Southern Africa Agribusiness Report Q3 2012

BMI View: We have updated some of our forecasts from the previous South West Africa report, specifically revising down corn production for Angola and Zambia while revising up production for Botswana. Overall, there is relatively little change in the grain sector for these countries, as the key importers and exporters will remain that way over the coming seasons. Food security in the region is largely stable, aside from pockets of poor or rural households that will suffer from localised shortages, mainly coming from bad weather. In terms of the sugar sector, we believe Zambia offers the best opportunities. Indeed, Zambian producers there have expanded production for the 2011/12 season due to high demand from the region and relatively high sugar prices. Sugar production in the rest of the region should be comparatively insignificant.

Key Views

Zambian corn production growth to 2015/16: 30% to 3.3mn tonnes. This will come as government support and expectation of high corn prices should lead to a continued rise in corn plantings in the coming years.

Angolan sugar production growth to 2015/16: 68.8% to 84,400 tonnes. This will mainly come from base effects, as we do not yet see a significant government commitment to the agricultural sector and believe the country will remain a net importer over the long term.

2012 regional average real GDP growth: 7.2% (up from 5.1% in 2011).

Average Consumer price inflation: 8.2% y-o-y in 2012 (down from 8.4% y-o-y in 2011). Industry Developments Despite revising down Angolan and Zambian grain production, BMI believes that south west African food security should be fairly stable in H212, with increases in local prices stemming from higher import costs for major importers. Rains have generally been favourable in many areas, with Zambia seeing the most abundant rains and Namibia seeing arguably the worst. Overall, production should come in slightly less year-on-year (y-o-y) in 2011/12 (largely due to the downgrades to Zambia and Angola). Zambia should remain a key exporter in the region, while Namibia, Angola and Botswana should remain net importers for the foreseeable future. Below we provide a summary of crop developments for the individual countries.

The recent US$650mn investment by Marubeni in the construction of a sugar and ethanol plant in Angola should boost sugar and ethanol production in the long term. The factory will be built in the Cunene region in the south of the country and will have an annual production capacity of 400,000 tonnes of sugar and 40mn litres of ethanol. We forecast the country to produce 75,000 tonnes of sugar in 2011/12 and to import 165,000 tonnes in order to accommodate demand of 250,000 tonnes. Marubeni's factory would provide a significant boost to domestic production and, if used at full capacity, could make the country fully self-sufficient. Moreover, we see the government's effort to increase private investment in the sugar sector as positive for the diversification of the economy away from oil exploration. Currently 44.2% of the Angolan GDP comes from mining and oil exploration. The government announced recently that it would invest US$6bn in the agricultural sector in order to increase its competitiveness and reduce dependence on the oil sector. Moreover, the government's plan to increase sugar cane planting to 500,000 hectares by the end of our forecast period, in 2016, should support ethanol production

Only Zambia A Net Exporter Select Countries – Net Corn Exports ('000 tonnes) Source: BMI, USDA

Zimbabwe BMI View: The Zimbabwean agricultural sector needs far greater private and public sector investment to meet its potential. The government's weakening fiscal position, coupled with confused policy-making, which has been criticised for being at odds with the needs of the economically-important agricultural sector, is likely to restrict the effectiveness of government support over the short term. Meanwhile private sector investment will be constrained by ongoing political uncertainty. We have a more constructive view towards the sector over the medium-term and we see output of key crops such as sugar, corn, cotton and tobacco increasing. However, Zimbabwe remains a long, long way from regaining its status as a regional breadbasket, especially as regional neighbours continue to develop their own agricultural sectors more quickly and more effectively.

Key Views We have revised down our sugar consumption growth forecasts for 2012 (from 20% to 15%) and 2013 (from 11% to 7%). We expect lingering political uncertainty to impact investment and tighten liquidity, which will prove bad for an economy already affected by the expectation of lower agricultural output. We expect this to negatively impact consumer confidence and result in moderating consumption.

We have revised our corn production forecast for the 2012/13 harvest season down to 1mn tonnes (a 29% year-on-year (y-o-y) contraction) due to widespread drought and reduced fertiliser use among grains farmers. This will dramatically increase Zimbabwe's grains import needs.

We maintain our view that price growth will accelerate over 2012 and have made an upward revision to our year-end forecast (to 7.5%, from 7.0%) due to an upward adjustment to our global oil price forecasts and a downward revision to our corn production forecasts. However, tight liquidity (reducing demand-driven inflation) and a weaker rand (making South African imports cheaper) will limit inflation.

Industry Developments Political Risk: Heightened political risk, due to ZANU-PF succession concerns, uncertainty surrounding the establishment of a new constitution and the ongoing indigenisation drive, are all weighing on investor sentiment, which is in turn strangling liquidity and weighing on economic growth. This is a major risk for the agricultural sector, which needs private capital to help drive sustainable long-term production growth.

Government Fiscal Dynamics: We believe that fiscal revenue will continue to fall short of target over the course of 2012 as diamond revenues underperform relative to what the Treasury planned on receiving from the sector. Given that the government is operating a cash budget which by definition will be balanced, we believe that spending will be cut by an amount commensurate with the revenue shortfall.

While we believe that revenues and spending will come in below target, we do not believe the government will face a fiscal crisis but rather continue to limp along spending what it can, when it can.

Nonetheless, this could impede investment in further agricultural support programmes. Added-Value Needed: The government has stressed its desire to develop added-value industries upstream of its existing agricultural activities. It is keen to take a larger slice of the value chain, rather than export primary materials. Its desire to develop ethanol processing capabilities could be seen as illustrative of this – development here helping to support the sugar sector downstream of it. Cotton could be an initial beneficiary of this drive, with more cotton going towards textile manufacturing domestically, rather than being exported Tobacco A Bright Spot: The performance of Zimbabwe's major exports is forecast to be robust in 2012. The volume of tobacco, the primary agricultural export, sold by the end of March was 21.0% above the corresponding period in 2011. Furthermore, because of higher prices, the value of tobacco sold by the end of March was 48.0% higher than the same period a year earlier. Farmers told BMI during a trip to Harare in late April that auction prices had remained firm during April and that volumes had also remained well ahead of 2011 levels. We therefore expect tobacco export revenues to grow strongly from the US$400mn earned last year.