The pitfalls of grain success

At the regional Grain SA meeting held recently in Elsenburg, Dr Kobus Laubscher, general manager of Grain SA, talked about the issues facing the agricultural sector.
Issue date: 22 February 2008

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Just after deregulation agriculture could almost have been compared to a documentary programme as the new market environment continuously produced new challenges and insights. Today, however, it’s more like a soap opera – almost like Sewende Laan – it doesn’t matter how much of the programme you miss, you still know exactly what’s going on. This is because the core issues remain the same.

The energy crisis is one these disconcerting issues. South Africa used to be a model of success compared to other African countries. The energy crisis threatens that reputation. We’re becoming like other northern African countries where load-shedding is a fact of life. The situation is so bad in Nigeria, it’s estimated that only 25% of Lagos’s energy demand is being met.

 Poor planning and a lack of vision, 20 years ago, are now taking their toll on SA’s economic growth. And this comes at a time when we should have gained economic momentum. The way the problem is being addressed is also a cause for concern. It could take years before a new power plant is fully operational. In China there was enough foresight to anticipate that economic growth would not have been sustainable without sufficient energy. That country is erecting new power plants almost daily and economic growth is maintained at around 12% per year.

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Another issue that must be considered is the bread-price hikes based not on increased demand, but rather on increased demand for protein from emerging countries such as China and India. Consumers there are becoming more sophisticated and have more money to spend. The demand for protein results in a rise in demand for grain to feed animals. That combined with the increased demand for grain to use in biofuel, is causing a grain-price rise. It’s relatively certain the increased demand for protein will continue resulting in favourable grain prices.

The question, however, is whether South Africa’s ability to take advantage of the market environment is not going to be stymied by the energy situation. Biofuel should not be seen as the saviour of the grain industry. The impact of biofuel on the price of grain is still uncertain. Interference with the price, especially in the US, has skewed it. At the moment there is a surplus of biofuel in the US. That situation has to be rectified and would obviously have an impact on the grain price. Even so, biofuel production is a factor that could help South African producers diversify the market, and risks, so as to increase production. Grain SA and South African producers have never planned to enter that market at the cost of food security.

It must also be considered that consumers respond to price. In South Africa we have had relatively low inflation and good economic growth for the past few years. The black middle class has grown by almost 400%, up to 2006, and that has lead to a surge in car and house sales. The demand for food has also changed and increased. A major concern here is the extent of pseudo-wealth. It seems there’s a huge demand for credit in the wrong places. Government needs to revise its economic growth strategy. It’s not too late to intervene, but intervention needs to be subtle – they would have to gently coerce expenditure into the right direction, while not breaking the back of the population.

Such intervention could result in people having less money to buy food and could result in decreased demand for certain products, which in turn could have a negative impact on price. nflation on the input side also needs to be addressed. Input costs in the agricultural sector, for some products, have increased by between 40% and 50% over the past year. Even though prices are more favourable, farmer’s earnings remain under pressure. he whole value chain needs to be evaluated to identify exactly where excessive profits are being made. Farmers and the rest of the supply chain are in partnership with one another. They need to ensure products remain affordable to consumers.

We also need to ensure the industry as a whole operates in a free-market environment. Producers need to be more cold-blooded in terms of farm and cost management to benefit from favourable prices. Don’t forget the cyclic nature of the industry. If you realise a good net income, use that money to make provision for difficult years, and reduce debt. Inflation is set to maintain pressure for a while. Contact Dr Kobus Laubscher on (056) 515 2145