IMPACT OF HIGH FOOD PRICES ON PRODUCERS AND REQUIRED

INTERVENTIONS

John PurchaseAgricultural Business Chamber (ABC)

Gauteng Food Summit

10 & 11 July 2008

Introduction

Causes of high food prices South African situation Competitiveness, Profitability and

Confidence of Industry Investment situation and climate Interventions Conclusion

Causes of high food prices

• High agricultural commodity prices• Global macro-economic factors - Strong economic growth, stimulating demand - Depreciation of the US dollar - Increased speculative transactions in markets• Dynamics of the specific agricultural commodities• Changes in government policies

0

50

100

150

200

250

300

350

400

450

500

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Oil Metals All Commodities Food

Rising Commodity Prices(January 1990 = 100)

Oil Prices (US$/Barrel)

International fertilizer prices

1000

2000

3000

4000

5000

6000

7000

Feb Apr Jun Aug Okt Dec Feb Apr Jun Aug Okt Des Feb

Ran

d p

er t

on

Ammonium DAP Potasium Urea

2006 2007 2008

Mean Real GDP Growth (%)

0

2

4

6

8

10

12

World Developed Developing China India USA

1975-90 1990-2000 2000-07 2009-17

End stocks and the Price of Wheat the past 10 years

0

10

20

30

40

50

60

70

87/88 91/92 95/96 99/00 03/04 07/08

Mil

lio

n t

on

s

0

50

100

150

200

250

300

350

$/to

n F

OB

End Stocks U.S. HRW Price

USA Maize production, exports and ethanol use

(MMT)

0

50

100

150

200

250

300

350

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Exports Maize for ethanol Maize Production

Soya production, consumption and end

stocks (MMT)

0

50

100

150

200

250

97/98 98/99 99/00 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08

Production Consumption End stocks

Vegetable oil imports by China (MMT)

0

20

40

60

80

100

120

140

160

180

1995  1996  1997  1998  1999  2000  2001  2002  2003  2004  2005  2006  2007 

Mill

ion

to

n

South African situation

• Declining maize production area• But significant maize yield increases (productivity increases)• Maize Crop of ~12,0 MMT has helped to stabilize prices – need • Extensive wheat and soya meal imports still a major concern

1923/24 1933/34 1943/44 1953/54 1963/64 1973/74 1983/84 1993/94 2003/040

1

2

3

4

5

PRODUCTION YEARS

Maize area planted in South Africa

1923/24 to 2006/07Million hectares

1923/24 1933/34 1943/44 1953/54 1963/64 1973/74 1983/84 1993/94 2003/040

1

2

3

4

5

PRODUCTION YEARS

Ton/haMean yield of maize:1923/24 to 2006/07

Competitiveness, Profitability and

Confidence of industry

Increased competitiveness:

Requires policies for adoption of

quality and productivity improvements

in order to exploit export potential, but

also to maintain and grow local

markets

(0.20)

(0.10)

-

0.10

0.20

0.30

0.40

0.50

0.60

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

DroughtPolitical Uncertainty

Deregulation(from co-ops to companiesWeak RandNew markets

Strong RandDrop inBusinessconfidence

The AGRIBUSINESS COMPETITIVENESS STATUS index (ACS)

Competitiveness : 1960 - 2007

(0.50)

-

0.50

1.00

1.50

2.00

2.50

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

Profitability of Sector

Gross and Nett Farming Income

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07

Seasons

Ra

nd

X

1 0

00

00

0

Gross Farming Income Nett Farming Income

Agricultural Export and Import Volumes: 1998 - 2006

0

1000000

2000000

3000000

4000000

5000000

6000000

7000000

8000000

9000000

10000000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007Year

To

nn

es

Agric Export Volumes Agric Import volumes

Agricultural trade balance: 1998 - 2006

- 5 000 000

5 000 000

10 000 000

15 000 000

20 000 000

25 000 000

30 000 000

35 000 000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Year

R 0

00

Agric Trade balance Agric Exports Agric Imports

Investment situation and climate

• Gross fixed capital formation has remained stagnant•Capital stock in Agriculture has declined over the past decade, but showing signs of a turnaround due to improved profitability.

Gross fixed capital formation: Agriculture, forestry and fishing: 1994-2006

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Current pricesConstant 2000 prices

R million

74000

75000

76000

77000

78000

79000

80000

81000

82000

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Year

R M

illi

on

Capital Stock in Agriculture (Constant 2000 prices): 1995 - 2007

Constraints and Challenges to Investment in

Agribusiness Limited global competitiveness and profitability (High

input costs, especially derived from energy costs!) Skewed participation and access Not sufficiently adequate support and delivery systems Often poor and unsustainable management of natural

resources Governance and entrepreneurship – public and private Knowledge and innovation for productivity/new products International cooperation, e.g. trade agreements, etc. Infrastructure Safety and security Traditionally, low investor confidence, but changing

(0.20)

(0.10)

-

0.10

0.20

0.30

0.40

0.50

0.60

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

DroughtPolitical Uncertainty

Deregulation(from co-ops to companiesWeak RandNew markets

Strong RandDrop inBusinessconfidence

The AGRIBUSINESS COMPETITIVENESS STATUS index (ACS)

Trends in Agribusiness Confidence : 2001 - 2007

(0.50)

-

0.50

1.00

1.50

2.00

2.50

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

Trends in the confidence of agribusinesses in South Africa

-40.00%

-20.00%

0.00%

20.00%

40.00%

1st 2nd 3rd 4th 1st 2nd 3rd 4th 1st 2nd 3rd 4th 1st 2nd 3rd 4th 1st 2nd 3rd 4th 1st 2nd 3rd 4th 1st 2nd 3rd

2001 2002 2003 2004 2005 2006 2007

Quarters

% C

ha

ng

e

Devaluation of the Rand

Sharp increased in the price of major commodities

Persistent drought

I ncrease in the value of the Rand

I mprovement in general agricultural conditions

Lower interest rates

Positive economic growth

Strength of the Rand

Low product prices

Unfavorable agricultural conditions

Positive economic growth

I ncreased in the prices of major commodities

Drought

Short Term Interventions

• Agree wholeheartedly that Government needs to support the vulnerable and poorest of the poor, e.g. food stamps, starter packs, feeding schemes, etc.

Medium and long term interventions

• Government to create an enabling (market) policy environment for entrepreneurs to exploit opportunity• Investment in general infrastructure in rural areas, but also in agricultural infrastructure • Technology development and transfer needs to be improved through investment and bringing top students into this environment

Medium and long term interventions

Major investment in skills development Improve access to capital and facilitate

financing of agricultural production Establish improved information

systems, with improved communication Ensure sustainable resource

management Improved institutional support services

by both public and private sector

Conclusion

Food price crisis is a global

phenomenon and complex

Holds many threats to society,

especially to the poorest of the poor

and most vulnerable of society

Opportunities are however certainly

increasing across whole industry

Conclusion

• Global economy changing rapidly

• Global food and agriculture changing

rapidly

• Food crisis will challenge

conventional thinking across whole

value chains

• Sustainability: Less intensive energy

systems with Conservation

Agriculture

Conclusion

Create confidence, competitiveness and

profitability in the sector!

THANK YOU