The outbreak of the coronavirus (COVID-19) in China is spreading across Asia and other regions of the world. The health implications of this virus on people also present risks for global value chains. Given that South Africa’s agriculture is export-orientated, with exports of roughly $10 billion in 2019, the potential disruptions the COVID-19 virus could cause in global value chains is a key concern.
This is specifically the case for Asia, as the epicentre of the outbreak, and an area that accounts for a quarter of South Africa’s agriculture exports, as shown in Exhibit 1. The commodities most exposed to the Asian market are wool, fruit, grains, beverages, vegetables and red meat.
Fluctuating product demand
There are two channels to consider when thinking about the potential implication of the virus for the South African agricultural sector. First, the supply side of the aforementioned products that South Africa typically exports to Asia is in good shape and promising to be higher than that of 2019 because of improved domestic weather conditions. This means any decline in exports in the near-term would be a function of a softening demand rather than supply from a South African side.
With China having temporarily closed some of the manufacturing hubs and placing restrictions on human movements as a method to contain the spread of the virus, this could negatively affect demand from firms. What’s more, the longer firms remain closed, the more likely that some might stop paying workers, which could also have an implication on consumer demand. This poses a risk to $2,5 billion worth of South Africa’s agriculture exports to Asia.
Declining agricultural commodity prices
Second, we observed a significant decline in global commodity prices over the past week, in line with what happened in global stock markets. The underpinning reason for this is the fact that Asia is an important agricultural market, not only to South Africa but to the world. To be specific, China, with 8% of global agricultural imports, is the second biggest importer in the world. Moreover, Japan, with 4% of global agriculture imports, is the sixth-biggest importer in the world.
South Korea and Hong Kong collectively account for 4% of global agriculture imports. The top 15 importers account for nearly 60% of world agricultural imports, of which a quarter goes to Asia (China, Japan, South Korea and Hong Kong). Ultimately, this proportion of Asia within global agricultural trade is one of the reasons why we observed declining agricultural commodity prices.
Essentially, the potential decline in Asia’s agricultural demand and falling prices could see the value of South Africa’s agriculture exports to Asia also declining. While the picture of what could unfold looks gloomy, we note that thus far, we have not yet observed disruption on the movements of products to Asia. However, the risk could materialise if the situation with the COVID-19 virus continues and the spread of the virus worsens. – Wandile Sihlobo, Agbiz
Wandile Sihlobo, head of economic and agribusiness intelligence at Agbiz, shares highlights in his update on agricultural commodity markets. Click here for the full report on agri markets for the major commodities.