PRESS RELEASE: 8 MARCH 2010

ABC/IDC AGRIBUSINESS CONFIDENCE INDEX 2010 QUARTER 1

 

NEGATIVE AGRIBUSINESS CONFIDENCE AT LAST LIFTING ITS HEAD

 

The ABC/IDC Agribusiness Confidence Index remains in negative territory (<50 Index points), even though it improved somewhat in comparison to the preceding quarter, as well as in comparison to the same quarter of the previous year. Agribusiness confidence rose almost to the levels recorded at the end of 2008. According to Mrs Lindie Stroebel, the economic intelligence manager at the Agricultural Business Chamber (ABC) and compiler of the index, it would have been convenient to speculate whether it will return to the positive (even peaking) period in mid-2008. However, Stroebel warned that it would be dangerous, considering the expectations of lower commodity prices, strong exchange rates and the variable weather and production conditions being experienced, with specific reference also to the severe drought conditions in the southern and south eastern parts of the country.

 

 

Figure 1: ABC/IDC Agribusiness Confidence (2001 to the first quarter of 2010)

 

The Agricultural Business Chamber (ABC) and the Industrial Development Corporation (IDC) have found that confidence in the agribusiness sector in the first quarter of 2010 has increased by almost 11% since the first quarter of 2009; from 39.03 to 43.3 index points. The ABC/IDC Agribusiness Confidence Index measured a mere 9,4% higher in the first quarter of 2010, than the preceding quarter (39,55).

 

During the fourth quarter of 2008, the Index reached negative levels for the first time since 2006. Confidence dropped significantly after record turnovers and net operating income were achieved in 2008, due to high yields and the spike in commodity prices. The drop, however, did not come as a surprise as the global financial meltdown and economic slowdown at the time resulted in reduced purchasing power and demand. Even though the consequent relaxation in the monetary policy did assist considerably in stimulating the economy, the situation still deteriorated. The Agribusiness Confidence Index reached its all-time low in the third quarter of 2009. The first quarter of 2010, as with the 4^th quarter of 2009, again showed a small quarter-to-quarter increase, while the first year-to-year increase since mid 2008 was noted.

 

The ABC/IDC Agribusiness Confidence Index is compiled from ten weighted sub-indices that are constructed quarterly by means of a survey. The survey measures the perceptions of decision makers from agribusinesses across South Africa, serving all the different industries in the agricultural sector. The changes to the ten sub-indices therefore explain the perceived confidence levels. See the table below and interpretation thereafter.

 

Table 1: Changes in the sub-indices of the ABC/IDC Agribusiness Confidence Index

 

 

Even though turnover and net operating income increased in the short term (q/q), it decreased significantly from the first quarter of 2009. Dr John Purchase, Chief Executive Officer at the ABC explained that excellent yields are expected for the current summer grain season and considering the high carryover stock levels and the total expected harvest, record volumes of grain are expected. “Without sufficient off-take for the supply, prices are expected to be under severe pressure and to decrease” (Purchase). The severe drought in the Southern and Eastern Cape was identified by certain respondents to be a contributing factor to the decrease in the overall turnover of agribusinesses operating in those regions.

 

Market share of agribusinesses has increased since the beginning of 2009. Mr. Rian Coetsee, head of the IDC’s food, beverage and agro industries unit, explained that during tough economic conditions agribusinesses tend to refocus, rationalise and re-position itself in the market place. “The benefit of these actions of the past year show now in an anticipated growth in the market share” (Coetsee). Even though it can be expected that the larger companies are in a more favourable position to absorb the impact of a difficult period, Coetsee also emphasised the fact that the improvement in general market conditions (through GDP growth) has also signalled that their market share could be improved.

 

The improved growth prospects for the South African economy, as compared to the beginning of 2009, proved to be the most contributing factor to increased confidence. However, the increased agribusinesses’ confidence did not yet reflect in their investment perceptions - both in terms of fixed capital and human capital investment. Companies are reluctant to invest in such uncertain times and together with the increased difficulty to obtain financing, it appears that agribusinesses prefer to continue with the utilisation of existing capacity (machinery, staff, etc.), rather than to replace or expand thereon.

