By Mr T.T. Mboweni, Governor of the South African Reserve Bank, at the Annual Congress of Agriculture Western Cape, Goudini Spa, Worcester.

1.    INTRODUCTION

Many economists and policy-makers in the 1950s regarded the agricultural sector as a relatively unimportant factor in economic development processes. These views were mainly based on the reading that agriculture’s share of gross domestic product invariably declines as the economy develops to higher stages. As a result, the resources and policies in many countries were focused on industrial development, which was seen as the key to sustainable growth. In many cases, this hampered overall economic performance because there were insufficient supplies of food and raw materials at affordable prices and the imports of these agricultural inputs affected the balance of payments of many such countries.

From the 1960s many economists and policy-makers began to acknowledge that agricultural development was an important ingredient in the process of economic development. Increasingly they argued that agriculture creates employment opportunities, earns foreign exchange and provides food to the growing industrial and urban population. In South Africa we are also well aware of the importance of agriculture in our economy.

2.    AGRICULTURE AND THE SOUTH AFRICAN ECONOMY

As we all know very well, only about 13 per cent of South Africa’s land surface is suitable for cultivation. Arable resources are poor because rainfall is unreliable. The country is subject to severe recurrent droughts, which are sometimes followed by devastating floods. In view of the unreliability of our rainfall, irrigation is vital to our agricultural industry. A large variety of crops, such as sugar, citrus, vegetables and grain, are generally produced under irrigation.

Agricultural activities in South Africa therefore range from intensive crop production and mixed farming in winter rainfall and high summer rainfall areas, to cattle ranching in the bushveld and sheep farming in the more arid regions. Crops are grown under irrigation on approximately 1 million hectares and nearly 10 million hectares are used for dryland crop production. Livestock is found in most parts of the country and about 85 per cent of domestic meat requirements are produced domestically.

South Africa is self-sufficient in virtually all major agricultural products and has always been a net exporter of agricultural products. Agricultural production has more than doubled since 1960 because of the application of modern technology and improved farm management. Although this sector plays an important role in the creation of wealth in South Africa, its contribution to gross domestic product has declined from an average level of 12 per cent in the 1960s to about 5 per cent in the second half of the 1990s. The agricultural sector nevertheless has a strong impact on the growth performance of our economy. For example, in the good agricultural year of 1996 agriculture contributed 1 percentage point to the growth in gross domestic product.

The agricultural sector not only has an important direct impact on the growth of the economy, but because of forward and backward linkages with other sectors it also affects the economy indirectly. In an article written by the Research Department of the South African Reserve Bank it was calculated that for every R1 million of agricultural production, an additional output of about R600 000 is generated in the rest of the economyhttp://www.resbank/Address/2000/26072000.html - 1 Pretorius, C.J. and Smal, M.M.: Notes on the macro-economic effects of the Drought, Research Department, South African Reserve Bank. 1992. 1).

The forward linkages of the agricultural sector come from its delivery of a wide range of raw materials to the secondary sectors. The available indicators suggest that approximately 58 per cent of the value of agricultural production is delivered to secondary industries for further processing. By contrast, the delivery of agricultural production to processing industries amounts to about 8 per cent of the total value of manufacturing production.

The backward linkages of agriculture with other sectors arise from the fact that the agricultural sector is an important purchaser of the products and services of other sectors. The manufacturers of livestock feed, fertilisers, insecticides, agricultural machinery and implements depend almost exclusively on sales to farmers. If production in the agricultural sector declines because of drought, floods or any other natural disaster, this inevitably affects the activities of these industries.

In addition to its contribution to the economic growth of South Africa, the agricultural sector has traditionally been the largest employer in the economy. In the second half of the 1990s, the agricultural sector generated employment for about 900 000 workers, or almost 10 per cent of the economically active population. If the dependants of regular workers are also taken into account, the agricultural sector provides a livelihood to 6 million people. This represents roughly 20 per cent of the total South African population.

Like many other industries, there are signs that farmers are reducing their permanent labour force and that this is exacerbating social and urbanisation problems. Many factors probably contribute to this trend in the employment figures of agriculture. Particularly important is the rationalisation of the labour force resulting from the introduction of modern technology and other ongoing adjustments. Another contributing factor is the emergence of a large number of small-scale farmers who generally make more use of family labour rather than hired workers. (Itself not a bad thing).

