The Economy and Agriculture March 2016

Dr. HD van Schalkwyk

CONTENTS

• World economic outlook• Changing economies• Changing demographics• World politics• Oil prices and biofuel• Fertilizer• World agricultural outlook• South African agricultural outlook• Opportunities for agro-processing• Closing remarks

World Economic Outlook

• Global growth, 3.1 percent in 2015, is projected at3.4 percent in 2016 and 3.6 percent in 2017.

• The pickup in global activity is projected to be moregradual especially in emerging market anddeveloping economies.

• In advanced economies, a modest and unevenrecovery is expected to continue, with a gradualfurther narrowing of output gaps.

• The picture for emerging market and developingeconomies is diverse but in many cases challenging.

World Economic Outlook

Global growth is in slow mode, but a recession seems unlikely

• US: Will it continue to be a bright spot in a weak global economy?

GDP growth for the United States is adjusted downward by 0.4 percentagepoints to 2.0 percent, as the GDP growth in the 4th quarter and jobs growthover the past months have been somewhat disappointing.

Solid domestic demand will help overall GDP growth at 2.0 percent in 2016,which is slightly lower than 2015 growth rate.

Raising profits will become increasingly difficult for companies as labour costsaccelerate, labour productivity growth is modest, and interest rates are rising.

• EURO-AREA: Recovery is likely to get better

Despite increased political risks, the short-term economic environment inEurope has actually improved faster than expected.

As is the case in the US, domestic demand continues to drive the currentmoderate recovery.

Investment and productivity are projected to improve in the coming decade,paving the way for somewhat of an acceleration in growth.

World Economic Outlook

• ASIA-PACIFIC: Growth is unlikely to improve

Growth rates of China, India and Southeast Asia are unlikely to see significant improvement in2016 compared to last year.

Chinese growth in 2016 is expected to stay the same as that of 2015 at 3.7 percent.

India has already overtaken China as the growth champion of the region.

• LATIN AMERICA: Losing the race?

Rapid falls in oil and commodity prices negatively impacted Latin American economies, andexacerbated the ongoing troubles in the biggest economy in the region, Brazil.

More private sector and foreign investment is needed as well as integration of the informalsector into large and modern business practices.

• AFRICA: Positive, but uncertain

The prolonged decline in commodity prices, as well as weak growth in Nigeria and South Africa,will cause overall growth for the region in 2016 to come in at 3.7 percent – which is, though stillan improvement from 2015, well below the average growth of the last few years.

The region still has a lot of potential for economic expansion in the medium to long run, mainlydue to its demographic dividend, and there is ample room for catch-up, but several political andinstitutional constraints offer significant uncertainty.

Changing economies

Changing economies

Changing demographics

Changing demographics

Migration and changing world demographics

• More than 1,450 refugees per 100,000 ofHungary's local population claimed asylumin the first half of 2015. The figure forGermany was 323 and for the UK it was 30applications for every 100,000 residents.

• Influx also provides opportunities for theGerman economy.

• With the German population shrinking,businesses are unable to fill many jobs,and specialized workers are increasinglyrare. It's a development that jeopardizesthe country's future prosperity.

• There are currently close to 46 millionpeople of working age in Germany, whoare theoretically capable of working.Without immigration, that number willdecline to less than 29 million in about 30years.

• A smaller workforce translates into fewerpeople paying into the pension fund andhealth insurance systems, fewer peopleconsuming and producing goods, andfewer people paying taxes.

Migration and changing world demographics

• At least 2.2 million migrants will arrive in the rich worldevery year from now until 2050.

• Britain's population will rise from 60 million toapproaching 69 million by 2050 - almost entirely becauseof immigration.

• The latest figures from the UN's population divisionpredict a global upheaval without parallel in humanhistory over the next four decades.

• There will be billions more people in Africa, Asia andthe Middle East. Tens of millions will migrate toEurope and America, while the indigenouspopulations of most countries in the rich world willeither stagnate or decline.

• The gap in wealth and opportunity between the richand poor worlds will be the most significant "pullfactor" behind this change. But the pressure exertedby rapidly rising populations in developing countrieswill also be an important underlying cause.

• By 2050, India will have the highest population,totalling almost 1.7 billion people.

• There will be 292 million Pakistanis, fifth biggestpopulation.

• Nigeria will have 289 million people sixth mostpopulous country.

• This massive population growth will lead to landdegradation on a huge scale and place an immensestrain on the limited water resources of poorcountries.

• Malawi cannot feed its present population of 13million - and every year its soils become moredegraded and yields steadily fewer crops. By 2050, itwill have almost 32 million people.