 

Export volumes decreased due to still sluggish international demand and uncompetitive prices due primarily to the strength of the Rand against especially the US Dollar and the Euro. This impacted negatively on the foreign earnings of these companies.

 

General agricultural conditions are considered more favourable when compared to the fourth quarter of 2009, but unchanged when compared to the first quarter of last year. Erratic rainfall patterns, referring to drought in the Southern and Eastern Cape and floods in the Free State/North West provinces, challenge agribusinesses in these specific areas. Such erratic conditions makes planning and decision-making very difficult.

 

The decreases in respectively debtor provision for bad debt and financing costs definitely provide much relief, not only to agribusinesses, but also to the consumers and agribusiness clients. Respondents identified that credit facilities are becoming increasingly difficult to obtain and that general agricultural conditions are becoming a significant determinant thereof. Due to increased pressure, some agribusinesses that in the past relied on their own capital reserves, now rely on other sources of financing, which also has an increasing effect on financing costs.

 

For any further information, please contact:

 

Lindie Stroebel

Manager: Economic Intelligence

Agricultural Business Chamber

 

E-mail: lindie@agbiz.co.za

Tel:      012 349 1315

Cell:     079 497 1594

 

 To download the press release in WORD format, please click here

 

 

LONG AWAITED RECOVERY IN AGRIBUSINESSES’ CONFIDENCE

 

After two years of consistent decreases in confidence in the agribusiness sector, as measured by the ABC/IDC Agribusiness Confidence Index, the fourth quarter of 2009 showed a slight quarter-to-quarter increase of 14%, from 34.6 in the third quarter of 2009 to 39.6 in the fourth. However, there was still an 11% decrease in confidence when compared to the same quarter of the previous year. The confidence has recovered to the level of the 1^st quarter of this year. This indicates that the sector is geared for growth, with the one risk factor being the climatic conditions.

 

 

The ABC/IDC Agribusiness Confidence Index is measured jointly by the Agricultural Business Chamber (ABC) and the Industrial Development Corporation (IDC). The index provides a general overview of agribusinesses’ perception on the agribusiness environment they operate in. Agribusinesses across South Africa, operating in all the different industries in the sector, respond to the quarterly survey, which enables the compilers to construct ten sub indices, which are then used to measure the overall confidence level. The changes of the ten factors therefore explain the perceived confidence level. See the table below and interpretation thereafter.

 

 

Due to the seasonality of agriculture, it makes more sense to refer to the year-on-year changes when interpreting the confidence level. However, the quarter-to-quarter changes are relevant when the short term changes are considered of especially factors that are less seasonal, such as financing costs, economic growth and investment.

 

The decrease in commodity prices, as compared to last year, has a very negative impact on the turnover and net operating income of agribusinesses. Even though a constant decrease in this factor has been observed since the end of 2008, an increase occurred in the short term, such as when comparing with the preceding quarter. The current general agricultural conditions have a negative impact on confidence. Irregular rainfall is currently occurring across the country, with some areas receiving higher than normal rainfall and other areas being declared drought areas. This creates general uncertainty due to the vulnerability of the agricultural sector when considering weather patterns. Weather has also proved to be the determining factor in the fourth quarter of each previous year.

 

The expectations over employment and capital investment both decreased when being compared to the previous year. This relates to the broad trend perceived across the country due to the recession, however, employment were slightly higher than in the third quarter of this year. During an upswing, as explained by Rian Coetzee, head of the IDC’s Food, Beverage and Agro industries unit, companies will first try and utilize most of their existing production capacity prior to the investment in new capacity and/or replacement of old equipment. “This explains the small upswing in employment, whilst the investment trend is still negative. With more staff they try and sweat the existing assets” (Coetzee).

 

Volume exports decreased, when compared to the same time last year, due to the strong value of the Rand. Reduced foreign earnings were realized for export products and the international demand is lower, especially for luxury products. There are, however, some indications that the international demand might be recovering, especially due to the fact that the volume exports are higher, when compared to the preceding quarter.

