Operating environment

The defining factor in the southern African agricultural industry over the past year has undoubtedly been the devastating drought which has ravaged large areas across the region. Coupled with the current commodity slump, this has had a marked impact on regional economies and exacerbated the plight of the rural poor. The drought has also highlighted the fragility of African food security in the face of an increasing population, changing food consumption patterns, climate change and the scarcity of unexploited water and land resources for agricultural development.

In South Africa itself, food price increases have been well ahead of inflation and farmers in most sectors have come under severe pressure due to sharply reduced yields. Recovery is likely to be slow in the depressed economic conditions, with limited government resources available to provide much needed aid to the commercial agricultural sector.

The group’s results reflect remarkable resilience in the face of the drought, with poor cane yields in most areas offset to some extent by excellent prices, combined with good quality and prices on the group’s deciduous and banana operations. The current adverse conditions lend support to the group’s strategy for diversification into alternative crops and regions to mitigate climate, market and labour risks. As previously noted, for the first time since the group’s inception operating income from cane contributed less than 50% of total operating income in the 2016 financial year.
Above inflationary increases in the costs of various inputs such as labour, electricity, fertiliser and chemicals continue to put the industry under pressure throughout the region, although weakening exchange rates have contributed to increases in local currency prices.

Transformation remains an imperative in the South African industry. Changing regulations, re-opening of land claims, labour militancy, increased BBBEE requirements and erratic political interventions provide challenges. The group is now involved in five major projects with communities, aimed at the upliftment of the rural poor, skills development and transformation of the industry.
Mthayiza Farming at Malelane manages 1 100 hectare of community-owned cane; Mawecro farming manages 1 650 hectare of cane and 250 hectare of bananas at Komati; at Villiersdorp a 43 hectare deciduous farm is jointly managed in conjunction with previous employees; Mpambinyoni Construction Supplies was established at Scottburgh as a sand mining and block making operation in conjunction with the local community; and we are in the process of including the local communities in the Renishaw property development. The group is proud of its efforts to promote transformation in the sector. It is our intention that these ventures should become models for successful land restitution and empowerment.

Markets

Sugar

Global

Over the past year the world sugar price has improved from its low of around 11 US cents per lb to nearly 20 cents, which is the “equilibrium” level anticipated by industry commentators, at which new sugar projects become viable for low cost producers. While 2016 production is expected to fall well short of demand for the first time in many years, large stock-holdings, low oil prices and the weak Brazilian Real are expected to have a moderating effect on price increases.

Regional

The looming end to EU production quotas in October 2017 poses a significant threat to ACP countries such as Swaziland, Zambia, Mozambique and Malawi, which have traditionally targeted higher priced regional markets as a priority and sold the balance of their production to the EU under a preferential access arrangement. In the short term, however, the effects of the drought dominate.

Swaziland has traditionally sold approximately 50% of its sugar production to the EU and the balance on the high priced SA market. Forecasts for the Swaziland price for the current season reflect an increase of more than 20% on the previous season, largely due to reduced production as a result of the drought, but also assisted by the weakening of the currency against the US$ and the firmer world price. The Swazi industry is unlikely to be able to reduce its exposure to the world price significantly in the foreseeable future.

Future prices will thus depend largely on the ability of the Swaziland Sugar Association to identify alternative markets for its production and the level of the world price. Zambia Sugar (majority owned by Illovo), on the other hand, has been highly successful in developing regional markets to divert sugar away from the EU.

This success, coupled with a major weakening of the Kwacha against the US$, has resulted in an increase in the forecast price for cane of nearly 60% in the 2016 season. It is expected that steadily rising consumption in the southern African region due to increasing population and good GDP growth, combined with high barriers to entry for new producers, will continue to underpin regional markets.

Macadamia nuts

The international macadamia market is experiencing a period of strong growth, driven by the high demand for in-shell macadamias from China. The product is popular with Chinese consumers due to perceived health benefits and its exclusivity. This market has grown to consume more than 20% of the world macadamia supply. This demand and the limited availability of macadamias have driven prices to record levels over the past five years.

The more established macadamia kernel market is doing well in all the major consumer countries. The kernel market is split into the snack and ingredient segments. Macadamias are used to enhance confectionary products in the ingredient market and add exclusivity to luxury nut mixes.

The whole tree nut category is growing rapidly, volume having increased by 67% and value by 380% in US$ terms over the past thirteen years. The increase in volume and price can be attributed to taste and excellent marketing campaigns emphasising the health benefits associated with the consumption of tree nuts. The high investment costs and slow maturity rates provide major entry barriers which limit supply growth.

Currently the world macadamia crop constitutes approximately 1,2% of the total tree nut basket, an insignificant proportion compared to almonds, hazels and pistachios. There would thus appear to be ample scope for growth. In fact, production needs to increase to provide scope for new product development.

Bananas

The total South African banana production is marketed locally, as bananas from sub-tropical regions are generally considered unsuitable in export markets due to under-skin discolouration caused by low winter temperatures. This makes the market susceptible to dramatic supply-demand and consequently price fluctuations.

Local prices are coming under increasing pressure from imports from southern Mozambique where mainly ex-South African farmers are rapidly expanding production, taking advantage of better growing conditions and lower labour costs. During the past year, however, these farmers were also adversely affected by the drought.

The group’s banana production is distributed by Lebombo Growers, in which the group has a 27% shareholding, in line with its product supply. Lebombo operates on a similar basis to TAD, distributing its surpluses to grower shareholders via a rebate on product supplied. Lebombo supplies approximately 23% of the South African market. It has been particularly successful in the Western Cape where it has more than 40% market share and has established a state-of-the-art distribution centre near Wellington to supply selected retailers directly. A similar facility has recently been established in KwaZulu-Natal.

Exceptionally high prices were achieved during the latter part of last year due to reduced production as a result of the drought. CBL was able to capitalise on the high prices through its strategy of prioritising bananas in terms of water allocation. The high prices are expected to continue into the current year and persist until the drought abates.

Deciduous fruit

The group’s production is marketed through the Two-A-Day group (TAD), which is owned by its grower suppliers. TAD essentially operates as a co-operative, distributing income to shareholders via rebates on packing and marketing costs. TAD is a 50% shareholder in Tru-Cape (with Ceres Fruit Growers) which markets the TAD production. TAD is also a shareholder in APL Cartons, which gives it access to low cost packaging material, and Link Supply Chain Management, which manages logistics for its exports. Elgin Fruit Juices, a wholly-owned subsidiary of TAD, processes poor quality fruit not suitable for the local or export markets to juice. TAD provides a technical advisory service to growers and a service for the aggregated purchase of chemicals and fuel. TAD supplies fruit to more than 60 countries around the world.

This diversity considerably mitigates the risk posed by market volatility. The group owns a 19% shareholding in TAD and supplies approximately 25% of TAD’s throughput. The outstanding service provided by TAD is certainly a significant factor in the success of the group in the deciduous arena. While deciduous prices came under pressure in the 2015 season due to good production from competitor countries and the lesser quality of local production, the 2016 season has been much better, with excellent prices assisted by the weak rand, strong production and good quality.