DealMakers - Q3 2020
Despite the “pandemic quarter” and plunging retail sales, SA’s agricultural sector remains buoyant
The second quarter of 2020 was aptly dubbed “the pandemic quarter” by Statistics SA, as gross domestic product (GDP) fell by just over 16% between the first and second quarters of 2020, giving an annualised growth rate of 51%.
Historical data at the South African Reserve Bank indicated that this was the biggest quarterly fall in GDP since 1960.
The impact of the “pandemic quarter” was further concretised in October, when a number of retail companies, property funds and mining companies released their half year results or trading updates. Pick ‘n Pay anticipated a profit plunge of more than 60% (at end August 2020) and Woolworths 65% (at end September 2020) while Hyprop Investments experienced erosion in the value of its South African portfolio to the tune of R3,9bn. Retail sales figures (in other words, consumer spend) are generally deemed to “take the temperature” of the economy.
Since January this year, the central bank has slashed lending rates by 300 basis points, but economists argue that this will not be enough to revive the consumer sector. The South African Reserve Bank forecasts a GDP contraction of 8.2% in 2020, compared to the earlier forecast of 7.3% in July. Deputy Governor of the bank, Fundi Tshazibana, warns that economic recovery will take some years, with both private and official institutions not projecting a return of GDP to pre-COVID-19 levels until late 2021 or even late 2022. Negative output gaps are expected to be the norm.
Yet, while nearly all South African industries experienced a massive drop in output in the first half of the year, the agricultural sector has shown itself an anomaly by growing almost 30% during the financially turbulent first quarter of 2020. The agriculture, forestry and fishing sector increased by 27.8% on a seasonally adjusted and annualised basis. In the second quarter, the industry expanded by 15.1% with the second-quarter trade surplus 32% higher than it was a year ago, according to Wandile Sihlobo, chief economist at the Agricultural Business Chamber (Agbiz).
A key factor contributing to the sector’s strong performance has been favourable weather conditions which boosted a good harvest in grains and some horticultural products. Additionally, agriculture was one of the few sectors that could continue operations during South Africa’s stringent COVID-19 Level 5 lockdown, in that it was declared an essential service (notable exceptions were wine, tobacco, wool and floriculture industries which were constrained during the lockdown).
An article in Mzansi Agriculture Talk reports that in the second quarter of 2020, summer grains and oilseeds were the biggest driver of growth. Maize enjoyed a bumper harvest of 15.5 million tonnes, which is the second largest recorded crop in history. Overall, agricultural exports were kept buoyant through citrus production and exports. Between April and June 2020, agriculture exports were on average 21% above the corresponding period in 2019 which helped the sector to optimise its foreign earnings.
Despite the potential investment opportunities signalled in early 2020 by the robust growth, business confidence in the sector was slow to ignite. The Agbiz/IDC Agribusiness Confidence Index, which is widely regarded as a good indicator of the growth path of the agricultural economy and covers agribusinesses operating in all agricultural subsectors across South Africa, fell from the 50-point mark in the first quarter of 2020 to 39 in the second quarter. This was the lowest level since the third quarter of 2009, at the height of the global financial crisis. (A level below the neutral 50-point mark suggests that agribusinesses are downbeat about prevailing business conditions in South Africa.)
Low levels of confidence were undoubtedly a hangover from the dismal performance in 2019 which saw a 6.9% year-on-year contraction, the second consecutive year of contraction in South Africa’s farm economy. Hot on the heels of 2019’s disappointment came the broad market uncertainty wrought by the COVID-19 pandemic and subsequent lockdowns. This was further compounded by the unfortunate turn of events at the Land Bank, South Africa’s largest agricultural-focused lender and historically sound funding partner for many significant agri-initiatives. The bank defaulted on R50bn worth of loan repayments in April 2020 and, in June, failed to make interest payments of nearly R120m. The Treasury, which guarantees about R5,7bn of the Land Bank’s debt, has granted it R3bn in emergency equity funding.
However, as the COVID-19 pandemic regulations came into effect in South Africa, successful collaboration between government and agricultural industries made possible the formulation and implementation of enabling policy frameworks. With the assistance of the Bureau for Food and Agricultural Policy, a weekly value chain tracker was created covering all aspects of the sector. This proved an essential tool in identifying and tackling challenges to ensure the continuity of the sector through the provision of swift support to farmers and agribusinesses during lockdown.
By the third quarter of the year, business confidence in the agricultural sector had begun to pick up, as evidenced by improving scores on the Agbiz/IDC Agribusiness Confidence Index. The turnover and the net operating income sub-indices climbed by 21 and 26 points from the second quarter to 50 and 47 points, respectively. This is linked to large outputs in the 2019/20 production year, coupled with higher commodity prices. The capital investments confidence sub-index improved by 6 points from the second quarter to 44, indicating an improved perception of the financial conditions of farmers following larger harvests and higher commodity prices. The volume of exports improved by 19 points from the second quarter of 2020 to 55 in the third quarter. Economic conditions were perceived to be improving, as seen in the movement from 10 to 19, albeit still far below the neutral point of the fifty-mark.
Pursuing value-unlocking initiatives
for agricultural producers and investors, the growth of 2020 makes a compelling case to act on those strategic initiatives that will consolidate and/or strengthen their positions. The sector’s current growth outlook could place agricultural producers hoping to expand operations without taking the full risk on their own balance sheets, in a strong position to seek out suitable long-term partners. Exploring the disposal of certain core or non-core assets can concretise sound additional value for the business, be this to raise capital for the business to create liquidity for balance sheet optimisation, or to diversify from a product, geography or currency perspective.
Many South African agriculture groups that remain largely family-owned have never before taken the opportunity to realise value from these multi-generational enterprises. Here, a like-minded incoming investor could enable existing shareholders to realise value without losing sight of the family’s interests.
South Africa’s agricultural sector is extensive and well known for its varied produce from grapes, maize, soya, nuts, deciduous fruit and citrus, to red meat, wool and poultry production.
The key now will be for stakeholders to act on the sector’s strengths, and its testament to having survived a previous tough cycle, to deliver economic growth. As one of the few sectors that seems able to successfully rally against South Africa’s economic challenges, agriculture’s investment potential is worth exploring. n
Jeewan is a Principal at Bravura