 

Even though the cost of financing has decreased significantly, debtor provision for bad debt increased slightly. This is largely due to farmers retaining their grain in anticipation of possible higher prices in the near future. This is a short term concern for businesses, as this provision does not relate to drought condition or extremely low prices. The increase in demand for credit facilities will in effect result in an increase in market share during this quarter. The decrease in financing costs has brought much relief for producers, but agribusinesses that rely heavily on their investments in their debtor book, will possibly be bereft of bigger margins.

 

The recent upturn in the economy is perceived by agribusiness decision-makers to benefit them positively, due to the increase in purchasing power of consumers. Lindie Stroebel, agricultural economist at the Agricultural Business Chamber and compiler of the index emphasised that the increase in consumption is supported by the decrease in interest rates over the year, which has brought much relief to consumers. Consumption is also expected to increase over the Christmas season.

 

Stroebel predicted that “if the weather plays along and the slow economic recovery continues, further upward movement can be expected in agribusinesses’ confidence. Also taking in consideration that the 2010 World Cup could provide agribusinesses with an extra ’Christmas”, in terms of increasing consumption.

 

Please click here to download the results for the fourth quarter of 2009 together with the questionnaire for the first quarter of 2010.

 

 

 

All-time low for agribusiness confidence

 

The Agricultural Business Chamber (ABC) and the Industrial Development Corporation (IDC) once again constructed the ABC/IDC Agribusiness Confidence Index from the perceptions of decision makers in the agribusiness sector. In the third quarter of 2009 (July to September) the confidence in the agribusiness sector dropped to all all-time low of 34.62, since the initialisation of the index in 2001. The confidence is only 8,6% lower than the preceding quarter, but is a convincing 35,1% lower than the same quarter of the previous year, which makes more sense to take into account, considering the seasonality of agriculture.

 

 

 

The ABC/IDC Agribusiness Confidence Index provides a general overview of agribusinesses’ perception on the agribusiness environment they operate in. Agribusinesses across South Africa, operating in all the different industries in the sector, respond to the quarterly survey, which enables the compilers to construct ten sub indices, which is then used to measure the overall confidence level. The changes of the ten factors therefore explain the perceived confidence level. See the table below and interpretation thereafter.

 

 

 

The decrease in turnover is directly due to the lower commodity prices. The effect of high input costs reflect on the net operating income of both producers and agribusinesses. The 2008 season were labelled for its good harvest and high prices, therefore, when comparing the two seasons, the decrease is perceived to be large. The lower commodity prices are also the reason for the small increase in debtor provision for bad debt; Farmers are keeping their grain products back due to the low prices, therefore agribusinesses find themselves in a short term shortage of cash flow, considering farmers hereby taking longer to repay their production loans. This does place some pressure on the agribusinesses’ balance sheets, but is not a long term concern, especially with the decrease in the cost of financing.

 

Since the global economic slowdown and the financial crisis, the international demand for South African export products, especially high value products, decreased accordingly; resulting in the perceived decrease in volumes exported. The stronger exchange rate is also ‘squeezing’ possible earnings from exported products. The Rand is not expected to weaken in the near future and exporters, especially of high value goods, should consider alternative markets. In the longer term export volumes can be expected to increase as the global demand slowly but surely recovers and the international importers again start to access financing.

 

The perception on general agricultural conditions showed a significant large decrease, due to decision-makers who are very much aware of the possible impacts of an El-Nino weather phase. The general conditions are definitely not as favourable as the same time last year, as the El-Nino conditions, as explained by Johan van den Berg from Santam Agri, could result in a more erratic summer rain season, especially with the higher than normal probability of cyclone conditions in the north-eastern coast of Africa. Certain production areas within Southern Africa are expected to be affected more than others, even though some region can reap above average harvests. This remains of concern to decision makers.

 

There is a definite increase perceived in general economic conditions in South Africa. The very small quarter to quarter decrease in the overall index shows that this slow upturn in the global and local economy is also indirectly visible through all the other indicators. Compared to other sectors, agriculture was considered the least affected by the global economic slowdown, but is on the contrary again expected to show a lag effect in benefitting from the upturn; therefore employment and capital investment remains lower.

