Input suppliers feel the strain of drought

It is not only primary producers who are struggling to survive the drought.

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Machinery sales, seed companies and input suppliers have also reported declining revenues.

According to Prof Johan Willemse, Dr Dirk Strydom and Manfred Venter from the Department of Agricultural Economics at the University of the Free State (UFS), agribusinesses should prepare for a tough trading environment in the 2016/2017 season.

The UFS experts recently published their analysis of the drought in a joint paper entitled, ‘Implications of the lingering 2015 drought on the economy, agricultural markets, food processors, input suppliers and the consumer’.

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Seed production companies are expected to suffer financial losses as they receive unused seed back from farmers. The returns will be unfit for sales in the 2016/2017 planting season.

Furthermore, they have an additional burden to produce seed during the current drought to ensure seed is available for 2016/2017.

The report also warns that fertiliser, insecticide and chemical companies will have large unsold stock. This could result in a steep decline in profits, with some products un fit for use during the next season.

“The chemical industry is fighting a losing battle against currency depreciation because most active ingredients are produced internationally and only formulated in South Africa,” the report said. This will push up prices further, even though stock levels are high due to the drought.

The prices of agro-chemicals will also not necessarily decrease if there is a drop in the price of oil. This is because the prices of these items are not derived directly from the oil price.

“The agricultural machinery industry will experience heavy losses forcing them to scale down,” said the report. Sales of tractors and combine harvesters for 2015 have already declined 20% and 40% respectively and these figures are expected to decrease further in 2016.