Top trends in agriculture

Demand shifts 

Climate has a big effect on agricultural revenue. Equally, world and local economic cycles have a profound impact on the revenue streams of agriculture. This is especially true now that agriculture has been integrated in to the value chain, and it is no longer just focused on primary production. In analysing GDP growth above inflation, huge demand shifts have been predicted, with almost no growth in demand expected in developed countries - and major growth potential being shown in developing countries.

Production to outstrip demand in short run: The agricultural sector will not be in a position be to take advantage of the demand gap. This is because Latin America and Africa have the potential to increase agricultural production by 300%. Growth in production will therefore outstrip the growth in demand. This will keep commodity prices in check and limit production margins. 

To survive, farmers will have to continue to become more productive through the adoption of new technology and the utilisation of economies of scale. If they do this, they can remain competitive. South Africa can also expect more competition from the rest of Africa, as the growth in agricultural production will come from a variety of countries.

Soft commodity prices to soften and move sideways: Prices of soft commodities increased substantially during the last decade. This was mainly the result of an increase in demand in developing countries: good economic growth (above inflation) resulted in consumers becoming richer; thus their spending on food and fibre increased.

Prices were further supported by the creation of new markets for agricultural products in the form of renewable energy.  Higher commodity prices stimulated investment in the agriculture sector, with a resulting increase in production. This, combined with a slowdown in economic growth (demand) after the financial crisis led to prices flattening and, in some instances, even declining.

Given the expected growth in production, it is expected that soft commodity prices will move sideways. The only potential counter to lower commodity prices is the creation of new markets for agricultural produce like the biofuel market.

Agriculture investment opportunity: At present, interest rates are at a 36-year low and are expected to remain low over the next few years, creating the ideal opportunity for capital investment to gain economies of scale and/or to improve productivity.

This explains the continued acceleration in the consolidation of farming units as well as record sales for tractors and implements. This is in spite of an increase in the cost of capital, due to the financial crisis in 2009, as well as a decline in investor confidence due to the downgrading of South Africa’s credit rating. 

The predicted continuation of the drought of the last two seasons may have a negative impact on future investment, as this will impact negatively on the reparability of the industry in the drought-stricken areas.

In general, agriculture is doing well and still remains one of the few save havens for investors looking for capital growth. Property prices are expected to continue to grow by at least 10% per annum due to the profitability of the agricultural industry, and due to external investment from lifestyle buyers. A third reason to support the idea that property prices will continue to rise can be found in the government programme of buying land for restitution and redistribution. 

China, Brazil and South Africa will continue to drive investment in Africa.

To view business and investment opportunities, sector analyses and companies operating in Africa's agriculture sector, click here.