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Area coverage

Table 1.1 and Table 1.2 provides an overview of the area of coverage for dryland and irrigated summer crops in South Africa's key agro-ecological producing regions. The coordinators of this initiative are sincerely grateful for the interaction and assistance with data, knowledge and other inputs from each organisation, agribusiness and farmers.

Yield assumptions

Figure 1.1 and Figure 1.2 indicate the yield assumptions for dryland and irrigated crops. These assumptions represent target yields which were formulated in round table discussions. These levels are based on crop potential in the respective regions, historic trends and expert opinions. It is important to note that intra-regional variations will occur, and it is recommended that producers adjust their target yields based on their location and potential.

Crop price assumptions

Annually, the Bureau for Food and Agricultural Policy (BFAP) presents a baseline outlook for agricultural production, consumption, prices and trade in South Africa over a 10-year horizon. The outlook is generated within the BFAP system of models and is based on a coherent set of assumptions about a range of economic, technological, environmental, political, institutional, and social factors. Of the range of critical assumptions underpinning the baseline projections, one of the most important is that stable weather conditions will prevail in Southern Africa and around the world; therefore, yields grow constantly over the baseline as technology improves. Consequently, it does not represent a forecast, but rather a single plausible future outcome, based on fundamental factors underpinning markets. It presents a future equilibrium and a benchmark against which further analysis can be measured and understood.

Assumptions related to the future macro-economic environment are based on a combination of projections developed by the International Monetary Fund (IMF), the World Bank and the Bureau for Economic Research (BER) at Stellenbosch University. Baseline projections for world commodity markets were generated by FAPRI at the University of Missouri, as well as the Food and Agriculture Association (FAO) of the United Nations. Once these critical assumptions are captured in the BFAP system of models, the Outlook for all commodities is simulated within a closed system of equations. This captures the interlinkages between sectors and, for example, any shocks in the grain sector are transmitted to the livestock sector and vice versa. For each commodity, important components of supply and demand are identified, after which an equilibrium is established through balance sheet principles by equating total demand to total supply.

Figure 1.3 illustrates the key commodity price assumptions for white maize, yellow maize, sorghum, sunflower and soybeans that were used in the summer crop budgets for the 2022/23 production season. Further deductions were made to calculate a farm gate price for each agro-ecological producing region. The sensitivity analysis in the respective crop budgets makes provision for variation in price and yield and indicates the gross margin under each price and yield combination.

Key input cost trends

Figure 1.4 illustrates the cost trends for fuel and fertilisers over the period from January 2020 to September 2022. The Covid-19 pandemic disrupted the fertiliser supply chain, increasing the price during 2021. In February 2022 Russia invaded Ukraine, creating even more instability in fuel and fertiliser supply and prices. The Covid-19 pandemic and the war created a perfect storm that increased shipping delays and costs, commodity prices, energy, fertiliser and fuel costs, and put domestic and international spending power under pressure. When comparing September 2021 to September 2022 input costs trends, the weighted average fertiliser price (combination between nitrogen, phosphorus and potassium) has indicated a year-on-year increase of 57% for the above-mentioned period, with nitrogen increasing by 58% (urea = 60% and LAN28 = 55%), MAP by 39% and potassium by 69% (Grain SA, 2022). The fuel price increased by 55% from September 2021 to September 2022.

Some hope appeared as the local fuel, potassium chloride and MAP prices started to decrease in July 2022, however, the Urea and LAN prices have once again indicated an increase in September. Furthermore, the international fuel price started increasing at the end of September 2022, which could indicate towards a local fuel price increase, as the local prices have been lagging behind the international prices and did not change at the same rate. The input costs remain highly volatile due to global dynamics like OPEC production cuts, the energy crisis in Europe, and domestic factors such as a weakening in Rand/dollar exchange rate and demand and supply dynamics.

