BFAP and the Hortgro pome and stone fruit base year and outlook modelling

Welcome to the industry- and farm-level analysis and outlook for Hortgro pome and stone fruit, prepared and regularly updated by the Bureau for Food and Agricultural Policy (BFAP). BFAP, founded in 2004, serves the agro-food, fibre and beverage sectors in South Africa and Africa. Our purpose is to inform better decision-making by providing unique insights gained through rigorous analyses, supported by credible databases, a combination of integrated models and considerable experience. Over the course of 18 years, the Bureau has developed a very distinct value proposition to deliver a holistic solution to public sector and private clients active in the agricultural sector and related value chains. This offering is complemented through BFAP’s investment in the Integrated Value Information System (IVIS), a geo-spatial platform which further enhances BFAP’s product offering by providing enhanced systems-solutions to the integration of data and insights visualisation to support strategic-decision-making along multi-dimensional value chains.

The BFAP Group consists of a team of experienced experts with a range of multi-disciplinary skills including agricultural economics, food science, mathematics and data science, engineering, supply chain management, socio-economic impact assessment, systems technology, and geo-informatics. In addition, we fundamentally believe that a competitive and thriving agricultural sector with its related value chains is built on long-run partnerships. Hence, BFAP has developed a well-established network of local and international collaborators and partners in the public and private sector. As a team and as a network, we pool our knowledge and experience to offer the best possible insights and access to a unique high value network.

The BFAP Group utilises globally recognised techniques and modelling systems to analyse the food, fibre and beverage sectors. The current BFAP modelling system covers more than 50 commodities, each supported by:

• in-depth study of natural resources and input-output markets, production systems and farming business operations, offering the ability to evaluate the competitiveness and sustainability of farming systems
• end-to-end value chains analysis, tracking product flow, efficiencies and margins along the chain
• commodity markets scenario modelling and forecast to quantify future outcomes, evaluate risk, identify growth opportunities and assess impacts of changes in the macro-economic, business and policy environment
• analysis of the consumer and retail space to provide insights on food price impacts and food security
• credible analysis, monitoring and evaluation of rural and socio-economic development related to the food, fibre and beverage industries

The extensive integrated database and modelling frameworks enables BFAP to analyse and generate long-run projections and unpack alternative future scenarios for agricultural commodity markets and within the main sub-sectors (grain, livestock, and horticulture).

In this output, BFAP provides an industry outlook that considers both industry specific information, such as planted area, yields, market distribution and prices, and macro-economic factors that play a role in market demand and supply. The partial equilibrium model considers the drivers of global and domestic demand, and the supply from South Africa and global competitors to determine a market equilibrium price for the different marketing channels.

Considering a set of indices representing the likely movement of prices of inputs and produce over a 10-year outlook period, BFAP links farm level profitability to a baseline set of assumptions to create a baseline outlook for the industry. To quantify the potential impact on farm level profitability, a baseline farm level financial simulation study was conducted for the base year, which is informed by data collection and ground truthing through visits to a purposively selected group of producers in each region. The base year is simulated over the outlook period by linking inputs to the appropriate cost indices, revenue to the appropriate commodity price indices, and yields to the commodity specific projections. Thus,a base year profitability measurement with a certain risk profile is projected for a 10-year period relying on reasonable assumptions. Throughout the analysis, profitability is measured at EBITA level.

Whilst a baseline projection considers a single outcome under ‘normal conditions’, assessing risks within a broader spectrum of potential upswings and downswings bears more fruit. Whilst cost management at farm and packhouse level is important in realising positive returns, it is less volatile than produce prices, yields and pack-out percentages. The biggest drivers of variation in a given year’s farm level returns in the export orientated fruit industries are a result of the aforementioned variables. Consequently, bands of potential positive and negative deviations from the baseline projection in these variables are determined from historic data. These bands are used to run 500 iterations of random variability to stress test the baseline projection. The impact of freight rates is incorporated into the export price variable, as export prices are considered at FOB level in the modelling framework.

