While disaster is not yet imminent, farmers would do well to hedge their bets, reports Madeleine Wackernagel
The Maize Board has been disbanded, but some old farming habits are taking longer to die. El Ni–o will be the big test, says Rod Gravelet-Blondin, general manager of the agricultural markets division at the South African Futures Exchange (Safex).
“In the past, the market for agricultural produce was distorted because of subsidies and price controls. But now that the cushion has gone farmers will have to manage their risks alone, and many are completely unprepared,” he says.
While nobody is predicting disaster yet, the clouds are gathering. This year’s El Ni–o phenomenon is expected to be comparable to the 1982/83 event, one of the most severe, with significant drought implications for Southern Africa. At this stage, the likelihood of below-normal rainfall over the 1997/98 rainy season is more than 50%.
Worst of all, the effects of El Ni–o could extend beyond this summer. Says Tony Twine of Econometrix: “The first year in a drought cycle is usually not that bad; it’s the second and third years that really hit the sector. The good rains of last summer will be our saving grace, but beyond that is more difficult to assess.”
The farmers are busy harvesting at present and not overly concerned about El Ni–o and next year’s planting season. “To panic at this stage is premature,” says an agricultural economist, “but the industry must be made aware of the potential dangers. Every time there is a drought, or the threat of one, farmers just throw up their hands in horror. Instead they should think about strategy. Why do they persist in planting on marginal land, for instance?”
Adds Twine: “It will take a few more years before the mind-set changes and farmers realise that things are different in an open market; the risks are much higher.”
Where there’s risk there’s usually an antidote – in this case, Safex. Last month saw a record 2 200 number of contracts traded, with a value of more than R110- million. But the going has been slow, says Gravelet-Blondin.
“South Africans are notoriously suspicious by nature so we’ve had to do a lot of re- educating. But as more farmers realise the need to manage their risk, they realise the benefits of hedging against price fluctuations.”
The risks to South Africa’s economy are even greater – in the worst-case scenario, according to SBC Warburg, the investment bank, maize production could fall to 3,5- million tons, a drop of 50% on 1996/97 estimates. That translates into a potential 0,8% decline in gross domestic product (GDP) for next year, says the bank. As demand runs at about 6,5-million tons, the balance would have to be imported.
“Using the current spot maize price of around R460/ton, a poor maize crop could therefore bring about a R1,8-billion swing in the current account,” states the bank. “Coupled with expectations of lower gold exports in 1998, the current account deficit could therefore widen to more than R10-billion,” in turn destabilising the currency.
But all is not yet lost. If El Ni–o peaks early, before December, the blow to the agricultural sector will not be that severe, says Bertus van Heerden, senior manager for the agricultural sector at Standard Bank, thanks to a much higher soil moisture level and full dams.
The real problems start if El Ni–o peaks in February.
According to the southern oscillator index, which measures the effect of temperature changes in the Pacific Ocean (negative results mean an El Ni–o effect; positive imply normal weather patterns), the June reading was -2,0. This compares with -1,6 in June 1982 when the last severe El Ni–o phenomenon was experienced.
“It is very difficult to predict,” says Van Heerden. “But it’s a pity we don’t have a disaster management strategy in place. During the last drought the government had to bail out the farmers to the tune of R3- billion; we can’t afford a repeat performance.
“We need to have a policy of giving farmers incentives to look after themselves, to encourage savings.”
Van Heerden’s estimates of the possible effects of El Ni–o on the economy are not as gloomy as Warburg’s but they are bad enough: a 0,5% drop in GDP growth and a R1,1-billion blow to the current account next year.
Indeed, says Econometrix’s Twine, the negative impact is not confined to the formal economy alone. “A dry summer hits millions of people not included in the statistics. Subsistence farmers grow just enough to feed themselves and don’t have the resources to enter into the cash economy. The effects of a drought are devastating.”