Figure 1.5 presents an overview of the average year-on-year percentage changes for key agricultural inputs from 2020 to 2021, and from 2021 to an estimate for 2022. The rise in the cost of agricultural inputs remains a concern, with almost all costs recording higher percentage changes from 2021 to 2022 compared to the disrupted COVID era between 2020 to 2021. Fuel cost is expected to increase by 49%, compared to only 17% last year (average across the entire year from January to December). The weighted cost for fertiliser (a combination between nitrogen, phosphorus and potassium) is projected to increase by 66% in 2022 relative to 2021, with urea, LAN28 and MAP projected to increase by 63%, 63% and 57% respectively. Potassium is expected to increase significantly more compared to 2021, with a projection of 102%. Herbicides are projected to increase by 37%, and administered costs such as wages and electricity only have a 7% and 10% projected increase, lower compared to the previous season.

With the ongoing war between Russia and Ukraine and the world struggling to return to normal after the Covid-19 pandemic, there exists a large degree of uncertainty in global commodity markets. Farmers carry the risk of buying inputs at high costs and potentially selling their harvest at a lower crop price in 2023. The figure below illustrates the potential effect of a 10% and 20% crop price decrease, assuming accelerated normalisation in commodity markets. If the price decreases by 10%, the eastern production region's gross margin will decrease by R2,500 (28%), while the western region will decrease by R1,900 (23%).

Methodology, approach and definitions

• A standard operating procedure was used across all crops and regions for generating the cost and income budgets for the 2022/23 production season.
• Deterministic or target yields were based on industry discussions which refers to a yield that should be obtained given a normal production season with normal weather in the respective agro-ecological production regions.
• The farm gate price for each crop was calculated by deducting transport differential, grade differential, handling fees, commission and levies (statutory for seed breeding and technology) from the simulated SAFEX price. For white and yellow maize, industry averages for grade discounts were used to calculate grade differentials.
• The gross production value is then calculated by multiplying the yield with the farm gate price.
• The direct costs are calculated by multiplying the cost per unit by the estimated quantity of input use or application rate.
• For the majority of the crops, it was assumed that own machinery was used, except for speciality operations that is coupled with economies of scale. In such cases, a contracting cost item was allocated. For all crops, provision was made for hail insurance.
• Fertiliser and lime application will vary significantly in regions and across crops, however, an attempt was made to follow a standardised approach across the regions. Micro-elements and foliar feed for selective crops are included in the total fertiliser cost.
• The price for fertiliser nutrients (N, P & K) was calculated by using a weighted approach that accounts for 1. variation in discounts received from suppliers and 2. the time period when fertilisers were purchased.
• Fuel consumption is based on the prevalence production system in each region.
• For plant protection, herbicide, insecticide and fungicides are accounted for based on interaction with industry experts and producers. For instance, in certain regions provision was made for fungicide sprays, but for others where the practise is not common, fungicides were excluded from plant protection costs.
• Repairs and maintenance costs are calculated based on the production system operations.
• For seed, an assumption was made in terms of the majority of crop type area that is cultivated in each region. For instance, the cost of maize seed in Northern-Natal, Mpumalanga and Eastern Free State is based on the assumption that the majority of the area under maize cultivation is yellow maize whereas for the western producing regions, white maize was assumed. An average seed price across various seed companies was used for 1) conventional seeds and 2) GM-technology. The cost of seed per hectare is calculated by multiplying the cost per unit (either kilograms or plant population) by the application rate per hectare. For selective crops, seed treatment was included where relevant. For predominantly oilseeds production, the seed application rate was sub-divided according to own and purchased seed. For own seed use, a cost was also allocated which is based on a realistic crop price (hence, opportunity cost) and seed preparation costs such as sifting and treatment.
• For irrigated crops, the cost of water and electricity was calculated according to typical irrigation application rates at their respective regional costs per millimetre. For instance, variations will occur in the cost for water in areas where predominantly boreholes are used compared to irrigation/water scheme areas.
• The gross margin was calculated by subtracting the direct cost from the gross production value.