Politics and the world economy: Top 10 risks

1. The Hollow alliance: With the US no longer intervening on Europe's behalf, and Syria likely to further show theirdifferences, neither will continue to take responsibility to put out the fires of the world.

2. Those who want an "open" or a "closed" Europe will/can divide it. Possible UK exit.

3. China stands out as the most important economy of scale, but uncertain, driver of many global outcomes.

4. The response to the most powerful terrorist organisation in history has been misdirected. Highest on Isis' hit listwill be France, Russia, Turkey, Saudi Arabia and the United States, while nations with high numbers ofunintegrated Sunni Muslims in both the Middle East and Europe can expect to feel their displeasure.

5. Saudi Arabia. With King Salman's recent arrival on the throne, and ever greater anxiety over regional rival Iran,a scenario of open conflict has now become entirely realistic.

6. The rise of technologists: From Silicon Valley corporations to hacker groups - upon the political realm.

7. Unpredictable leaders: International politics will be even more volatile this year because of an "unusually wideconstellation of leaders known for their erratic behaviour."

8. Brazil: In political stalemate and a failure to address its growing fiscal deficit.

9. Not enough elections: Slow growth and lower living standards are going to make people discontented. A lack ofelections could see complaints boil over onto the streets.

10. Turkey: President Erdogan is pushing for a system run mainly by him, rather than parliament - an aggressivetactic which will harm business investment in the country. US pressure on the country to deal with Isis willactually make Turkey more vulnerable to attack from the terrorist group, while their own offensive against itwill produce "only modest results".

Source: Ian Bremmer

Global risks

World oil demand growth

• Global oil demand to slow in2016

• Oil prices have roughly halved inthe past year to around $50 perbarrel

• It is however very difficult topredict a very volatile oil price

• The demand for energy willdouble to 2035

• The traditional approach of theagricultural sector to simplyfocus on food and fibreproduction will change to a moremultidisciplinary approach

• The use of renewable energy(solar, wind and hydro farms) willincrease to fulfill this demand

Energy prices

When Ben van Beurden (CEO: Shell) was asked where oil prices may go next, he told the BBC:

"The honest answer to that is I don't know."

• This is clear in contrastingforecasts

• "van Beurden stated that arecovery in the price of oil ishard to foresee."

• However, the World Bankpredicts an increasing trend inprices from 2015 to 2024(approximately $90 per barrel)

• There are many factorsinfluencing especially thesupply of oil

5 Factors affecting oil prices

1. ChinaChina is the second largest consumer of oil. The trajectory of its

economy will significantly impact oil prices

2. American shale80% increase in oil production in American helped to send oil prices

down. Can America keep up with this supply in the future?

3. Elasticity of demandThe cure for low prices is low prices. Will low prices spur renewed

demand?

4. Opec's next moveOil prices crashed after their meeting in November 2014,

demonstrating their influence on price.

5. Geopolitical flashpointsHistory has demonstrated time and again that geopolitical crises are some

of the most powerful short-term movers of oil price

Oil Prices

• Lower oil prices are a source of downward pressure on prices,principally through their impact on energy and fertiliser costs.

• Under the projected lower oil prices, the production of firstgeneration biofuels is generally not profitable withoutmandates or other incentives.

• Policies are not expected to lead to significantly higher biofuelproduction in either the United States or the European Union.

• A rise in the production of sugar-based ethanol in Brazil isexpected to flow from the increase in the mandatory blendingratio in gasoline and the provision of tax incentives.

• Biodiesel production is being actively promoted in Indonesia.

Source: OECD-FAO (2015)

Biofuel production

Source: OECD, 2015

• In terms of biofuel, South Africandemand, supply and use isexpected to grow substantiallyuntil 2024

• Production in Argentina and Brazilis also expected to increase

• Relatively low growth rates areexpected in more developedcountries such as Canada and USA.

• African countries will also mostlikely increase biofuel supply,demand and use in the comingyears.

• Biodiesel production and use in SAis expected to increase by 17.55%to 2024

World Ethanol Production

Fertilizers Use

• World fertilizer use is projected toincrease

• SA fertilizer use will move sidewaysand may even decline

• This can be ascribed to decliningapplication rates that is a result ofincreased prices and a need forhigher efficiency

Global Fertilizer Prices

Although following a similartrend, domestic fertilizer pricesare projected to rise at a fasterrate than international prices in2016 and 2017 driven bycontinued depreciation in thevalue of the Rand, as well ascosts related to transport andimport administration.

World Agricultural Outlook

• World production and yields have slowed.

