Agribusiness confidence rebounds despite ongoing challenges

The formation of the Government of National Unity (GNU) earlier this year helped ease some political uncertainties that had contributed to the previous decline.

Wandile Sihlobo, chief economist at Agbiz, highlighted the impact of the national elections on agribusiness sentiment in the second quarter.

“Much of the pessimism we saw in Q2 was tied to the uncertainty around the elections. Now that we have more political clarity, attention has shifted back to addressing the agriculture sector’s core challenges,” Sihlobo said.

However, the sector still faces significant hurdles, including the 2023/24 summer crop drought, ongoing infrastructure issues, and outbreaks of animal diseases. Geopolitical tensions also continue to affect the global agricultural market, further contributing to a cautious outlook.

The ACI, which is composed of 10 subindexes, tracks key aspects of the agribusiness environment. Six of these subindexes showed improvement in Q3, with turnover confidence seeing one of the most significant increases, rising by 19 points to reach 50.

This was driven largely by optimism among winter crop producers and financial services firms, although businesses in red meat and summer grains continue to face difficulties due to the ongoing effects of drought and animal diseases.

The net operating income subindex increased by 12 points to 46, indicating better income prospects despite ongoing financial strain for many businesses.

Employment confidence saw a significant jump of 8 points to 64, recovering from a 5% drop in agricultural employment in Q2, which may suggest expectations of better production conditions in the upcoming season.

Capital investments increased by 11 points to 57, as businesses anticipate a potential reduction in interest rates.

However, current sales of agricultural machinery such as tractors and combine harvesters remain subdued, raising questions about whether this optimism will translate into actual investment.

The general economic conditions subindex improved modestly by 4 points to 43, driven by a reduction in load-shedding and the expectation of improved GDP growth. Meanwhile, confidence in general agricultural conditions rose by 4 points to 50, supported by expectations of a La Niña weather pattern in the upcoming summer season and favourable conditions for winter crops.

While certain areas saw improvements, others deteriorated in Q3. For example, the subindex for export volumes dropped by 7 points to 14, highlighting the severe impact of recent droughts. Agricultural exports had already fallen by 0,1% year-on-year in Q2, with further declines expected in Q3.

Other areas of concern include a sharp rise in debtor provision for bad debt, which surged by 19 points to 50, signalling growing financial pressure on farming businesses. Similarly, the financing costs subindex rose by 23 points to 46, indicating that borrowing costs remain a significant burden.

Paul Makube, senior agricultural economist at FNB, expressed cautious optimism about the recovery while emphasising the need for continued action.

“While the rebound in confidence is encouraging, it’s essential that we don’t lose sight of the bigger picture,” he said.

“The drought has left its mark, and many agribusinesses are still grappling with financial strain. Although we’ve seen some recovery, particularly in turnover and operating income, challenges related to infrastructure and animal diseases persist.”

Makube highlighted the critical role of Onderstepoort Biological Products in supplying vaccines to combat animal diseases. “The financial irregularities at Onderstepoort must be resolved swiftly to ensure that farmers can protect their livestock,” he said.

He also stressed the need to address infrastructure issues that hinder agricultural exports.

“We urgently need to upgrade road infrastructure and improve municipal service delivery. The inefficiency at our ports, especially through Transnet, is a major obstacle to agricultural exports,” Makube said.

Looking ahead, the formation the GNU has offered renewed hope for positive policy interventions.

“The GNU has brought some stability, but now we need decisive action. Policies that open up new export markets and reduce tariffs on South African agricultural products could provide a major boost to the sector,” he said.