Volatile markets increasing risks

Source: Prof Johan Willemse, SAPPO News, February 2022, photo credit: 123RF/mmphotoart

The national budget was delivered on Wednesday with relative good news. However, this news was turned upside down. The world changed on Thursday morning when Russia attacked the Ukraine with serious implications, among others, for farming input prices (fuel and fertiliser) and feed prices (maize, wheat and oilseeds). 

How this will play out, is uncertain, but the fact is that it creates a very volatile business environment with commodity prices increasing and financial markets reacting. We can expect uncertainty. Volatility and risks will be in place for at least a few weeks. The South African economy and agricultural markets will not escape this.

The risk is that we will take hasty decisions and deviate from our business plans and goals. However, the fact is that you will have to reconsider your cash flow position and how you can be more resilient and flexible. Do not ad risks to your business in a very volatile and risky macro environment.

The budget was hopefully the first signs of a turnaround in macro-economic policy and the fiscal situation in South Africa as was promised. Taxes did not really increase (as we are already heavily taxed). The windfall tax on mine income was mainly used to reduce government debt.

Tax income is forecast to increase in the next three years from R1 721 bn to R1 977 bn (12,7%). Expenditure is budgeted to increase by 5,7% over the three years to R2 281 bn. This is well below the expected inflation, reducing government share in the economy, which is good news.

The budget shortfall will reduce in rand terms. Government debt will stabilise at about 75% of GDP. This is below previous projections. There are still a lot of risks, as the militant labour unions will not accept the very little wage increases budgeted and a reduction in numbers. However, we are on a better path than a year ago.

The Ukraine/Russian war will disrupt the exports of wheat (30% of world exports), 19% of world corn exports and 85% of sunflower exports. This must be seen against the background of already low stock levels for most agricultural commodities with prices still in a bull phase.

At the time of writing this (24 February), prices reacted strongly higher for most commodities. Oil increased to above $103/barrel (47% increase for the year to date), natural gas (important for some fertiliser) is 66% higher this year. Chicago grain prices increased strongly (23 February), wheat was 13% higher for the week, corn 6%, soybeans 6% and the rand weakened. Share prices dropped all over.

Grain prices on Safex was yesterday substantially higher (yellow maize up by more than R277/ton to above R4 000/ton and soybeans increased by R660/ton above R9 700/ton). Obviously, the question is how long will this continue and when will feed prices stabilise and normalise.

However, given drought in the South American crops (maize and soybeans), this is a risky start to the USA new production season. With our first crop estimate due on Monday, I will plan for feed costs to stay high. Given the fact that pork supplies grew substantially during the past three years (much faster than demand grew) pork prices remain under severe pressure with very little or no profit margins. Pig slaughter numbers in December 2021 was 32% higher than in December 2018. Pork prices are 20% lower than in 2018, as the extra volumes must be discounted in the meat market, with poor economic growth and increasing unemployment. Feed prices are roughly 55% higher over this period.

Cutting overhead costs and managing cash flow, while improving efficiency, is the task at hand. The publication Successful Farming in the USA offers the following advice for tough times, which in essential is to focus on the controllables in your business:

• Managing your cash flow is critical, stretch payments and chase income. Running into cash flow problems must be avoided, banks do not like that and tend to pull financial facilities instead of helping.
• Add extra revenue streams, how small, will assist cash flow. Sell unused and unwanted equipment and assets to produce cash flow.
• Reduce costs such as family costs. My experience is that you need to look at you expenses and ask: What can I reduce and even stop? Some costs, such as insurance, tend to keep on increasing.
• Rent new equipment instead of buying. Refinance current assets and stretch the payment period and try to lock in current interest rates (given an outlook of rising rates this year).
• Improve marketing and your payment terms to receive cash earlier.
• Lastly, restructure your debt where possible. Also organise financing facilities well before you need the actual cash. Banks drag their feet and push you into a corner when you run out of cash!

Try not to change banks as it will take forever and squeeze you even more.

The South African Pork Producers’ Organisation (SAPPO) coordinates industry interventions and collaboratively manages risks in the value chain to enable the sustainability and profitability of pork producers in South Africa.