South Africa. Agricultural input costs remain elevated, squeezing farmers’ profits

Higher input costs, which have been the dominant feature of South Africa’s agricultural sector over the past year, will probably prevail in the coming months, with negative effects on farmers’ financial conditions.

First, for the crop farming sector, prices of fertiliser, herbicides and insecticides were up by more than 50% during the planting period of the 2021-22 season. Hence, the crop losses in parts of the country caused by floods proved costly for farmers who had to replant or forego extremely wet areas this season.

Second, the poultry and, to an extent, the livestock sector also had to contend with higher grains and soybeans prices since 2020, which have squeezed farmers’ profitability. Improved grazing veld conditions resulting from heavy rains will, to some degree, be beneficial to the livestock sector.

Crop inputs

In January 2022, the fertiliser prices remained elevated. For example, KAN/LAN (28), Ureum (46), and Kaliumchloried prices were, respectively, up by 127% year-on-year, 182% and 114% in January 2022, selling at about R13 933, R19 876 and R13 816 a tonne. Herbicides show a similar price trend. For example, Glyphosate, Acetochlor and Atrazine prices were, respectively, up by 211% year-on-year, 139% and 143% y/y in December 2021.

Regarding insecticides, Imidacloprid, Lambda-cyhalothrin, and Acetamiprid prices were, respectively, up by 124% year-on-year, 45% and 121% in December 2021.

There are many factors behind these sharp input cost increases, such as the supply constraints in critical fertiliser-producing countries, mainly China, India, the US, Russia and Canada. Rising shipping costs, oil and gas prices are also contributing factors to the price increases, along with firmer global demand from the growing global agriculture. Ongoing tension between Russia and Ukraine has added to the upside price pressures of these agricultural input costs.

Summer crop producers have already incurred these costs as the crops are now growing. The primary focus for the coming month is the winter crop growers, mainly for wheat, canola, barley and oats, where planting for the new season crop will begin at the end of April. This means that some of the input orders are already in process. Thus, even though the 2021-22 winter crops, such as wheat, were the largest since 2002 and canola a record harvest, the profits will be squeezed by the high input costs in the new upcoming production season.

For the summer crops, mainly maize, soybeans, sunflower seed, groundnuts, sorghum and dry beans, it will be a while before farmers embark on the 2022-23 production season, which will only begin in October. There is uncertainty about how the fertiliser and agrichemical (herbicides and insecticides) prices will be in the coming months. The global supply of critical inputs is likely to have recovered by then, even if partially so, thus providing some price relief. Such optimism is the outlook of some analysts in the global fertiliser market.

Global developments affect South Africa because it imports about 80% of its annual fertiliser consumption and is a minor player internationally, accounting for a mere 0.5% of total global consumption. Therefore, local prices tend to be influenced by developments in the major producing and consuming countries mentioned above.

Much of the fertiliser imported by South Africa is used in maize production, accounting for roughly 41% of total fertiliser consumption. The second-largest consumer is sugar cane farming, at 18%. Fertiliser constitutes about 35% of grain farmers’ input costs and a substantial share in other agricultural commodities and crops.

In terms of agrochemicals, South Africa also imports more than 90% of what it uses annually. The country lacks the primary minerals or natural resources needed for fertiliser and agrochemicals production.

Livestock and poultry inputs

There are similar cost pressures for the livestock and the poultry industry. Although the heavy rainfall of the past few months has improved the grazing conditions in South Africa, oilseeds and grains prices have remained elevated, thus boosting input costs for farmers, specifically poultry producers.

As I have previously argued, the higher grains and oilseeds prices were not a factor in the domestic market conditions, but underpinned by the global dynamics. The poor crop conditions in South America, strong demand for oilseeds in China and India, poor palm oil harvest in Indonesia and the Russia-Ukraine tension have been among the major upside drivers of prices in the past few months. This has, in turn, influenced the price dynamics in South Africa and the costs of feed for the livestock and poultry sector.

I have held a favourable view that the global grains and oilseed prices could soften in the coming months because of the expected improvement in the global supplies and sock levels. The International Grains Council and the United States Department of Agriculture expect this recovery in global grains stocks despite the possible poor crop in South America. But the recent data show that global grains and oilseeds prices are still at firmer levels.

For example, the Food and Agriculture Organisation Food Price Index averaged 136 points in January 2022, up by 1% from December 2021 and at its highest since April 2011. The recent increases in the food price index were mainly underpinned by the vegetable oils and dairy products.

The grains prices, which we are closely monitoring, were roughly unchanged from December 2021 and up by 13% from January 2021. Only a downward price change in vegetables oils and grains would provide much needed relief in the livestock and the poultry industry. The interplay of a potential recovery in stocks and consumption levels and ultimate harvest size in South America will be the main determinants of these prices in the coming months.

Overall, the higher input costs environment of 2021 has not changed much at the start of this year. The year’s livestock and poultry farmers’ input costs direction will be more precise over the coming months.

Still, there is hope that a potential recovery in stocks could add a slight downward pressure on global grains prices, which will affect prices in South Africa.

In the case of fertiliser and agrochemicals, there is talk of replenishment in stocks or an increase in production of major minerals. At the moment, the winter crop producers of South Africa could experience higher input costs, as was the case for the 2021-22 summer crop planting season. Such conditions would overshadow the profits of the 2021-22 large crop.

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Tags: South Africa, fertilisers, corn