• The slowdown is due to lower demand for agricultural products which canbe ascribed to:

The fact that fairly high levels of food consumption per person are now beingreached in many countries due to a continued decline in population growth ratessince 1960.

But also due to the fact that a stubbornly high share of the world's populationremains in absolute poverty and so lacks the necessary income to translate itsneeds into effective demand.

• As a result, the growth in world demand for agricultural products is expectedto fall from an average 2.2 percent a year over the past 30 years to 1.5percent a year for the next 30.

• In developing countries the slowdown will be more dramatic, from 3.7percent to 2 percent, partly as a result of China having passed the phase ofrapid growth in its demand for food.

World Agricultural Outlook

• Advancing technology (production, information, transport-ation)

• Increased reliance on information

• Importance of controlling economic resources

• Understanding how to direct human resources

• Understanding consumer demand

• Recognizing the integration of businesses

• Recognizing the impact of concerns about the environment,food safety, food availability and food cost

• Appreciating the implications of globalization

Reasons for the production trends

Global agricultural commodity outlook

• China's unstable economicstate continues to weigh on allcommodities.

• The agricultural sector willadjust to lower prices for mostfarm commodities.

• For crops, production responseto lower prices will result inreduced area planted.

• In the livestock sector, lowerfeed costs will provideeconomic incentives forexpansion.

Short to Medium term

• Steady world economic growth andcontinued global demand forbiofuel feedstock, will supportincreases in consumption, trade,and prices of agricultural products.

• Following reductions in 2015 and2016, farm cash receipts areexpected to grow .

• Although farm productionexpenses also increase beyond2016, net farm income will remainabove its 2001-10 average.

Longer term

Source: OECD-FAO (2015)

Demand for Agricultural Products

• World demand will be subdued by per capita consumption of staplecommodities approaching saturation in many emerging economiesand by a generally sluggish recovery of the global economy.

• The major changes in demand are in developing countries, wherecontinued but slowing population growth, rising per capita incomesand urbanisation all increase the demand for food.

• Rising incomes prompt consumers to diversify their diets by increasingtheir consumption of animal protein relative to starches.

• For this reason, the prices of meat and dairy products are expected tobe high relative to the prices of crops; while among crops the prices ofcoarse grains and oilseeds used for feed should rise relative to theprices of food staples.

• These structural tendencies are in some cases offset by specificfactors, such as a flat demand for maize-based ethanol.

Price and Production of Agricultural Products

• In real terms, world prices for all agricultural products are expected todecrease over the next ten years, as production growth, helped by on-trend productivity growth and lower input prices, outpaces slowingdemand increases.

• While this is consistent with the tendency for long-term seculardecline, prices are projected to remain at a higher level than in theyears preceding the 2007-08 price spike.

• In Asia, Europe and North America additional agricultural productionwill be driven almost exclusively by yield improvements.

• South America yield improvements and additional agricultural area areprojected.

• Modest production growth is expected in Africa, although furtherinvestments could raise yields and production significantly.

Source: OECD-FAO (2015)

Growth in Yields

• Yield increases is a result ofcontinued improvements invarieties.

• Investment in research makesnations more competitive.

• Effect of El Nino varies.

• Coming decades arelikely to bring morefrequent episodes ofsevere drought.

• Devastating impact onthe world's ability to feeda growing population.

• Need a sustainableagricultural system thatmakes the most efficientuse of water.

Climate change

South African Agricultural Commodity Outlook

Baseline Assumptions

• Exchange rate is currently undervalued.• Stock build-up in China has major impact on imports of

minerals.• Local elections in 2016 will have impact on economy.• Economy will remain weak for most of 2016.• Credit rating will not or will?? deteriorate further.• Politics in South Africa is starting to become a very

serious issue.• Improvements in economic growth might start to show

towards the end of 2016 if we get our act right.• Weather 2016/17?

National Summer Crops Estimate

CROP Area planted

2016

2nd forecast

2016

Area planted

2015Final crop

2015

Change

Ha Tons Ha Tons %

(A) (B) (C) (D) (B) ÷ (D)

Commercial

White maize 1 020 750 3 195 800 1 448 050 4 735 000 -32,51

Yellow maize 945 000 4 059 950 1 204 800 5 220 000 -22,22

Total Maize 1 965 750 7 255 750 2 652 850 9 955 000 -27,11

Sunflower seed 687 500 687 150 576 000 663 000 +3,64

Soybeans 519 800 724 600 687 300 1 070 000 -32,28

Groundnuts 23 100 34 120 58 000 62 300 -45,23

Sorghum 48 500 93 400 70 500 120 500 -22,49

Dry beans 36 400 44 095 64 000 73 390 -39,92

TOTAL 3 281 050 8 839 115 4 108 650 11 944 190 -26,00

Source: Crops estimates committee (February 2016)

SA Commodity Outlook : Weaners

WEANER CALF PRICE PRDEDICTION MARCH TO DECEMBER 2016

1500

1600

1700

1800

1900

2000

2100

2200

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

c/k

g

Weaner price 2015 3-year average

Weaner prices (2016) Prediction March to December 2016

?

