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The state and economic contribution of agriculture in SA

If confidence remains depressed it starts impacting the production chain, investment and growth – John Hudson (Nedbank) and Wandile Sihlobo (Agbiz).

NASTASSIA ARENDSE:  I had a conversation with John Hudson, the divisional manager for agriculture at Nedbank on the agricultural scene in South Africa.

JOHN HUDSON:  I think the short answer is it has a massive role. It’s a very important sector and it’s really difficult to do it justice in just a few sentences.

I think what is key for me is that the contribution of the sector at primary level is less than 3% to the greater GDP. But if you take the linkages, and look at the multiple, it’s probably five to six times the 3% prime contribution. This starts to demonstrate the value of agriculture in terms of the whole value chain. 

I think further to that, if you look at the GDP and the rural economy, together with employment and factors such as food security, you start to understand the importance of this sector to the country as a whole – which is far beyond just this primary contribution.

NASTASSIA ARENDSE:  People talk of the “multiplier effect”. Take me through that and paint some colour on how it affects the agricultural side.

JOHN HUDSON:  Certainly. If you study the value chain and in particular the agricultural value chain, it has many components. Essentially it starts with the production of the primary product, whether it’s dairy or sugar cane, etcetera. For that matter this includes food and fibre. But the production of the primary product involves many suppliers and service providers, such as fertiliser companies, and finance such as with Nedbank. If you take that product further down the chain and you add value, it then goes through processing or a manufacturing process, and further value is created.

So, if you start to understand the full chain, you start to see how these multiplier effects or these linkages come into play. I think from a holistic point of view if you understand the multiplier effect and the employment and so on, you start to get a more holistic view of this chain and its importance to the economy as a whole.

NASTASSIA ARENDSE:  John Hudson, thank you. To continue our conversation on agriculture, the Agbiz/IDC Agribusiness Confidence Index came out. To talk to us about the figures is Wandile Sihlobo from Agbiz. Wandile, thanks so much for your time.

WANDILE SIHLOBO:  Good afternoon. Thanks for having me.

NASTASSIA ARENDSE:  What can we read with regard to the number? I see here it has declined further by two index points in the third quarter. It’s about 54 points.

WANDILE SIHLOBO:  Look, the key thing that you have to understand about the index is the fact that to some extent it plays as a sort of lead indicator on what the growth of the sector is actually going to be. Earlier, for example, two quarters actually went below the 50 index points, which is pretty much your standard. Anything below 50 points means that the agribusinesses are pretty much downbeat about business conditions in South Africa.

What we have now for fourth quarter is around 49 index points. It has been on a declining trend for the past two quarters or so, and what the numbers really say is that though we are seeing some robust growth like a previous guest just explained on overall GDP, as you go forward you must be conscious that if confidence remains depressed, that plays against investment that we expect in the sector, and later on it will start impacting growth.

NASTASSIA ARENDSE:  What makes up the index in terms of the sub-indices?

WANDILE SIHLOBO:  On the sub-indices we pretty much looked at around ten more important things that really determine the performance of the agricultural sector. You look at variables like turnover and net operating incomes, and employment which is pretty important – because it tells you something about the contribution that the sector could make in the economy – economic growth, general agriculture conditions, debtor provisions, or back debt financing costs, and all of those things.

Out of those ten index points what really has been driving the confidence down of late is mainly four index points, where we are getting a negative reading on the employment side, we are getting a negative reading around capital investment, as well as economic conditions and the general agricultural situation.

Some of those are easy to explain because, when we look at the general agricultural conditions, you have agribusinesses that are operating in the Western Cape, and those have been really hard-hit by the drought. And even on the inland side some expected rainfall a bit earlier, and the rainfall didn’t come on time. As you know, right now people are planting and some were really getting a little anxious when the survey was done, which is really [reflected] in there.

But, most importantly, in the capital investment sub-index, confidence around capital investment for example has declined by 20 index points from the first quarter to now, dropping to 44 – which is the lowest level since the first quarter of 2010. What that tells you is that if the… [conditions in?] agribusinesses really prevail for quite some time, you must start to see negative reading around actual investment – which we so need to see growth and activity on the ground.

NASTASSIA ARENDSE:  Wandile, thank you so much for your time.

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