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Area coverage

Table 1 and Table 2 provide a summary of the area coverage for enterprise budgets that were generated for this report (dryland- and irrigated regions). The source of data and collaborators are also presented. The collaborators are sincerely grateful for the interaction and assistance with data, knowledge and other inputs from each organisation, agribusiness and farmers.

Yield assumptions

Table 1.3 illustrates descriptive statistics for yield trends over the period from 2005-2023 (2023 assumes trend yields). Figure 1.1 and Figure 1.2 reports the yield assumptions for dryland and irrigated crops. The yield assumptions represent target yields which were formulated in round table discussions and inputs provided by industry experts. These assumptions are re-evaluated and updated on a continuous basis. It is important to note that intra-regional variations will occur, and it is recommended that producers adjust their respective target yields based on their location and potential.

Source: BFAP, 2023

Crop price assumptions

Annually, the Bureau for Food and Agricultural Policy (BFAP) presents an outlook of agricultural production, consumption, prices and trade in South Africa over a 10-year period. The information presented is based on assumptions about a range of economic, technological, environmental, political, institutional, and social factors. The outlook is generated by the BFAP system of models. A number of critical assumptions have to be made for baseline projections. One of the most important assumptions is that normal weather conditions will prevail in Southern Africa and around the world; therefore, yields grow constantly over the baseline as technology improves. Assumptions regarding the outlook of macroeconomic conditions are based on a combination of projections developed by the International Monetary Fund (IMF), the World Bank and the Bureau for Economic Research (BER) at Stellenbosch University. Baseline projections for world commodity markets were generated by FAPRI at the University of Missouri. Once the critical assumptions are captured in the BFAP system of models, the Outlook for all commodities is simulated within a closed system of equations. This implies that, for example, any shocks in the grain sector are transmitted to the livestock sector and vice versa. Therefore, for each commodity, important components of supply and demand are identified, after which an equilibrium is established through balance sheet principles by equalling total demand to total supply.

Table 1.4 illustrates the standard deduction from the base SAFEX or derived price as presented in Figure 1.3. Figure 1.3 illustrates the commodity price assumptions for wheat, barley, canola and oats that were used as base price for the winter crop budgets for the 2023 production season. The sensitivity analysis in the respective crop budgets makes provision for variation in price and yield and indicates the gross margin under each price and yield combination.

Global and local commodity prices have started to decline since the price hike over the past few years due to covid and the Russian invasion of Ukraine. According to the FAO, the price index for vegetable oils reported a decline of 46% from March 2022 to February 2023 with major grain- and oilseed primary commodities following a similar trend. Although uncertainties and risks remain in global markets, stock levels remain reasonable and mostly above the lows observed during the 2011 to 2013 drought period. Considering stock-to-use ratios in relation to previous years suggests that the price response in the current cycle has been sharper than before at comparable stock-to-use levels. This is due to risk premiums accounted for in global markets amid the ongoing war and persistent weather uncertainty in South America as well as the location- and perceived tradability of stocks. With an anticipated supply response globally, world prices are expected to decline although the rate of decline remains uncertain.

Key input cost trends

Following the unprecedented high cost of agricultural inputs since 2021, recent trends suggest that the costs for key inputs have started to decline, both globally and locally. Lower energy costs (natural gas and brent crude oil) together with weak demand in for instance fertiliser markets supported the downward trend. Logistical bottlenecks following global shutdowns due to COVID are also easing with the cost of transportation declining. However, levels of input costs remain well above the period before COVID with significant scope for further declines. The depreciation in the Rand against the dollar caused a divergence between what is observed in international markets compared to locally. In plant protection markets, mixed market signals were observed with some ease in prices being reported from November 2022 to January 2023.

Figure 1.4 shows a calendar year-on-year percentage change for key agricultural inputs over the period from 2021 to 2023 (projected). The weighted cost for fertiliser (a combination between nitrogen, phosphorus and potassium) has increased by 65% in 2022 following an increase of 51% over the period from 2020 to 2021. Aligned with the latest World Bank projections together with assumptions on the Rand / US dollar exchange rate, it is projected that the cost of fertilisers could decrease by 29% in 2023. Urea and LAN(28) are projected to decline by 37% and 22% respectively with MAP and potassium to decline between 21-24%. For plant protection chemicals, market uncertainty remains with China dominating global supply (e.g. China supplies about 80% of global glyphosate demand). Considering recent trends and drivers in input- and energy markets, the cost of herbicides is projected 7% lower in 2023 and insecticides, 11% lower compared to 2022. The cost of fuel is projected to decline by 4% (year-on-year) with administered costs such as labour and electricity to increase by double digits.

Methodology, approach and definitions

• A standard operating procedure was used across all crops and regions for generating the cost and income budgets for the 2023 winter production season.
• Deterministic or target yields are based on industry discussions which refer to a yield that should be obtained given a normal production season with normal weather in the respective agro-ecological production regions.
• The farm gate price for each crop is calculated by deducting transport differential, grade differential, handling fees, commission and levies (statutory for seed breeding and technology) from the BFAP simulated SAFEX price and adding price premiums, as discussed in Table 1.4.
• The gross production value is then calculated by multiplying the yield with the farm gate price.
• The direct costs are calculated by multiplying the cost per unit by the estimated quantity of input use or application rate.
• For the majority of the crops, it is assumed that own machinery is used, except for speciality operations that are coupled with economies of scale. In such cases, a contracting cost item is allocated.
• In the Western Cape, provision was made for fire and SASRIA crop insurance, and in the northern parts of South Africa, provision was made for hail insurance.
• Fertiliser and lime application will vary significantly in regions and across crops, however, an attempt was made to follow a standardised approach across the regions. Micro-elements and foliar feed for selective crops are included in the total fertiliser cost.
• The price for fertiliser nutrients (N, P & K) was calculated by using a weighted approach that accounts for 1) variation in discounts received from suppliers and 2) the time period when fertilisers were purchased.
• Fuel consumption is based on the prevalence production system in each region.
• For plant protection, herbicide, insecticide and fungicides are accounted for based on interaction with industry experts and producers. For instance, in certain regions provision was made for fungicide sprays, but for others where the practice is not common, fungicides were excluded from plant protection costs.
• Repairs and maintenance costs are calculated based on the production system operations and were consulted with industry experts and producers.
• An average seed price across various seed companies was used for calculating the cost of seed. The cost of seed per hectare is calculated by multiplying the cost per unit (either kilograms or plant population) by the application rate per hectare. For selective crops, seed treatment was included where relevant. For wheat and barley, the seed application rate was sub-divided according to own and purchased seed. For own seed use, a cost is allocated which is based on a realistic crop price (hence, opportunity cost) and seed preparation costs such as sifting and treatment.
• For irrigated crops, the cost of water and electricity is calculated according to typical irrigation application rates at their respective regional costs per millimetre water applied throughout a season. For instance, variations will occur in the cost for water in areas where predominantly boreholes are used compared to irrigation/water scheme areas.
• The gross margin was calculated by subtracting the direct cost from the gross production value.
• Overhead costs and production interest are not accounted for in the enterprise budgets.