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July 26, 2010

Electricity hikes a big worry for South African farmers

by Petronel Smit

The electricity tariff hikes announced by the National Energy Regulator of South Africa in February are expected to have a significant impact on the ability of maize and wheat irrigation farmers to realise sustainable profits in the future.

The National Agricultural Marketing Council (NAMC) has raised concerns about the future of irrigation agriculture in its recent report, released in April. The report, compiled in collaboration with the Bureau for Food and Agricul- tural Policy at the University of Pretoria, focused on the impact of electricity cost increases on the profitability and risk position of a typical grain irrigation farm in the Northern Cape province, where average rainfall amounts to about 250 mm yearly.

The report stated that electricity costs were the second- and fourth-largest cost components respectively in the production of wheat and maize under irrigation on the farm investigated, which consisted of 200 ha under pivot irrigation. While electricity costs had never exceeded 8% of the total variable costs, these were projected to constitute almost 20% of the maize variable costs in 2014 and 2015.

In 2010, electricity costs would already have comprised 12% of variable costs of maize production at R1 906/ha, while the report projected that electricity costs would amount to R3 551/ha of maize planted under irrigation in 2015.

In the case of wheat, it was reported that electricity costs would increase to more than 18% of total variable costs from 2012 onwards. Electricity costs for the pro- duction of wheat under irrigation were expected to increase from R1 516/ha in 2010 to R2 965/ha in 2015.

Electricity tariffs would have a nega- tive impact on farming, as the typical farm would have realised a net farming income (NFI) of about R300 000 higher in 2010 if electricity tariffs had not been increased. It is further expected that, as a result of the tariff hikes, the farm would realise an NFI about R829 000 lower in 2015.

The NAMC reported that farm busi- nesses were exposed to a high level of risk because of the volatile nature of the agriculture markets. Changes in commodity and input prices had a significant impact on the risk position and subsequent financial stability of a farm business.

The council stated that, in extremely favourable conditions, the typical farm would be able to generate an NFI that accounted for the impact of electricity tariffs of R1,9-million in 2010, which would increase to R3,64-million in 2015. Without the electricity tariff hikes, the typical farm would have been able to generate an NFI of R2,07-million in 2010 and R4,35-million in 2015 under favourable conditions.

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