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July 15, 2008

South Africa:Rising inputs costs make farming high risk

"No farmers, no future." So says the bumper sticker on farmer Bully Botma's white pick-up truck, parked just off President Street in Bothaville, South Africa's mealie capital.

Botma is on the phone to his broker, carefully playing the market, to get the best price possible for his recently harvested maize.

"The price has dropped by R25($3.30)," he says by way of introduction. By the close of trade it will have improved by R2. Botma displays the increasing financial savvy and business acumen required by farmers to make a success of maize farming in a volatile global commodities market.

Leaving the advent of biofuels out of the picture for now, the risks involved in farming, particularly from rising input costs such as fuel and fertiliser, are making the job complicated for established players and nearly impossible for farmers starting from scratch.

"This year it's a disaster," says Botma, when asked about the effect input costs are having on farmers. "Some of those inputs have doubled since the previous season, which is as far as I'm concerned ... ridiculous. If it would go up at the CPIX that's understandable ... but it's ridiculous for lack of a stronger word."

Botma believes that the spike in the cost of items such as fertiliser, fuel and herbicides will stop farmers from growing what he terms "cash crops" or summer crops such as maize and sunflowers. The rising costs of planting crops such as maize -- and its changeable profitability -- mean farmers stay away from them to avoid increasing debt.

While this year's mealie crop has been good, with total yields in South Africa reaching more than 11-million tonnes and prices improving because of soaring global food costs, Botma believes this is being countered by rising inputs.

"It's going to kill a number of farmers that have had a good crop this year. With a [reasonable price] they can get out of their debt," he says. "But they might decide to get out of their cash crops because ... they will not want to put themselves in a position where they can lose what they have."

Grain SA estimates that in May 2008 input costs for the 2008/09 production season rose by as much as 76,1% from the 2007/08 season for farmers in the eastern Highveld. Input costs reached a total of R6 083 per hectare, on an estimated yield of 3,5 tonnes of maize per hectare. This is up from R3 453 in October 2007. While the maize price has risen to more than R2 000 a tonne, this equates to only a 60% increase year-on-year.

But Grain SA estimates, once the cost of planting, harvesting, moving, storing and marketing the grain is complete, eastern Highveld farmers can expect a total of R554,18 profit per hectare of land at a yield of 3,5 tonnes. Farms can vary in size from small, part-time operations of 300ha to large-scale farms of more than 6 000ha, but the numbers paint a gloomy picture.

"A farmer is a price taker," says Nico Hawkins, manager of industry services at Grain SA. "A farmer's never a price maker, especially a grain farmer."

Hawkins insists the picture is not as dire as it appears. South African farmers are some of the best in the world, he says, and some of them are strong enough to weather these massive shifts in the market. But, he says, the price regimes make it almost impossible for emerging farmers to enter the sector.

"That's why it's so difficult for government and also for us … to put new farmers on the ground, black farmers," he says. "If you don't help them financially, if you don't subsidise them, there's no way they can start from scratch."

He says that if farmers cannot produce profitably, they will cut production -- as any sound business would -- to mitigate their risk. While consumers might cry foul about rising food prices, they would be far worse off if there was a shortage of food and prices increase even further.

Although food prices have increased over the past year, Hawkins points out that maize is trading at export parity price -- as cheap as it is going to get.

"In the short- and medium-term this level of price is here to stay ... the main reason is input prices," he explains. "If those input prices remain the same and food prices drop, farmers are not going to be able to produce. The price-forming mechanism is out of their hands."

According to Botma, the input costs hit the farmer as a total package. "[Inputs are a] packaged deal," he says. "Per acreage your fertiliser is probably the most expensive. But in the past we didn't even bring diesel into the budget -- it was so minor and now it is a huge part. So is seed, so is labour, so are pesticides, but you can't go without [any of them]."

According to Grain SA, input costs such as fertiliser have gone up, some as much as 126%. The main factor in the increase is the fuel price, says Pietman Botha, senior research agriculturalist at the organisation. Fertilisers are a by-product of the oil, which has seen well-documented price increases in recent months. Furthermore, says Botha, the prices of herbicides and pesticides have increased because of a worldwide shortage.

In addition to this, for a number of years stable food prices globally have meant that consumers have grown accustomed to relatively cheap food. With low prices there has been little incentive for farmers to invest in increased production.

A recent report by the United States Department of Agriculture on factors that have contributed to the increase in food prices noted: "Stable food prices during the past two decades have led to some complacency about global food concerns."

