This report evaluates the impact of the current drought on the South African economy, on commercial and smallholder producers, and on consumers. Whilst the impact of the drought on current prices in undeniable, the effect of the depreciation in the value of the Rand also remains undisputed. It not only shifts the level of the import and export parity price band, but also impacts on every stage of the food value chain.

Reduced domestic production induces significant changes in trade volumes to meet domestic demand, even when it implies substantial price increases. As the most basic food staple that was hardest hit by the severe drought conditions, significant quantities of maize will have to be imported in 2016. The Crop Estimates Committee (CEC) of the Department of Agriculture, Forestry and Fisheries released the preliminary area estimates for summer crops on 27 January 2106. Contrary to 2015, when the maize crop was planted well within the optimal window, a substantial share of the 2016 maize area was only planted in January. This high share of risky late plantings, combined with an earlier than usual production forecast, raises concern that the prediction of a 7.4 million ton maize crop may be optimistic. Consequently this report illustrates 2 scenarios: the baseline, based on the official production forecast from the CEC of 7.4 million tons of maize, and a second scenario that assumes reduced yields on the preliminary area estimate presented by the CEC, reducing the total maize crop to 6.6 million tons.

In addition to domestic demand, many deficit regions across Southern Africa, such as Swaziland, Lesotho, Namibia, Botswana and southern Mozambique are dependent on South African maize. The drought conditions experienced in South Africa have been far reaching in the continent and initial production forecasts across Southern Africa have been reduced from recent norms. The fact that Zambia’s crop has also been affected by the drought raises further concerns for the regional maize balance.

South Africa is expected to import 856 000 tons of white maize and 1.9 million tons of yellow maize under the CEC baseline scenario at a cost of R11.5 billion. Imports will increase to 1.2 million tons and 2.2 million tons respectively under the alternative scenario, at a cost R14.5 billion. There are ample supplies of yellow maize in the world market and the local shortfalls will comfortably be met by imports. However, Mexico’s ability to provide the entire domestic shortfall of white maize remains uncertain. South Africa may need to look elsewhere towards the end of the season, with the US the most likely alternative. Current GM regulations would however have to be altered for US imports to occur. Opening the US market will reduce maize meal prices and provide a more certain source of white maize imports to the South African market to ensure availability.

As South Africa is normally an exporter of maize the total import volumes expected in 2016 are unprecedented. To ensure that imports occur timeously and efficiently, infrastructural capacity needs to be considered. The total loading capacity within the 4 ports currently used for grain trade (Durban, Cape Town, Port Elizabeth and East London), is sufficient for the additional import requirements, but continued cooperation between industry and government is essential for imports to occur timeously.

The effect of the drought is also clear in grazing conditions and the impact on extensive livestock industries that depend on grazing has been catastrophic. Beef production tends to increase in dry periods as producers cull due to poor or insufficient grazing and high feed costs. Intensive producers of pork and poultry however have little flexibility in their feeding systems so that production declines only marginally in the short term. While the weaker exchange rate helps, the increase in feed grain prices is greater than the increase in meat prices, impacting negatively on profit margins.

Coming as it did after an already below-average production season in 2015, the combination of the drought and the weaker exchange rate has already impacted severely on agricultural commodity prices in South Africa. Whilst the Agricultural GDP remains above the 3 year average and net farm income declines only marginally under the crop estimates scenario, a reduced yield scenario results in significant deterioration, as prices remain relatively unchanged at import parity levels, whilst production volumes decline. In addition, reduced production volumes will impact on South Africa’s trade balance. Sectors such as maize and sugar, which would normally contribute to the sector’s positive trade balance, will shift to a negative net trade position in 2016.

From a farm business perspective the current drought will not only affect the current production season, but might also have long term financial and debt implications for farm businesses. Furthermore, poor rural households continue to be dependent on household agricultural production. More than 1.2 million individuals will be affected by the current drought, which will inevitably have a significant impact on maize yields and would give rise to food insecurity. Hence, supporting the primary agricultural sector to overcome the short term effects is critical to ensure that long-term agricultural production, growth and food security is not compromised.

Agriculture has been identified as a sector to expand in the National Development Plan, with intensive, export orientated industries in particular identified as key in creating jobs within the rural economy. Ambitious job creation targets will require investment in irrigation infrastructure and consequently, the response to the current drought must continue to foster an enabling environment where investment can flourish. At the same time, the cost of basic food staples is a key consideration in responding to the current drought. Based on January 2016’s preliminary retail prices, the cost of the staple basket increased by approximately 19% from January 2015 to the corresponding month in 2016 and a further increase of 10% in quarter 1 of 2016 is expected.

In the longer term it is a return to surplus production that will be most effective in reducing the cost of food staples and curbing food price inflation. Despite further depreciation in the Rand to beyond R17 to the US dollar in 2017, a return to surplus production will imply a decline of more than 30% in domestic white maize prices. In the longer term, a favourable food price inflation Outlook will depend on a vibrant and sustainable agricultural sector and hence the short term response to the severity of the current drought should prioritise the ability of producers to stay in business, enabling them to contribute to the recovery when weather conditions improve.