2016

• Weaner/yellow maize price ratio weakened with 55,3%.

• Impact of the drought is not fully discounted.

• Uncertain whether there will be enough winter grazing on the weaner producing farms.

• If not, the price, due to supply may be forced further downward over the first six months.

• If this is however the case a shortage of marketable weaner calves will occur during the second half of 2016 which will push the predicted price further upwards.

SA Commodity Outlook : Beef

PREDICTION OF BEEF PRICES (A2/A3) FOR MARCH TO DECEMBER 2016

2800

3000

3200

3400

3600

3800

4000

4200

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

c/k

g

Class A2/A3 (2015) 3-year average prices

Class A2/A3 (2016) Prediction March to December 2016

2016

• Beef/yellow maize price ratio weakened by 45,0%.

• January 2016 year-on-year, the number of animal slaughtered was 16,4% higher.

• Reduction of national herd, which will lead to a decline in the supply of beef on the markets in the next few years.

• It is expected that the supply of beef to the market is going to decline in the third quarter.

• This action may start to intensify as early as April/May depending on the availability of grazing.

SA Commodity Outlook : Lamb

PREDICTION OF LAMB MEAT PRICES FOR MARCH

TO DECEMBER 2016

3800

4300

4800

5300

5800

6300

6800

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

c/k

g

3-year average prices Class A2/A3 price (2015)

Class A2/A3 (2016) Prediction March to December 2016

2016

• Lamb/yellow maize price ratioweakened with 48,6%.

• January 2016 number of sheepslaughtered was 9,1% highercompared to January 2014.

• Drought has impact on the nationalherd size,

• However in large areas of theCentral Karoo sheep farmers aremore aware of drought and aremuch more flexible.

SA meat consumption

SA maize prices 2014/16

SA Commodity Outlook : Maize and Sorghum

White maize:

– Production to decline

– Increased domestic use

– As a result, price is likely to reach approx. R3750 by 2024

Sorghum:

Production and consumption to move

sideways

Prices to reach approx. R3500 per ton by

2024

Yellow maize:

Increase production

Increased domestic use

As a result, prices will increase at a slightly slower

rate than white maize to approx. R3500 by 2024

SA Commodity Outlook : Wheat

• Projections indicate thatprice may increase to R4500per ton by 2024.

• Consumption can increase tobetween 3500 thousand tonsby 2024.

• Production is projected todecline to 1800 thousandtons by 2024.

• Imports will increase due todeclining supply and growingdemand

SA Commodity Outlook : Oilseeds

• Oilseed production andconsumption are projected toincrease at a similar pace.

• Average oilseed prices are expectedto reach R7800 per ton by 2024

• Trade balance will improve slightlyafter which it will decrease tocurrent levels in 2024

• Vegetable oil and protein meals willfollow similar trends

Opportunities for Agro-processing

• The reliance on markets in achieving policy goals requires developing nations toinvest in institutions and services that will allow markets to function well in a globaleconomy.

• Food processing is an important driver of jobs and incomes in many Africancountries and can also provide access to greater diversity of affordable, high qualityand nutritious foods.

• By improving the capacity of local food processors across sub-Saharan Africa toproduce and market healthy food products, while simultaneously improvingsmallholder farmers’ access to markets, food security for both producers andconsumers can be strengthened.

• The role of agro-processing and Village Parks was also mentioned in the 2016budget speech.

• Small plants like extrusion can be very competitive.

• The reliance on markets in achieving policy goals requires developing nations toinvest in institutions and services that will allow markets to function well in a globaleconomy.

• Food processing is an important driver of jobs and incomes in many Africancountries and can also provide access to greater diversity of affordable, high qualityand nutritious foods.

• By improving the capacity of local food processors across sub-Saharan Africa toproduce and market healthy food products, while simultaneously improvingsmallholder farmers’ access to markets, food security for both producers andconsumers can be strengthened.

• The role of agro-processing and Village Parks was emphasised in the 2016 budgetspeech.

• Small factories like extrusion plants can become very competitive.

Closing Remarks