 

Together with the slow upturn in the economy, which will definitely stimulate consumption, the other boosting factors at this stage are the decrease in the financing costs. The interest rate cuts over the past year not only provided cheaper and more accessible financing for producers and agribusinesses, but also brought relief from the burden on consumers and enable then to increase their expenditure on food once again.

 

* * * * * *

Please click here to download the document with the Survey for the Fourth Quarter of 2009. 

 

Is this the turning point in the drop in agribusiness confidence?

 

The Agricultural Business Chamber (ABC) and the Industrial Development Corporation (IDC) have found that agribusiness confidence levels, measured for the second quarter of 2009, may indicate a possible turning point in the drop in the ABC/IDC Agribusiness Confidence Index over the past year. In general, decision-makers in agriculture are not overly pessimistic about the sector’s performance, taking into consideration two consecutive years of relatively good producer prices and above average yields. According to Statistics South Africa’s Gross Domestic Product (GDP) figures, the country’s economic growth has relied heavily on agriculture’s positive performance over the past year. However, the local economic downturn and recently proclaimed recession and the impact of the global economic slowdown have not left the sector unharmed.

 

The two preceding quarters (fourth quarter of 2008 and the first quarter of 2009) indicated a drastic year-on-year decrease in agribusiness confidence. The second quarter of 2009 showed a slight decrease of 2,9% when compared to the preceding quarter. However, the confidence dropped by nearly 30% from the same quarter of the previous year. Lindie Stroebel, manager of economic intelligence at the ABC and compiler of the index, argues that the small decrease in the short term could indicate a turning point in the continuous drop in agribusiness confidence over the past 18 months. The year-on-year decrease remains large and can be attributed to contracting demand, both locally and globally, as well as to the cost price squeeze experienced due to higher input prices and lower commodity/producer prices. The only positive contributor to the Agribusiness Confidence Index was the cut in interest rates, which brought well needed relief for consumers and a decrease in financing costs for all role players in the food value chain.

 

The ABC/IDC Agribusiness Confidence Index provides a general overview of agribusinesses’ perception of the agribusiness environment that they operate in. Agribusinesses across South Africa, operating in all the different industries in the sector, respond to the quarterly survey and this enables the compilers to construct ten sub indices, which are then used to measure the overall confidence level. The indicated changes in the ten factors therefore explain the perceived confidence levels. See the table below.

 

 

 

Agribusinesses expected a large year-on-year decrease in turnover. The second quarter of last year delivered excellent summer harvests, with exceptionally high producer prices. This year also delivered good harvests, but the sector has had to absorb the impact of the sharp run-ups in energy and other input prices on the supply side and the drop in commodity prices due to the contracting demand side. Some agribusinesses also indicated that turnover declined due to late plantings in certain grain producing areas. These aspects are reflected directly in the large decrease expected for net operating income.

 

Until recently employment and capital investment levels remained positive, due to the relatively good financial position of agribusinesses. As more negative expectations surfaced in the business decision- making arena, a significant decrease in both employment and investment was observed for this quarter. Mr Rian Coetzee, Head of the Food, Beverage and Agro Industries Unit at the IDC, noted that the expected decline in job creation and investment in the agricultural value chain, emphasizes the necessity for private sector and government to cooperate in tackling the rural development and poverty challenges facing our country.

 

The stronger exchange rate of the Rand against major currencies since the beginning of 2009 restrained earnings from export products, hence the expected decrease in volume exports. Lower household income and purchasing power, resulting in a decline in real household consumption expenditure, is currently being experienced both locally and globally. This has caused a general decline in demand, especially for luxury and non-essential export products.

 

Agribusinesses’ current expectations for economic growth for South Africa are slightly more positive than during the same quarter of last year. The improving economy, as expected by agribusinesses, is mainly due to the stimulus effect of a loosening monetary policy. The recent cuts in the interest rate have not only decreased financing costs for agribusiness, but are also bringing much needed relief for consumers. On 26 May 2009, I-Net Bridge reported on an announcement by National Treasury that South Africa are in a strong fiscal position, even though the economy was proclaimed, by Statistics South Africa, to officially be in a recession now. This means that we are able to respond to this crisis without putting an undue burden on future generation.

