result of theft in most areas Domestic prices are
moving below import prices - import
competition Import volumes continue to grow -
limiting domestic profitability / value adding
and taking income away from agriculture / rural
areas / Free State ....
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Wool
Wool producer prices continue to decline since
2002 -reducing profitability of sheep farming -
declining rural income
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Dairy
Dairy producer prices continue to decline since
2002, with feed costs increasing The
supply/demand position is in deficit, with
imports growing and herd sizes continue to
increase (economies of scale) to survive
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IMPORT COMPETITION DUTIES

• Agricultural products produced in Free State face
  
• Declining production, result of declining prices
• Price decline continuous import competition at
  lower prices / international Government support
• Import quality (example wheat) is allowed to be
  inferior to SA quality prescriptions to producers
• Input cost increases despite efficiency growth
• Rural areas income / economy continues to shrink,
  while agricultural production declines,
  subsidized / lower quality imports continue....
• ?Profitability of Free State agriculture under
  severe pressure to adapt, for financial survival
• ? To revive rural economy, 6 growth positive
  supporting Government policy needed ...

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Import competition
SA agricultural product imports (2006/07)

• The cost of products imported R10,6 bn
• FS agricultural income pro rata lost could be
  R3 R4 bn
• FS normal economy loss on GDP multiplier (1,5)
  R4,5 R6 bn/year
• The outcome of a trade policy approach, that
  ignores market realities and SA rural growth needs

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IMPORTANCE OF AGRICULTURE IN THE FREE STATE

• FS agriculture is number 1, 2 and 7 in ranking of
  divisions in provinces
• Agriculture is the economic basis for large areas
  and number of families in the province
• Free State agriculture is the second largest
  agricultural producer of all provinces

Source Agricultural Census 2002, SSA, 2005
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Free State Agriculture

• FS agriculture has the most farming units
• It has the second most farm workers, but the
  highest debt/asset ratio as well, indicating the
  worsening impact of declining prices /
  profitability, despite efficiency gains
• FS agriculture basis of economic activity in most
  rural areas / towns

Source Agricultural Census 2002, SSA, 2005
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Economic multipliers

• GDP multiplier
• ?value added
• ? Production Agriculture 1,51 All
  sectors 1,5
• Household income multiplier
• ?household income
• Production Agriculture 0,89 All sectors 0,98
• Labour multiplier
• ?employment
• Production Agriculture 24,17 All sectors
  8,16
• Agriculture Equal performance to total economic
  growth multiplier
• Labour multiplier 3 times better than rest of
  economy
• Household income multiplier, equal to total
  economy and larger for low income household
• Source SA Agricultural Sector Review
  Evaluation of changes since 1994
• (Chapter 13, Sectorial Multipliers), NDA, 2004

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THE WAY FORWARD

• Support Land reform/new farmers must be
  successful
• Current farming environment not conducive for
  success -all farmers / rural areas are in
  financial decline
• Profitability declining continuously since 2002,
  forcing restructuring and limiting ability to
  adjust to new policy requirements / taxes on
  agriculture (wages, land tax etc)
• Need supporting agricultural environment in
  Free State to support rural economy, reduce
  poverty and improve employment
• Agriculture is economic base of large areas in
  Free State
• Successful agriculture-basis for economic
  prosperity in rural areas
• Agriculture needs to play a central role in
  Asgisa (6 growth target) to reduce unemployment
  and poverty by 2014 supporting agricultural
  trade and policy pre-requisite in the region
• Co-ordinated, supportive agricultural policy
  needed, taking world realities into account (not
  asking for subsidies!)
• Agri entrepreneurs are available and can grow FS
  economy they also demonstrated willingness to
  co-operate with Government