ICB User information

Area coverage

Table 1.1 and Table 1.2 provides an overview of the area of coverage for dryland and irrigated summer crops in South Africa's key agro-ecological producing regions. The coordinators of this initiative are sincerely grateful for the interaction and assistance with data, knowledge and other inputs from each organisation, agribusiness and farmers.

Yield assumptions

Figure 1.1 and Figure 1.2 indicate the yield assumptions for dryland and irrigated crops. These assumptions represent target yields which were formulated in round table discussions. These levels are based on crop potential in the respective regions, historic trends and expert opinions. It is important to note that intra-regional variations will occur and it is recommended that producers adjust their target yields based on their location and potential.

Crop price assumptions

Annually, the Bureau for Food and Agricultural Policy (BFAP) presents a baseline outlook for agricultural production, consumption, prices and trade in South Africa over a 10-year horizon. The outlook is generated within the BFAP system of models and is based on a coherent set of assumptions about a range of economic, technological, environmental, political, institutional, and social factors. Of the range of critical assumptions underpinning the baseline projections, one of the most important is that stable weather conditions will prevail in Southern Africa and around the world; therefore, yields grow constantly over the baseline as technology improves. Consequently, it does not represent a forecast, but rather a single plausible future outcome, based on fundamental factors underpinning markets. It presents a future equilibrium and a benchmark against which further analysis can be measured and understood.

Assumptions related to the future macro-economic environment 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, as well as the Food and Agriculture Association (FAO) of the United Nations. Once these critical assumptions are captured in the BFAP system of models, the Outlook for all commodities is simulated within a closed system of equations. This captures the interlinkages between sectors and, for example, any shocks in the grain sector are transmitted to the livestock sector and vice versa. For each commodity, important components of supply and demand are identified, after which an equilibrium is established through balance sheet principles by equating total demand to total supply.

Figure 1.3 illustrates the key commodity price assumptions for white maize, yellow maize, sorghum, sunflower and soybeans that were used in the summer crop budgets for the 2021/22 production season. Further deductions were made to calculate a farm gate price for each agro-ecological producing region. 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.

Key input cost trends

Figure 1.4 illustrates the cost trends for fuel and fertilisers over the period from January 2019 to October 2021. Fertiliser prices have started to increase from roughly May 2021 with significant price hikes from July 2021. The underpinning drivers of these increases were due to a number of demand and supply dynamics, creating a perfect storm in fertiliser markets. By October 2021, the weighted average fertiliser price (combination between nitrogen, phosphorus and potassium) has indicated a year-on-year increase of 75% with nitrogen increasing by 73% (urea = 92% and LAN28 = 40%), MAP by 67% and potassium by 104% (Grain SA, 2021). This perfect storm in fertiliser markets is underpinned by tight supplies, rising raw material costs such as oil and gas, increasing demand as a result of continuous high commodity prices and global logistical constraints / high freight rates. The fuel price has also increased during the year, returning to its pre-covid level in March 2021 with recent sources indicating that even higher prices towards the end of 2021 may materialise.

Figure 1.5 presents an overview of the year-on-year percentage changes for key agricultural inputs from 2020 to 2021. The rise in the cost of agricultural inputs remains a concern, with numerous inputs showing double digit percentage change from 2020. The weighted cost for fertiliser (combination between nitrogen, phosphorus and potassium) is projected to increase by 41% in 2021, relative to 2020 with urea and LAN28 projected to increase by 48% and 30% respectively, MAP by 50% and potassium by 34%. Herbicides are projected to increase by 20%, although recent information indicated that this increase may be higher with certain sources expressing their concerns regarding availability of certain products towards the end of 2021 / start of 2022. Administered costs such as wages and electricity are projected to increase on average by 16%.

Year-on-year inflation for direct costs will vary significantly between producers which is dependent on the time period when inputs were purchased. Although February is normally an important month when producers acquire some inputs, it cannot be generalised and therefore, direct cost per hectare and respective gross margins will differ substantially. Depending on the period when inputs were purchased, the direct cost for maize for the 2021/22 production season can increase by more than 32%. Figure 1.6 illustrates scenarios which show the impact on the cost of production and gross margins of maize which is based on the month when inputs were purchased in 2021. The figure is representative of maize production in the eastern- and western producing regions of the country. For the eastern regions, the gross margin can decrease by R1500 per hectare if inputs were purchased in August opposed to February 2021.

Methodology, approach and definitions

• A standard operating procedure was used across all crops and regions for generating the cost and income budgets for the 2021/22 production season.
• Deterministic or target yields were based on industry discussions which refers 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 was calculated by deducting transport differential, grade differential, handling fees, commission and levies (statutory for seed breeding and technology) from the simulated SAFEX price.
• 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 was assumed that own machinery was used, except for speciality operations that is coupled with economies of scale. In such cases, a contracting cost item was allocated. For all crops, 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 and 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 practise is not common, fungicides were excluded from plant protection costs.
• Repairs and maintenance costs are calculated based on the production system operations.
• For seed, an assumption was made in terms of the majority of crop type area that is cultivated in each region. For instance, the cost of maize seed in Northern-Natal, Mpumalanga and Eastern Free State is based on the assumption that the majority of the area under maize cultivation is yellow maize whereas for the western producing regions, white maize was assumed. An average seed price across various seed companies was used for 1) conventional seeds and 2) GM-technology. 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 predominantly oilseeds production, the seed application rate was sub-divided according to own and purchased seed. For own seed use, a cost was also 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 was calculated according to typical irrigation application rates at their respective regional costs per millimetre. 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.