 

During the second quarter of 2008 agribusinesses remained fairly optimistic, while other sectors in the economy became highly pessimistic about the then uncertain economic environment, which actually preceded the crash in commodity prices and the global financial crisis. According to the Reuters consensus forecasts surveyed in March 2009, the South African economy is expected to show positive growth in the third and fourth quarter of 2009, as well as in 2010 and 2011. “There are slightly more positive expectations on the economic, social and political front, together with more favourable climatic conditions, which make agribusiness decision-makers slightly more confident. However, in order to perform, the South African economy remains highly dependent on the recovery from the global and local economic recession” says Stroebel.

 

To access this report in a WORD document, please click here

To download the survey letter for the third quarter of 2009, please click here 

 

The deteriorating local and global economy lays heavily on the business confidence in South Africa. The South African Chamber of Commerce and Industry published their lowest confidence levels in more than six years. Recent growth figures by StatsSA highlighted two sectors which are still contributing significantly to the Gross Domestic Product (GDP), being the construction and the agricultural sectors. The agricultural sector in South Africa is therefore still contributing, even though the Agricultural Business Chamber (ABC) and the Industrial Development Corporation (IDC) found in their ABC/IDC Agribusiness Confidence Index that the agribusiness confidence in the first quarter of 2009 dropped by almost 30% compared to the same quarter of last year.

The overall confidence level is measured through ten weighted sub-indices. The changes of the ten factors further explain the perceived confidence levels. See the table below.

 

 

 

In the fourth quarter of 2008 the domestic economy contracted to -1,8% quarter to quarter change in Gross Domestic Product (GDP), from 0,2% in the preceding quarter. Agriculture, which is, together with forestry and fishing, one of the major contributors to the economy at this stage, also started to show decline in its sector’s percentage change. Agriculture’s contribution dropped from 31,6% in the third quarter of 2008 to 16,1% in the fourth quarter. This decline is evident when considering the decrease in turnover and net operating income of agribusinesses in the fourth quarter of 2009, compared to the previous quarter and the same quarter of the previous year. Due to the high input and operating costs, the cost price squeeze is showing its effect with the expectations for a decrease in net operating income.

 

Even though perceptions regarding employment and capital investment in the agribusiness sector decreased in the short run, the agribusinesses are investing more in both human capital and operations than year ago. This is due to the excellent income earned last season. Such investment is inevitable in preparation for survival in an uncertain economic environment.

 

The global demand for products is continuously contracting. The weaker exchange rate poses good earning for export products, but volumes exported has decreased due to a lack of demand. The export market has become very specific, with strong demand for certain products, but none for others. The export potential for staple foods to other African countries poses ample opportunities, considering, among other factors, the decline in production in the US.

 

The relaxation in monetary policy brought much relieve in terms of financing costs. The cut in interest rates are the direct reason for the large decrease in financing costs. However, the producers’ and lenders’ ability to repay their loans are of concern. Debtor provision for bad debt has increased, which is usually not the case when the cost of financing decreased. The decrease in net operating income, on producers’ level as well as agribusiness’ level are considered the reason therefore. Credit financing is not very accessible, due to the regulation by the National Credit Act and the shortage of financing globally, i.e. the global financial crisis. High risk enterprises struggle to obtain credit facilities. Fortunately, most agricultural enterprises are generally considered lower risk and more sustainable than those in other sectors.

 

The major concern agribusinesses faced during the first quarter of 2009 was the deteriorating macroeconomic environment and the possibility of a local recession. Consumer confidence in general is low, but demand for food, especially staple foods will remain high, which poses opportunities in the agribusiness sector, as compared to other sectors. The general agricultural conditions, which were rather uncertain earlier this year, turned out to be very favourable and good yields are expected from the summer production season.

 

 DOWNLOAD SURVEY LETTER FOR THE SECOND QUARTER OF 2009