South Africa’s food and beverages industry is one of a handful of key agri-processing segments set to benefit from a new state-led investment incentive scheme.
Launched at the end of June, the Department of Trade and Industry’s Agro-Processing Support Scheme (APSS) offers cost-sharing grants to be awarded to the value of 20-30% of basic investments.
The programme, with a budget of R1bn ($77m), offers funding support of up to R20m ($1.5m) over a two-year investment period to operators in five focus areas: food and beverage value addition and processing, furniture manufacturing, fibre processing, feed production and fertiliser production.
To qualify for the grant, investments must total at least R1m ($77,250), and satisfy minimum local content requirements: 50% of raw materials must be sourced from South African suppliers, and at least 30% from Black South African suppliers in particular.
An additional grant covering 10% of the original investment is available for projects that boost employment levels by 25% in a single year, achieve top rankings for Broad-Based Black Economic Empowerment codes of good practice, and have 70% of equipment and machinery inputs locally sourced.
Top marks
The programme is welcome news for the food and beverage segment, which was one of the few in South Africa’s manufacturing sector to post positive results in May.
While industry sector-wide production volume eased marginally from a year earlier, down 0.8%, the industry posted 3.5% year-on-year (y-o-y) growth that month, according to the latest figures from Statistics South Africa (Statistics SA), with output increasing to R40.1bn ($3bn).
The gains in the food industry mirror a similarly positive performance in the agriculture sector, which, although a relative small contributor to GDP, rebounded strongly in the first quarter of 2017 after eight consecutive quarters of decline.
Agriculture, fisheries and forestry GDP expanded by 22.2%, contributing 0.4% to the national total. Most of the growth came from increased output in the field crop and horticultural segments, both prime local inputs for agri-processing.
Downside risks
While agri-processing investment should be buoyed further by the APSS, there are some short-term headwinds that producers are having to navigate.
One of these is related to the country’s economic recession. In constant 2010 prices, household final consumption expenditure fell by 2.3% y-o-y in the first three months of this year, according to Statistics SA, with a 3.4% downturn in food and non-alcoholic beverages specifically.
While this was more modest than the downturn witnessed in some other categories, such as clothing and footwear (12.1%) or transport (4.4%), it nonetheless suggests a potential dip in domestic demand.
Value-added agricultural products could also be affected by a declining supply of inputs, as a result of the possible return of drought conditions in parts of the country.
While much of South Africa experienced adequate rainfall during the 2016/17 summer period, the Department of Agriculture, Forestry and Fisheries issued an advisory statement in June, warning of lower-than-average seasonal rains for the winter months in key regions. The department also said it expected unusually high temperatures and drier conditions that could affect the next season’s harvests.
The government has therefore instructed irrigation farmers to reduce planting areas and operate within regional water restrictions. The department also advised dryland winter crop farmers to wait until moisture levels in the soil reach sufficient levels before planting, and to be conservative in terms of planting density.
Drought status has already been declared in the Western Cape, a key region for agricultural production, including citrus fruits, grapes, pome fruits and stone fruits. The province hosts both a substantial proportion of the country’s prime farmland and, according to local media sources, accounts for some 50% of exports from the agri-processing chain and 20% of the industry nationwide.
While expectations for harvest prospects remain average to above average, reduced plantings and dryer conditions could see harvest and livestock production ease late this year or into 2018. This would have a direct impact on the agri-processing industry, driving up input costs and making it more difficult to pass on increased prices to already consumption-conscious consumers.
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