AGRICULTURE INSIGHTS | 28 APRIL 2020 COVID-19 has further reinforced the importance of Africa’s agriculture sector Absa | Corporate and Investment Banking > Insights and Events > COVID-19 has further reinforced the importance of Africa’s agriculture sector Roux Wildenboer Head: Agriculture SHARE There’s a spotlight on agriculture as the coronavirus pandemic highlights critical sectors that support the continent’s ability to be self-sustainable. The coronavirus pandemic has emphasised the importance of the agriculture sector in South Africa and across Africa because of its potential to support economic growth, create and sustain jobs and boost exports. Is agriculture the boost that Africa’s economy needs? At a time when most industries will be reducing employment, it is hoped that agriculture will at least maintain employment in primary activities. While unemployment rises, agriculture has kept employment levels going because it is a labour-intensive sector by nature, directly employing nearly 900, 000 people in South Africa alone. Many agricultural sectors are increasing seasonal employment as well. For example, we have clients that are currently expanding employment to cater for seasonal expansion. Another reason why agriculture must be emphasised is that it has a strong employment multiplier ability on a commercial level. The amount of direct, indirect and induced jobs created through the agriculture sector can assist in alleviating poverty and even the establishment of new businesses and investment. It is a proven fact that food production and availability is of strategic importance to any country, but this crisis has shown the importance of being food secure, meaning the ability to produce the bulk of your staple food requirements. What is essential is not only the production of food but also the logistics and supply chain to make this food available at affordable prices throughout a population. In this regard, the role of the informal sector is being illuminated. Supply chains, the informal sector and COVID-19 lessons There is a complex supply chain in the informal sector, the importance of which is becoming increasingly apparent. In this respect, future partnerships between formal producers, networks and the informal sector may become increasingly necessary. Another lesson from the coronavirus crisis is that food consumption patterns are most likely going to change in many African countries. Due to economic hardship, it is expected that expenditure will increasingly be aimed at basic foodstuffs, and more expensive food will on aggregate represent a smaller portion of the expenditure basket. This is not an economic benefit, of course, but a logical result of economic recession. This phenomenon will be particularly observable in emerging and developing economies. Where countries are not self-sufficient with staples, exchange rate depreciation will make food much more expensive if it must be imported. This makes the production of affordable staple foods such a strategic imperative. Exporting opportunities on the rise In wealthier countries, such as European nations and the USA, the demand for fresh fruit has increased dramatically, and we have seen strong price effects. There are varied reasons for this, but one is the renewed realisation of the importance of healthy diets. Another factor has been smaller harvests in other exporting countries, which has created an opportunity for South African produce. For exporters, currency depreciation is favourable over the short term. In South Africa, the Rand has depreciated by more than 20% over the last 30 days. Fruit exporters specifically are going to see the benefit of this over the next 12 months. It is expected that profits over the next six to 12 months are going to be particularly good, assuming logistic chains are not dramatically disrupted. A depreciated currency also makes exported goods more competitive in international markets. Over the long term though the impact on exporters are not only positive, as most of the inputs in the Agri value chain are USD based: fertiliser, insecticides, shipping costs, machinery, and fuel. There is an occurrence of diminishing and negative returns beyond a certain level of depreciation. The dangers of not establishing food stability For countries reliant on food imports, currency depreciation is going to add enormously to the fiscal burden. This is because imported food will become more expensive, and with government finances under stress due to increasing unemployment, food dependence is going to increase in these countries. Due to poverty and the inability to produce enough food and to not be reliant on expensive food imports, governments will have to re-look agricultural policy and strategy. With many people in Africa involved in subsistence and small-scale farming, programmes to increase yields and the use of technology will have to be intensified, and new strategies will have to be implemented. Agriculture, like any investment, requires sound regulations and policy consistency. In this respect, agricultural and trade policy must be aimed at increasing trade and the mobility of goods between countries. The stimulation of export industries will be increasingly important. Future-focused success There is still a lot of room for agricultural export development in African countries, and governments must encourage activities that can assist with staple food production. It is also important to reduce and eventually eliminate red tape, and overregulation must be liberalised wherever it occurs. Governments and development agencies will have to find a balance in policy to achieve two objectives: 1. Increasing food security by producing more staples locally 2. Stimulating the production of exported products, which increases GDP and currency earnings. Both these objectives must be pursued, although the emphasis will differ between countries depending on their circumstances. Investment in technology is crucial Going forward, technology and investment will be even more critical. This is accepted as a universal truth in agricultural production, and the absolute necessity of utilising technology in agriculture is unquestioned. Governments will have to attract and lock-in the private sector to assist with this because public/private partnerships are proving to be a feasible way to achieve this. To take advantage of the opportunities in agriculture, particularly during the post-COVID-19 era, there are various lessons to be seen at individual business levels. First, there is need for a strong balance sheet, which can sustain your agricultural operations in uncertain and stressed environments. This means ensuring that you have manageable and lower gearing and leverage. A healthy balance sheet gives you the financial flexibility to absorb shocks. Many businesses that will now be failing will have weak balance sheets that prevent financial institutions from assisting them. It is a fundamental truth that the lower a business’s gearing and leverage, the easier it is for banks to help in an unforeseen stress scenario. Stronger balance sheets and financial flexibility also allow a business to capitalise on opportunities that may present themselves. Another point to make is the need for risk management. Businesses need risk strategies on various topics: what do you do (and what are you doing) to prevent employees from becoming sick? The worst thing that can happen to a fruit packhouse at present is if the facility is closed because of illness. If you have foreign exchange exposure, you need a risk strategy or policy with hedging. You also need to look at your logistics and supply chain as part of your risk management and ability to keep on doing business. What is your plan if a transporter cannot transport your employees or produce, for instance? Lastly, employee relations are of utmost importance. When a shock of this magnitude occurs, you need your employees to support you. This will only happen if you have had consistently good employee strategies in the past: remuneration, working conditions, treating employees fairly, good communication and leadership. Roux WildenboerHead: Agriculture https://cib.absa.africa/wp-content/uploads/2020/07/file_example_MP3_700KB.mp3 Related Articles Agriculture Insights Farmers, Ferraris and harvesting good investments in Africa Farmers might not be driving Ferraris… yet, but there’s no doubt that Agriculture is a continental bright spot. 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