Below is a high-level list of components that are typically incorporated in the modelling framework

Component	Description
Whole farm financial simulation budgeting model	Farm size, orchard age distribution, cultivar selection and performance.
Production & establishment cost	Cost drivers in establishment of new orchards and production cost, which is incorporated by considering a production cost curve that aligns with yields.
Total yield & distribution by market segment	Tonnes per hectare per orchard and the share of produce into each market segment (Export | Local | Processing).
Establishment plan & replacement age	Incorporating planned expansion of area and the planned replacement age for different orchards.
Profitability per hectare	Considers the elements applicable in a whole farm budget to project a set of profitability indicators per hectare under a certain set of assumptions on variables such as exchange rate, price inflation and the prototype farm setup of area, cultivars and cost.
Variable income probability indicator	Considers historic variability in yield, pack-out %, local and export prices per carton and the relationship between these variables to establish the probability of a better or worse financial performance than the baseline.
Model results	Results presented as a probability distribution of what may happen to farm-level profitability over the projection period, with worst and best case scenarios included.
Alternative scenarios	The tool can be used to model alternative scenarios, such as additional establishment or changing the replacement age. The effect of these changes can then be compared to the baseline to inform decision-making.

For the farm level modelling, the following regions were investigated and the abbreviations thereof are as follows:

Sub-sector	Regions
Pome fruit	Elgin, Grabouw, Vyeboom and Villiersdorp (EGVV); Langkloof; Witzenberg
Stone fruit	Bonnievale, Ashton and Robertson (BAR); Berg River (BR); Klein Karoo (KK); Northern Provinces (NP); Stellenbosch, Franschhoek and Somerset West region (SFS); Witzenberg

Perspectives on topical risks in the export orientated fruit industries

Investment in orchards, vineyards and other infrastructure was mostly driven by real price growth (prices rising faster than general inflation). The rate at which exports grew exceeded area expansion, which is indicative of investments geared towards commodities and cultivars that have the characteristics required to be successfully exported. On the market side, the competition for shelf space for the different commodity groups are rooted in a range of factors. For example, in pome fruit, the advancement in cold storage technology has resulted in South African produce competing with Northern Hemisphere suppliers in the Northern Hemisphere markets. For commodities such as plums, the good yields in recent years have not translated into good returns, with competition for shelf space not necessarily commodity or cultivar specific. Whilst the drive towards market led expansion is commendable, it did not come without challenges. And in recent years, these challenges have come thick and fast. After recovering from multiyear droughts between 2017 and 2019, a seemingly never-ending series of adverse events struck the export orientated fruit industries.

Perhaps the biggest risk at farm level currently is cash flow management. With market prices already declining and expected to remain under pressure in the next 2-3 years, the rising cost of primary inputs, especially the cost of fuel, fertilisers and chemicals, are worrisome and meticulous management of costs and the timing of the incurrence would be required to hedge some of the risks. The projected rise in the cost of labour (averaging 11.6% per annum since 2012) often the single biggest expense at primary production level, are concerning over the long run, with mechanisation when possible a method to reduce dependency on labour. Interest rates will play a major role in the ability to repay loans on capital acquisitions. The interest rate increases from 2021 to 2023 is expected to further exacerbate the precarious cash flow situation of many primary production operations.

Currently, the biggest drivers of cost increases in packhouses are the cost of packing material, chemicals, cost of financing infrastructure upgrades and expansions, and rent or purchase of equipment to ensure operational continuity during loadshedding. If the last mentioned is not done, downtime during shifts in the packhouse are likely to increase the relative cost of labour per output and/or result in additional shifts, often at overtime rates. With a 20%-22% year-on-year increase in 2023 in the cost of pulp paper, packing material cost is expected to follow suit. Cooling facilities face similar pressure to packhouses to invest in infrastructure to ensure operational continuity during loadshedding, which can substantially increase the cost to be recovered from facility users. Given the pressure on these facilities to ensure fruit are within the protocol stipulations when due for containerisation, they cannot forego on a solid electricity backup plan.

