2010/04/19

AAN/TO:DIE HOOFBESTUURDER / THE MANAGER

SUBJECT:ABC / IDC AGRIBUSINESS CONFIDENCE INDEX

NEGATIVE AGRIBUSINESS CONFIDENCE AT LAST LIFTING ITS HEAD

The ABC/IDC Agribusiness Confidence Index remains in negative territory (<50 Index points), even though it improved somewhat in comparison to the preceding quarter, as well as in comparison to the same quarter of the previous year. Agribusiness confidence rose almost to the levels recorded at the end of 2008. It would have been convenient to speculate whether it will return to the positive (even peaking) period in mid-2008. However, that it would be dangerous, considering the expectations of lower commodity prices, strong exchange rates and the variable weather and production conditions being experienced, with specific reference also to the severe drought conditions in the southern and south eastern parts of the country.

Figure 1: ABC/IDC Agribusiness Confidence (2001 to the first quarter of 2010)

The Agricultural Business Chamber (ABC) and the Industrial Development Corporation (IDC) have found that confidence in the agribusiness sector in the first quarter of 2010 has increased by almost 11% since the first quarter of 2009; from 39.03 to 43.3 index points. The ABC/IDC Agribusiness Confidence Index measured a mere 9,4% higher in the first quarter of 2010, than the preceding quarter (39,55).

During the fourth quarter of 2008, the Index reached negative levels for the first time since 2006. Confidence dropped significantly after record turnovers and net operating income were achieved in 2008, due to high yields and the spike in commodity prices. The drop, however, did not come as a surprise as the global financial meltdown and economic slowdown at the time resulted in reduced purchasing power and demand. Even though the consequent relaxation in the monetary policy did assist considerably in stimulating the economy, the situation still deteriorated. The Agribusiness Confidence Index reached its all-time low in the third quarter of 2009. The first quarter of 2010, as with the 4th quarter of 2009, showed a small quarter-to-quarter increase, while the first year-to-year increase since mid 2008 was noted.

The ABC/IDC Agribusiness Confidence Index is compiled from ten weighted sub-indices that are constructed quarterly by means of a survey. The survey measures the perceptions of decision makers from agribusinesses across South Africa, serving all the different industries in the agricultural sector. The changes to the ten sub-indices therefore explain the perceived confidence levels. See the table below and interpretation thereafter.

Table 1: Changes in the sub-indices of the ABC/IDC Agribusiness Confidence Index

Sub-Index / Quarter to Quarter / Year-on-Year
Turnover / Increase / Decrease
Net operating income / Increase / Decrease
Market share of the business / Unchanged / Increase
Employment / Unchanged / Decrease
Capital investment / Decrease / Decrease
Volume exports / Small decrease / Small decrease
Economic growth in South Africa / HUGE increase / HUGE increase
General agricultural conditions / HUGE increase / Unchanged
Debtor provision for bad debt / Small decrease / Small decrease
Financing costs / Increase / Decrease
Overall index / Small increase (9%) / Increase (11%)
  • Even though turnover and net operating income increased in the short term (q/q), it decreased significantly from the first quarter of 2009. Excellent yields are expected for the current summer grain season and considering the high carryover stock levels and the total expected harvest, record volumes of grain are expected. Without sufficient off-take for the supply, prices are expected to be under severe pressure and to decrease. The severe drought in the Southern and Eastern Cape was identified by certain respondents to be a contributing factor to the decrease in the overall turnover of agribusinesses operating in those regions.
  • Market share of agribusinesses has increased since the beginning of 2009. During tough economic conditions agribusinesses tend to refocus, rationalise and re-position itself in the market place. The benefit of these actions of the past year show now in an anticipated growth in the market share. Even though it can be expected that the larger companies are in a more favourable position to absorb the impact of a difficult period, the improvement in general market conditions has also signalled that their market share could be improved.
  • The improved growth prospects for the South African economy, as compared to the beginning of 2009, proved to be the most contributing factor to increased confidence. However, the increased agribusinesses’ confidence did not yet reflect in their investment perceptions - both in terms of fixed capital and human capital investment. Companies are reluctant to invest in such uncertain times and together with the increased difficulty to obtain financing, it appears that agribusinesses prefer to continue with the utilisation of existing capacity (machinery, staff, etc.), rather than to replace or expand thereon.
  • Export volumes decreased due to still sluggish international demand and uncompetitive prices due primarily to the strength of the Rand against especially the US Dollar and the Euro. This impacted negatively on the foreign earnings of these companies.
  • General agricultural conditions are considered more favourable when compared to the fourth quarter of 2009, but unchanged when compared to the first quarter of last year. Erratic rainfall patterns, referring to drought in the Southern and Eastern Cape and floods in the Free State/North West provinces, challenge agribusinesses in these specific areas. Such erratic conditions makes planning and decision-making very difficult.
  • The decreases in respectively debtor provision for bad debt and financing costs definitely provide much relief, not only to agribusinesses, but also to the consumers and agribusiness clients. Respondents identified that credit facilities are becoming increasingly difficult to obtain and that general agricultural conditions are becoming a significant determinant thereof. Due to increased pressure, some agribusinesses that in the past relied on their own capital reserves, now rely on other sources of financing, which also has an increasing effect on financing costs.

More info:

Mrs Lindie Stroebel

Manager, Economic Intelligence and Finance

Agricultural Business Chamber

Phone: 012807 6686

Email: