Paul Makube, Senior Agricultural Economist at FNB Agri-Business
South Africa : In just over a month’s time, farmers will be preparing themselves for the onset of the winter crop planting season. Farmers planted just over 751,000 hectares under wheat, barley, canola and oats and this is likely to increase for 2021 given the relatively favourable seasonal outlook. Although on-farm agricultural activity is currently at a seasonal low except for distribution of produce, harvesting of record summer grains is around the corner. Against this background, demand and consumption of fuel is expected to increase in the medium term and the recent uptrend in crude oil prices does not bode well for producers as production costs are likely to escalate. Brent crude oil prices recently breached the US$60/bbl. and peaked at a high of US$65/bbl. in February 2021 which is 19% and 18% higher relative to the January 2021 and February 2020 averages respectively.
A surge in international crude oil prices more than offset the stronger rand exchange rate and will see the March prices of diesel and petrol increasing by about 66 and 57 cents per litre respectively. Adding fuel to the fire were the increases of 15 and 11 cents per litre in the general fuel levy and the Road Accident Fund levy respectively in the 2021 National Budget.
Activity in the agriculture space is expected to increase in the medium term and with upside risks to crude oil prices not dissipating, cost of production across the value chains that manifest differently from planting, harvesting, distribution and packaging are likely to escalate. Grain producers and logistics companies in the agriculture value chain will feel the pain as closer to 80% of grain is transported by road. Livestock and horticulture will also be affected in terms of distribution across the country and for exports. Moreover, the prices of derivatives of crude oil processing such as fertilizer, herbicides and pesticides are likely to increase should its recent uptrend persist. Hopefully, the rand will maintain the current momentum and strengthen to limit further fuel price increases.