AgriworldSA

ABC/IDC Agribusiness Confidence Index

LONG AWAITED RECOVERY IN AGRIBUSINESSES' CONFIDENCE

After two years of consistent decreases in confidence in the agribusiness sector, as measured by the ABC/IDC Agribusiness Confidence Index, the fourth quarter of 2009 showed a slight quarter-to-quarter increase of 14%, from 34.6 in the third quarter of 2009 to 39.6 in the fourth. However, there was still an 11% decrease in confidence when compared to the same quarter of the previous year. The confidence has recovered to the level of the 1^st quarter of this year. This indicates that the sector is geared for growth, with the one risk factor being the climatic conditions. 

The ABC/IDC Agribusiness Confidence Index is measured jointly by the Agricultural Business Chamber (ABC) and the Industrial Development Corporation (IDC). The index provides a general overview of agribusinesses' perception on the agribusiness environment they operate in. Agribusinesses across South Africa, operating in all the different industries in the sector, respond to the quarterly survey, which enables the compilers to construct ten sub indices, which are then used to measure the overall confidence level. The changes of the ten factors therefore explain the perceived confidence level. See the table below and interpretation thereafter.

Due to the seasonality of agriculture, it makes more sense to refer to the year-on-year changes when interpreting the confidence level. However, the quarter-to-quarter changes are relevant when the short term changes are considered of especially factors that are less seasonal, such as financing costs, economic growth and investment.

The decrease in commodity prices, as compared to last year, has a very negative impact on the turnover and net operating income of agribusinesses. Even though a constant decrease in this factor has been observed since the end of 2008, an increase occurred in the short term, such as when comparing with the preceding quarter. The current general agricultural conditions have a negative impact on confidence. Irregular rainfall is currently occurring across the country, with some areas receiving higher than normal rainfall and other areas being declared drought areas. This creates general uncertainty due to the vulnerability of the agricultural sector when considering weather patterns. Weather has also proved to be the determining factor in the fourth quarter of each previous year.

The expectations over employment and capital investment both decreased when being compared to the previous year. This relates to the broad trend perceived across the country due to the recession, however, employment were slightly higher than in the third quarter of this year. During an upswing, as explained by Rian Coetzee, head of the IDC's Food, Beverage and Agro industries unit, companies will first try and utilize most of their existing production capacity prior to the investment in new capacity and/or replacement of old equipment. "This explains the small upswing in employment, whilst the investment trend is still negative. With more staff they try and sweat the existing assets" (Coetzee).

Volume exports decreased, when compared to the same time last year, due to the strong value of the Rand. Reduced foreign earnings were realized for export products and the international demand is lower, especially for luxury products. There are, however, some indications that the international demand might be recovering, especially due to the fact that the volume exports are higher, when compared to the preceding quarter.

Even though the cost of financing has decreased significantly, debtor provision for bad debt increased slightly. This is largely due to farmers retaining their grain in anticipation of possible higher prices in the near future. This is a short term concern for businesses, as this provision does not relate to drought condition or extremely low prices. The increase in demand for credit facilities will in effect result in an increase in market share during this quarter. The decrease in financing costs has brought much relief for producers, but agribusinesses that rely heavily on their investments in their debtor book, will possibly be bereft of bigger margins.

The recent upturn in the economy is perceived by agribusiness decision-makers to benefit them positively, due to the increase in purchasing power of consumers. Lindie Stroebel, agricultural economist at the Agricultural Business Chamber and compiler of the index emphasised that the increase in consumption is supported by the decrease in interest rates over the year, which has brought much relief to consumers. Consumption is also expected to increase over the Christmas season.

Stroebel predicted that "if the weather plays along and the slow economic recovery continues, further upward movement can be expected in agribusinesses' confidence. Also taking in consideration that the 2010 World Cup could provide agribusinesses with an extra 'Christmas", in terms of increasing consumption.