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SIMON BROWN: I’m chatting now with Anthony Clark. You’ll find him of course on Twitter at Small Talk Daily. Anthony, I appreciate the time. A tweet that you and Wandile Sihlobo were putting out – I think it was over the weekend – was around [our having had] what, four years of La Niña weather, which is nice rains. We’ve had great crops, we’ve had great prices. Farmers have done excellently. The forecast is for El Niño, which means dry weather, potentially even drought. These farming stocks, and many of them allied stocks – I’m thinking Kaap Agri and Senwes and the like – are in for tough times.
ANTHONY CLARK: Yes. Hi, Simon. We speak on a very apt subject, given I’m currently at the heart of the wheat-growing area here in the Western Cape in the Swartland. Indeed, we’ve had four excellent years of crops under La Niña; in fact crops have been north of 15 million tonnes. This year’s expected commercial maize crop is around 15.6 million tonnes, a third-best on record.
But, as you correctly say, we as a country have had four years now of historically good weather, and all signs say, from a scientist, that at some point later this year we will start to see the weather oscillation move towards an El Niño, which is a much hotter, much drier period, which will not be good for domestic farmers. As such, the bumper crops we have seen in yellow maize, white maize, and soya among others, should revert back to their norms, which is at least 15% to 25% lower than we’ve seen produced in the last two years.
We as a country are self-sufficient. Anything above 11/12 million tonnes a year we export, but it means that farmers will see less revenue, and if there’s less revenue there’s less money in the system that goes into the likes of the fertiliser companies, tractor companies, and farming co-ops like Kaap Agri, TWK, Senwes, etc. So there is a ripple effect. But as I wrote in a note fairly recently, that ripple effect should be moderated, because many of these co-ops have used the old adage of ‘make hay while the sun shines’ to diversify their businesses away to a certain degree from agriculture towards allied products, allied services and/or offshore interests.
SIMON BROWN: And even Kaap Agri to a degree has done that. They’ve got their store footprint, they’ve got their fuel division. The point is that most of their customers are farmers and if they’re finding it tougher, they’re going to spend a little less when they pop into the store.
ANTHONY CLARK: Correct. Well, Kaap Agri is now called KAL Group, because the market simply doesn’t understand what this company does. Only 25% of the company’s revenue and profit is actually derived from what we would call traditional agriculture, and much of that is annuity-based, selling diesel and all the usual requisites.
Yes, the farmers are spending less.
We know that times are tough currently in this country, interest rates are at 11.25%. I think the diesel costs are quite high, the cost of producing goods in this country is quite high, given load shedding and the higher costs of fertiliser and a lot of the other requisites.
And the export market has been difficult because of the port congestion, again.
So infrastructure and load shedding [are] factors, but 75% of their business is derived from good old-fashioned retailing. And Sean Walsh, the CEO of Kaap Agri, or KAL Group as I should now call it, told me fairly recently they now make more money selling takeaway coffees at their convenience stores than selling the equivalent rand value and tonnage of fertiliser, showing you how the retail split of the company has changed. They make more money selling pies and coke and coffee than they do selling some huge, bulky items which take up massive warehousing space.
SIMON BROWN: Okay. Now I’m always a fan for a good coffee. So agri stocks are under pressure.
In the broader space, you kind of specialise in agri, but a broad agri. Is there a space where we think we could be looking for better conditions, even maybe in light of El Niño?
ANTHONY CLARK: Interestingly the answer is yes. Again, to be technical for a second, if it’s hotter on land, it generally means the seas are colder. That’s to do with the oscillations regarding the difference between El Niño and La Niña. So as I wrote in a report about a month ago, I’m anticipating that the fishing sector should do quite well for the last two years because of the warmer weather on the land. The waters off the Cape have been slightly warmer as well, and the fish have abandoned the traditional sort of fishing areas, and they’ve just scattered to the winds.
I spoke to Oceana and Sea Harvest [recently], and they believe that we do move back into a colder-water period next year, and that the fish, which have had time to mature and grow, will come back to the traditional shoaling areas, which means the fishing sector should do quite well. And, as we all know, fishing is an expensive business given the cost of oil and taking the boats out to sea and catch fish. So we will have fish which have matured. They’ll be larger, it’ll be more cost-effective to fill [the boats]. And hopefully it’ll be a little bit more bountiful to catch these fish.
So my call in the last couple of months has been to consider switching away from the agricultural sector at some point between now and the middle of this year into the fishing sector, if that is your strategic intent. But agriculture as a whole should continue to do reasonably well, but the best is over. Let’s just say that the ‘make hay while the sun shines’ lasted four years [and] the next couple of years might be a slightly leaner period, and I can see earnings at best being flat and in certain cases being down.
SIMON BROWN: That’s a good point. This is not a crisis. We’re not looking at multi-year droughts, anything like that.
What about food producers? Is this a space? They’ve had a really tough time and I’ve got to say, I don’t see much glimmering for them on the horizon either.
ANTHONY CLARK: No. Well, as load shedding is back to Stage 6, as we discussed before we came on air, a company like Astral Foods, the country’s largest chicken producer, at Stage 6 spends R60 million a month on diesel. Even Libstar, a mid-sized food company which is the predominant supplier to Woolworths, is spending R10 million a month.
But there are some silver linings to the clouds. Since early November, 2022 most prices of soft commodities, which I call white maize, yellow maize, soya and sunflower, have fallen quite rapidly. As I speak to you right now, yellow maize is down 27%, white maize 30%, and soya 27% – literally in the last four-and-a-half months. Now, it takes time for these lower Safex prices to feed into the producers who manufacture our food, then it takes time before that food gets onto the shelves.
So I, again, have written that I foresee that food-price inflation should start to moderate from a producer level in about mid- to late-quarter three this year. The consumers should start to see the benefit in quarter four. It takes time for everything to feed through into the system. Just because a price falls on a financial market doesn’t automatically – unlike a CompCom belief – mean it falls immediately on the shelf. It takes several months.
So I believe that going forward the consumer who’s been under the whip for the last couple of years will start to see some relief. But it all is dependent on load shedding and, as we know, the state of the dear old economy.
SIMON BROWN: That’s a good point. I watch the maize price because of course with Astral it’s a huge input. And there’s that sort of zone they really like, which is around, what, R2 200/R2 400 a tonne. But R60 million a month for diesel – that takes all the shine out of any benefit they get from a lower maize price.
ANTHONY CLARK: Absolutely. As it stands right now, the sweet spot for any chicken company, as you say, is between R2 300 and R2 600, R2 800 a tonne. I don’t think we’re going to see that anytime soon. As we stand right now, we’re at R3 800 a tonne, but back in late October, early November ’22, we were at R5 300 a tonne to R5 500 a tonne. So when you’re buying 800 000 tonnes of maize like Astral Foods, do some simple mathematics. They are saving a significant sum of money on input costs.
But the trouble is, let’s just say in round numbers it’s a billion rand they’re saving on input costs, they have to spend a big chunk of that on diesel costs. So Chris Schutte must be smiling on one side of his mouth and cursing at the other. That’s the sad state of affairs of a country which has been in neglect by its ruling government for some years. Companies are doing their best to be efficient to feed the nation, but the trouble is in feeding the nation they have to incur costs. And that cost, as you and I both know as good capitalists, ultimately has to be borne by the consumer.
SIMON BROWN: And a cost like load shedding –R60 million a month. That’s more than half a billion a year. That’s a cost which no business should have to anticipate.
We’ll leave it there. Anthony Clark, Small Talk Daily on Twitter, I always appreciate the time.
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