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AFGRI remains committed to |
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Introduction
After three drought periods and low crop outputs the South African maize farmers have experienced two successive good crops. The cycle of high input costs is beginning to turn and large maize farmers, able to forward cover their prices, have been rewarded. On a macroeconomic level, farmers were affected by the global crisis through limited credit lines and volatile exchange rates. In the year under review there has been little reprieve in terms of an end to the global crisis, although a few market commentators talk of “green shoots” which are only expected to develop well into 2010.
Efforts to limit the impact of the deteriorating world economy continue with the Group’s management aggressively controlling working capital and adopting an extensive cost control programme. The primary sector, in which it operates, together with its diverse product offering, ensures that AFGRI is well positioned to meet the challenges posed by both the slowing local economy and the global financial crisis.
AFGRI remains committed to world-class, full-spectrum services to the agricultural sector in South Africa and Africa. The importance of agriculture in South Africa is reflected in its contribution to GDP, some 3%, and possibly more importantly is that it remains one of the largest areas of employment. According to the South African Department of Agriculture, Forestry and Fishers, “8,5 million people are directly or indirectly dependent on agriculture for employment and income.”
The AFGRI business
Last year AFGRI announced a year-end change from
28 February to 30 June in order to more closely align the Group’s financial year with the summer agricultural season in South Africa. In this annual report you will find the
12-month actual results for the year ended 30 June 2009 as well as a comparative of the 16-month reporting period. In an effort to assist the market with relevant comparative figures a 12-on-12 month unaudited comparative is also included. The operational and financial review appearing here, details year-on-year operating profit comparisons of the Group’s underlying segments.
- AFGRI Financial Services (including the Capital and Broking operating units)
- AFGRI Agri Services (comprising Logistics and Producer Services divisions)
- AFGRI Foods (comprising the Animal Protein and Oil and Protein businesses)
Strategic intent
AFGRI is positioning itself to benefit directly from the food and agricultural value chain in which it operates. It is only the manufacture of primary agricultural inputs that the Group does not wish to participate in. The remaining agricultural cycle of planting, growing, harvesting, storage and trade of commodities dovetails with AFGRI’s various product offerings of inputs, requisites, equipment, finance, storage and logistics and commodity trading. A greater exposure to the foods sector of the economy will result in a more balanced investment portfolio across the Group.
One may view the production cycle of grain as having the following stages:- Direct manufacturing (functions such as seed and chemical production)
- Growth period (plant and manage)
- Harvest (store)
- Processing (trade and sale)
- End customer
AFGRI does not envisage that it will be involved in (1) direct manufacturing and (5) the end customer stages of the food and agricultural value chain and therefore will focus on the “grain value-chain”. It is within this chain that our Producer Services, Logistics, Foods and Financial Services companies best operate. By adopting this strategy AFGRI reduces elements of risk and large capital investment prior to the season. By remaining focused on the food elements within this cycle it builds AFGRI’s core of agriculture and diversifies the Group.
The agricultural environment in South Africa
Last year the South African economy faced Eskom power outages, oil and food inflation, CPIX rising to a level of 13,5% and a number of interest rate increases. As the year progressed our economy was buffeted by external factors from international markets. In an effort to promote economic growth the South African Reserve Bank has systematically implemented interest rate cuts taking the prime overdraft rate from a high of 15,5% in July 2008 to the current level of 10,5% reached in August 2009. This interest rate decline has been well received by farmers and has led to a greater stability within the market.
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| Source: National crop estimate committee and SAGIS (South African Grian information service) |
The South African grains and oilseeds market has experienced significant price volatility in the past 12 months. The initial price increases on commodities were based on surging world demand for all commodities with the greatest contributing factor being the crude oil price. Crude oil was trading at over $140 per barrel in July 2008, and shortly thereafter corrected back to $40 per barrel by the end of December 2008. The Rand Dollar exchange rate weakened in October 2008, when the Rand was trading above R11 to the US Dollar, with a subsequent strengthening to below R8 to the Dollar by the end of June 2009. Agricultural commodities are US Dollar based and although quoted in Rand in the South African market, changes in world prices as well as currency play an enormous role in determining the local prices of commodities.
As a country, good summer rains assisted with the above average production of summer crops and as at April 2009, South Africa had an estimated maize surplus of 1,6 million tons. The commercial maize crop for the 2008/09 production season is estimated to be 11,6 million tons, 8,63% less than the previous season’s crop of 12,7 million tons. It is estimated that the 2009/10 maize crop will result in a surplus of 1,9 million tons of maize at the end of April 2010.
In 2008, white and yellow maize prices averaged approximately R1 799 per ton. In the 2009 report, The Bureau for Food & Agricultural Policy (“BFPA”) expects white and yellow maize prices to trade between R1 500 per ton and
R1 600 per ton for the 2009 and 2010 seasons and to increase to close to R2 000 per ton thereafter on the back of higher price parity. Key to driving prices in the local market is exports. During the 2005/06 maize season South Africa exported record amounts of maize and the 2008/09 season saw greater levels still, due to higher maize production in the local market. A total of
2,2 million tons of maize was exported during the year of which white maize represented 87% of the total. These exports are driven largely by levels of maize production in other SADC countries. BFPA estimates that in the past season more than 60 000 tons of maize was exported per week to neighbouring countries.
Winter crops (wheat) suffered in the central part of the country due to the opposite weather conditions, and as a result South Africa will import close to 1,5 million tons of wheat this year. Coming off the high of R3 500 per ton in 2008, 2009 wheat prices have been as low as R2 600 per ton, averaging R2 746 per ton on the South African Futures Exchange (“SAFEX”), primarily due to sharp decreases in the world wheat price. The price is expected to be depressed into the future as world prices struggle to recover and in South Africa the total wheat area planted is expected to decline sharply.
Worldwide, wheat harvests last year were excellent and currently the conditions for maize production in the US are looking favourable. The only countries that suffered drought conditions this year were Argentina and Brazil which resulted in reduced soya bean production and a lower wheat crop from Argentina.
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| Source: The South African Afgricultural Baseline 2009 |
The outlook for South African winter crops currently being planted and the summer crop that will be planted from September to December 2009, is encouraging based on the late winter rains. Current market prices do not provide sufficient incentive to increase wheat plantings, however a reduction in the major input costs such as fuel and fertiliser, may encourage maize producers to plant for the coming season. Availability of finance will also play a role with regard to the area to be planted, as the current economic environment forces financiers to impose much stricter limits on lending.
Biofuels remain an international and local topic. Declining oil prices of late have negatively impacted bio-ethanol projects in South Africa and production in South Africa is still primarily sourced from sugar cane.