It also noted that as the world's population grows people's eating habits have changed. More meat is consumed, which means more grain is channeled towards animal feed and so the prices for basic foods increase.

So what are farmers doing to manage these changes? For one thing, they do not put all their eggs in one basket. "[Farmers] are not specialising as they used to," says Botma. They will farm cattle and other livestock -- as well as other crops -- to mitigate their risk, he says.

According to Ernst Janovsky, general manager for Absa Agribusiness, farmers do a number of things to cope with shifts in the market. Firstly, if they can they get big. "It's economies of scale," says Janovsky. The larger the farm, the lower fixed costs, such as marketing costs and labour, become. Secondly, input suppliers can offer financing to farmers. For instance, a fertiliser producer can finance the cost of the fertiliser inputs if the farmer agrees to use its product, he says.

The same principle can be applied on the offtake side, he says. A miller or food manufacturing company may ask a farmer to grow a crop specifically for its use and it will finance the inputs.

"We will manage the price volatility for the farmer, buy the crop from him and in some cases finance the inputs," he says. The bank will use the farmland as collateral, but if that is insufficient to finance the loan, capital equipment will also be used as security. The bank will also require the farmer to insure the crop against things such as bad weather, if it finances the input costs.

In a place such as Bothaville, says Janovsky, the bank will only finance input costs up to a maximum value of R7 900 a hectare, depending on the average long-term yield of a farmer's land.

The financing facilities are becoming increasingly popular, he says, but "it's not a cheap option". Often to decrease the risk of trading maize the bank will ensure that a farmer fixes his price. While this might lessen the risk, it can also ensure that the farmer could lose out on any potential profits that could be made in an unexpected rise in prices.

There is a concern that if input costs continue to increase it will erode the financial structure, but, says Janovsky, "as long as the commodity price increases at the same rate it is still profitable".

Absa says inputs costs have risen by 60% this year and the bank forecasts that they will rise by another 30% in the coming season.

"But bear in mind they have had a good season and as such they are cash flush and have money to plough back into their operations to cope with the coming 30% increase," he says. "A farmer is a player in a global market. This exposes him to price volatility," he adds.

Storage can play a significant role in how a farmer manages the highs and lows of maize prices. Farmers pay for the off-loading and on-loading of grain to and from a silo, as well as a daily storage fee to keep their grain there. Silos can charge the farmer in the region of R25 a ton to weigh-in grain and the same fee to weigh grain when it leaves the silo.

The longer a farmer waits to store and market his grain, the more expensive it becomes -- waiting for market conditions puts his product at risk and can potentially be as expensive as selling it short.

But silo bags offer an alternative to storage in traditional silos. They are long tubes of highly durable plastic and each can store between 160 and 200 tonnes of product.

Grain is pumped into the bags, which are then sealed. Special machines are used to insert and extract the grain and the silo bags maintain the quality of the grain, protecting it from various environmental threats. The bags were developed in Argentina and have been on the local market for three years now.

Just outside Bothaville a silo bag facility is doing rapid business, with truckload after truckload of maize passing through its gates to be stored. Botma says he is charged a one-off weighing-in fee at R25 a tonne and saves on the costs of weighing out. "That's a lot of money," he says.

Botma believes that the increased competition on storage has been good for farmers, preventing silo operators, who were the only storage providers in the market, from arbitrarily increasing prices.

The South African government's cautious policy towards the biofuels industry has seen the exclusion of maize as a biofuels feedstock.

But, says Grain SA's Hawkins, the creation of a third market for biofuels, alongside maize produced for human and animal consumption, could well incentivise farmers to increase production.

"We can understand the government's concern over food security. But what is food security? Is it the availability of food or is it the availability of a lot of cheap food?" asks Hawkins.

"If it's the availability of food, our view point is that you if you create new markets such as the biofuels market then farmers will invest more in production," he says.

Furthermore, he says, if the country regularly begins producing more maize than is needed for local consumption and a drought occurs, for instance, the "point of departure is higher than it would have been if you had not produced the excess for biofuels."

But critics argue that is open to abuse and farmers could begin using land -- required for growing food for human consumption -- for biofuels, quickly shortening supplies and driving up prices.

Hawkins argues that creative policy interventions on the part of government can be used to curb these potential problems. He says that rather than lose out on incentivising farmers, government should combat the effects of rising food prices by increasing social good grants for the poor. This, he believes, can both secure food supply and help consumers cope should prices get any worse.

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