On the logistics front, container ports across the globe have been struggling in recent years, with waterside operations, stacking and truck throughput productivity intermittently severely constrained. The performance of ports that normally operate at high throughput levels, have deteriorated during the pandemic. When major ports struggle to perform it creates a seemingly endless chain reaction throughout the global logistics network. For the second year, a global container port performance study was conducted, with 370 ports included in the analysis. In addition to the global logistic disruptions, the performance of domestic container ports is of the worst in the world, with South Africa’s major reefer container ports, Ngqura, Durban and Cape Town positioned 363rd, 364th and 365th out of the 370 container ports included in the measurement (World Bank, 2022). Whilst every effort is made by various forums, consortiums and individual industry bodies, including Fruit SA, its member organisations, and Agbiz to meet with Transnet National Ports Authority and Transnet Port Terminals at regular intervals to discuss current issues, exchange information regarding scheduling and expected volumes, major inefficiencies in the process remain. Most recently, the multi-week labour strike that crippled operations in the ports have again highlighted how South Africa’s own container terminals are an integral component to the risk that export orientated fresh fruit industries are exposed to (Transnet, 2022).

Linked to the performance of major international and domestic ports, is the schedule reliability of shipping lines, that is, the ability to call on ports as scheduled. Once delayed in one port, it initiates an almost insurmountable series of challenges, with the availability of empty reefer containers also becoming an issue. Rescheduling and/or omitting ports enroute is often the only way to get back on track. Despite signs of recovery during 2022, the current level is still a long way off the pre-disruption levels of 2019 and early 2020. Especially for highly perishable fresh produce, this has a detrimental impact on both client relations and product quality.

A number of factors are driving the projected trends on export prices. Supply has been well covered, but prices are also influenced by demand conditions, reflecting the equilibrium level where supply and demand are equal. In this regard, the waning demand for high value fresh produce is worrisome and a contributor to the fairly bleak price prospects over the next 2-3 years. Stone fruits have over 50% exposure to the EU and UK markets. Whilst long standing trade relations are typically the basis for these supply patterns, the effect of major disruptions in consumer spending in these markets unfortunately disrupts operations for exporters and packhouses, with primary producers often paying the ultimate price.

Although Europe, with its own challenges that have been exacerbated by the conflict in Ukraine, is a major off taker of produce from South Africa, a broader global perspective is also indicative of a wider slowdown possibly looming. Inflation remains persistently high and GDP growth in the EU, the UK and most other major economies is bleak, suggesting that marketing conditions across the globe are constrained. In order to curb inflation rates, governments are rising interest rates, putting additional downward pressure on GDP growth. On the domestic front, whilst not the focal point of production and marketing of pome and stone fruit, similar market constraints could play out than what is observed globally.

2021/22 and 2022 Season overview

From a volume perspective, the past season was an excellent one, with record yields logged across commodities and regions. In another marketing environment, this may have been one of the best seasons financially too. However, the industry faced a number of challenges throughout the value chain that has affected quality, timeliness of delivery and returns to farmgate. In addition, the cost of production, packing and shipping have resulted in losses at primary production in many instances. For some commodities, like nectarines and apricots, producers still realised fair returns, with a mixed bag experienced in the case of pears. Timing and marketing decision-making played a major role in the returns realised within the context of Russia’s invasion of Ukraine, with instances of both high risk and low risk decision execution resulting in disappointing returns. In some instances, the high risk decisions did pay off. Apples and peaches returned marginal profits, with a number of exogenous factors, and consumer demand playing a role. Lastly, after a challenging 2020/21 season where marketers and markets were caught off-guard with the volume, plum growers hoped for better returns in 2021/22, which, unfortunately, did not materialise. Claims have played a critical role in the reduction of returns to farm gate. With school fees paid and learnings banked on various fronts, producers and marketers alike are looking ahead.