Jason Macfie reviews SA’s agriculture industry including the challenges faced over the last 2 years and explores alternative investment options that are present in South Africa.
Growing Strong: South Africa’s Agricultural Sector Overcomes Challenges and Looks to the Future
South Africa’s agricultural sector remains an important contributor to the country’s economy contributing 2.5% to GDP in 2021 with a reliance on core sub-sectors including crops, livestock and fisheries and its performance in 2022 is worth taking a closer look at. Let’s look into the challenges faced by the sector, its resilience, and the opportunities for growth in the coming years. Let’s get started!
The agricultural sector in South Africa has been performing well in the years leading up to 2022. In 2020 and 2021, the industry saw two consecutive years of strong growth at 14.9% year-on-year and 8.8% year-on-year respectively. This was a positive outcome, especially considering that it was one of the few sectors that performed well during the COVID-19 pandemic. The sector was deemed an essential service and was able to continue operating during the lockdown, which helped mitigate the impact of the pandemic on the sector.
However, in 2022, the agricultural sector was weighed down by multiple external challenges that led to a 12.4% year-on-year increase in production costs. One of the major challenges faced by the sector was the war in Ukraine, which led to a sharp increase in the cost of inputs such as fertilizers and pesticides. Additionally, South Africa’s logistics infrastructure, which is essential for the movement of goods, has been struggling in recent years.
The challenges faced by the industry in 2022 don’t stop there. It also had to contend with issues such as loadshedding, water shortages, fuel price hikes, and service delivery issues in local municipalities. All of these challenges contributed to a sharp increase in input costs, inevitably eroding profit margins. The graphs below from GrainSA depicts how these issues have impacted food inflation in 2022
Despite these challenges, agricultural companies in South Africa recovered well in the second half of the financial year in 2022. Notable mentions include the Senwes Group and Tiger Brands. Senwes delivered encouraging interim operating results, with a 30.4% increase in revenue year-on-year to R6.68 billion. Tiger Brands beat analyst’s expectations for the year ended 30 September 2022, with revenue up 10% year-on-year to R34 billion and net income up 62% year-on-year to R2.86 billion.
Looking ahead, the market is projected to have a steady growth rate of 4.2% from 2022 to 2027, with an increase in real agricultural GDP expected in the same period.
This presents an attractive opportunity for those looking for alternative investments. In particular, three key areas we will be keeping an eye on include:
- Controlled environment agriculture or indoor farming which has the potential to increase crop yields and reduce the impact of weather conditions on crop growth.
- Smart farming agri-tech specifically focusing on automation, precision agriculture, and data collection, which has the potential to improve efficiency, reduce costs, and increase crop yields.
- Electric farming machinery leasing, which can help farmers afford the high costs of purchasing new machinery and reduce the environmental impact of farming.
Controlled environment agriculture, also known as indoor farming, is a method of growing crops in a controlled environment, such as a greenhouse, using artificial light and temperature control. This method has the potential to increase crop yields and reduce the impact of weather conditions on crop growth. In South Africa, there is a growing interest in controlled environment agriculture, particularly in the cannabis industry, which is projected to have a market opportunity of over R21 billion.
Smart farming agri-tech is another area worth keeping an eye on. This includes technologies such as the Internet of things (IoT), robotics and autonomous vehicles, sensor technology including drones, and software solutions for disease forecasting, GIS mapping, and data analytics. These technologies have the potential to improve efficiency, reduce costs, and increase crop yields.
Electric farming machinery leasing is another area with a growing market size in South Africa. The market size for tractor units alone is projected to exceed R267 million. This allows farmers to afford the high costs of purchasing new machinery and reduce the environmental impact of farming Electric farming machinery can reduce costs, improve efficiency, and reduce the environmental impact of farming. According to a study by the International Energy Agency, the global market for electric tractors and other electric farm machinery is expected to grow to $30 billion by 2030.
The past few years have been a bit of a bumpy ride, but the future looks bright. Despite facing multiple external challenges, the sector has shown resilience and adaptability, and it has strong potential for growth in the coming years.
