The agricultural sector could emerge from the Covid-19 pandemic in a strong position, if certain challenges can be overcome, both in South Africa and throughout the continent, explains Roux Wildenboer of Absa
The coronavirus has emphasised the importance of the agriculture sector in South Africa and across Africa because of its potential to support economic growth, create and sustain jobs and boost exports.
At a time when most industries will be reducing employment, it is hoped that agriculture will at least maintain employment in primary activities. Agriculture has kept employment levels going because by nature, it is a labour-intensive sector, employing for example nearly 900,000 people in SA directly. There are many agricultural sectors that are increasing employment now, although seasonal, such as the fruit export sector.
Another reason why agriculture must be emphasised is because of its employment ability – agriculture on a commercial level has a strong employment multiplier. This will assist in alleviating poverty and even the establishment of new businesses and investment.
It is a proven fact that food production and its availability is of strategic importance to any country, but this crisis has shown the importance of being food secure, meaning the ability to produce the bulk of your own staple food requirements. What is important is not only the production of food, but also the logistics and supply chain to make this food available at affordable prices throughout a population. In this regard the role of the informal sector is being illuminated.
There is a complex supply chain in the informal sector, the importance of which is becoming increasingly apparent. In this respect, future partnerships between formal producers/networks and the informal sector may become increasingly necessary.
Another lesson from the coronavirus crisis is that food consumption patterns are most likely going to change in many African countries. Due to economic hardship it is expected that expenditure will increasingly be aimed at basic foodstuffs, and more expensive food will on aggregate, represent a smaller portion of the expenditure basket.
This is not an economic benefit of course, but a logical result of economic recession. This phenomenon will be particularly observable in emerging and developing economies. Where countries are not self-sufficient with staples, exchange rate depreciation will make food much more expensive if it must be imported. This makes the production of affordable staple foods such a strategic imperative.
In richer countries (Europe and the United States), the demand for fresh fruit has increased dramatically, and we have already seen the strong price effects of this. There are varied reasons for this, but one is the renewed realisation of the importance of healthy diets. Another factor has been smaller harvests in other exporting countries which have created opportunities for South African produce.
For exporters, currency depreciation is positive over the short term. For example, in South Africa, the rand has depreciated more than 20% over the last 30 days. Fruit exporters are going to see the benefit of this over the next 12 months. It is expected that profits over the next six to 12 months are going to be particularly strong, assuming logistics chains are not dramatically disrupted. Whilst there may be an occurrence of diminishing and negative returns beyond a certain level of depreciation – with most inputs in the agri value chain based in the US, for example fertilizer, shipping costs, machinery, fuel etc… a depreciated currency also makes exported goods more competitive on international markets.
However, for countries reliant on food imports, currency depreciation is going to add enormously to the fiscal burden. This is because imported food will become more expensive, and with government finances under stress due to increasing unemployment, food dependence is going to increase in these countries.
Due to poverty and the inability to produce enough food to not be reliant on expensive food imports, governments will have to take a closer look at agricultural policy and strategy.
Agriculture, like any investment, requires sound regulations and policy consistency. In this respect, agricultural and trade policy must be aimed at increasing trade and the mobility of goods between countries. The stimulation of export industries will be increasingly important.
There is still a lot of room for agricultural export development in African countries and governments must encourage activities that can assist with staple food production. It is also important to reduce, and eventually eliminate, red tape and over-regulation wherever it occurs. Governments and development agencies will have to find a balance in policy to achieve two objectives: increasing food security by producing more staples locally, and stimulating the production of exported products which increases GDP and currency earnings. Both these objectives must be pursued, although the emphasis will differ between countries depending on their circumstances.
Going forward, technology and investment will be even more important. This is accepted as a universal truth in agricultural production, and the absolute necessity of utilising technology in agriculture is unquestioned. Governments will have to attract and lock-in the private sector to assist with this, because public/private partnerships are proving to be the feasible way to achieve this.
To take advantage of the opportunities in agriculture, particularly during the post coronavirus era, there are various lessons to be seen at individual business levels: first, there is need for a strong balance sheet which can sustain your agricultural operations in uncertain and stressed environments. This means ensuring that you have manageable and lower gearing and leverage.
A strong balance sheet gives you financial flexibility to absorb shocks and the financial flexibility to capitalise on opportunities that may present themselves.
Another key factor is risk management. Businesses need risk strategies on various topics, such as how to prevent employees from becoming sick. The worst thing that can happen at present to a fruit pack house is the facility being closed due to coronavirus. .
Companies also need to look at their logistics and supply chain as part of their risk management strategies to keep on doing business. What is the plan if a transporter cannot transport your employees or produce, for instance?
Lastly, employee relations are of utmost importance. When a shock of this magnitude occurs, businesses need their employees to support them. This will only occur if you have had consistently good employee strategies in the past: remuneration, working conditions, treating employees fairly, good communication and leadership.
Roux Wildenboer is sector head of agriculture for Absa in Johannesburg