Whatever the reasons for this development, it is essential that employment creation should be maximised in the agricultural sector. This has become one of the key focus areas of government. The Minister of Agriculture and Land Affairs recently announced that in the current financial year the government would concentrate on supporting job creation on farms through labour-intensive initiatives in the Land Care projects, such as the livestock development programme for sheep farmers in the Eastern Cape.

3. RESTRUCTURING OF AGRICULTURE

Another important challenge that the agricultural sector will have to face in the new millennium is the worldwide move away from excessive state regulation and intervention in agricultural markets. A recent articlehttp://www.resbank/Address/2000/26072000.html - 2 Information obtained from the General Manager: Agricultural Markets Division, South African Futures Exchange. 2) on European agriculture describes this change in the following way: "European agriculture is changing. Historical patterns of government farm price supports, export and import controls and resource management are changing with shifts in policy, the World Trade Organisation and other world market and policy forces. Agricultural interests are responding to these far reaching changes. Increasingly, their production, processing and trading decisions are based on market considerations."

All over the world it has become clear that excessive government intervention in agricultural marketing is costly, inefficient and leads to distorted decisions in the market place. Indeed South Africa as a significant economic factor in the global village, has been making commendable steps in the adjustment process. The traditional marketing systems are falling away.

In keeping with these general globalisation trends, the agricultural sector has been restructured over the last couple of years, as the majority of agricultural marketing schemes and control boards were phased out. The agricultural markets have been liberalised and access to them broadened through legislation and a transformed National Agricultural Marketing Council which represents all groups, including small-scale farmers and labour. In addition, the Broadening Access to Agriculture Trust (BATAT) has been established to enable poor, previously disadvantaged and potential farmers to succeed as commercial farmers. The Trust focuses on providing financial services while reducing dependence on government; on human resources and technology development especially for small-scale farmers; and on the development of marketing systems and infrastructure.

As a result of these changes, farming has become market-driven and not production-driven. This naturally leads to greater volatility in agricultural prices, but as countries around the world are finding, the impact of such price volatility can be managed by using recognised mechanisms such as future contracts to create greater price stability. In circumstances where all those involved in the agricultural sector face increased price risks as a result of restructuring and the liberalisation of commodity markets, the futures market provides a market-related, transparent and reliable facility for managing that price risk. The challenge of managing price volatility has reverted to those directly involved in the market now that the structures and institutional arrangements that supported agricultural commodity marketing and pricing policies have been abolished.

Recognising this need, the South African Futures Exchange (SAFEX) established the Agricultural Markets Division. This division started trading on 31 July 1995 with the successful introduction of chilled beef futures. Today agricultural products marketed through the Agricultural Market Division include white and yellow maize, sunflower seed and wheat.

The development of an efficient and effective futures market requires a reorientation of government policies as well as intensive training. Without these changes, farmers will remain vulnerable to price volatility, especially when prices fall. In addition, governments will continue to be confronted by demands for excessive intervention, in the market, which may probably result in increased costs to the economy and also distortions in the market place. International organisations are accordingly encouraging countries to develop such mechanisms. A recent publication of the United Nations Conference on Trade and Development states: "The social and economic consequences of neglecting to develop mechanisms for price risk management, as an alternative to minimum producer price policies, can indeed be large 3)http://www.resbank/Address/2000/26072000.html - 3 As above.."

The expansion of the activities of future contracts for agricultural products has been most encouraging. Like all futures market development throughout the world and in both the financial and commodity markets, these markets were rather slow to take off but are now doing quite well. Although the primary objective of a futures market is not physical delivery or physical procurement, but the management of price risk, the futures market also provides a fully guaranteed market for future physical delivery. This change in agricultural marketing in South Africa should not be seen as a negative development, but rather as a step forward that, together with other effective and efficient mechanisms, could lead to a fundamentally better-based agricultural sector.

4. TRADE AGREEMENTS AND AGRICULTURE

The marketing of agricultural products has not only been restructured domestically, but considerable progress has also been made with removing trade barriers. The trade agreement between South Africa and the European Union that became effective on 1 January 2000, has important implications for our agricultural sector. This agreement has secured preferential access for agricultural products to the market of the European Union, ahead of many of our competitors and ahead of the tariff reductions planned by the World Trade Organisation. Although the negotiations on agricultural issues were highly sensitive, preferential quotas for agricultural products were obtained that are significantly better than the European Union's initial position. Moreover, South Africa managed to include in the agreement a unique agricultural safeguard clause over and above the general safeguard clauses. Article 16, namely, gives South Africa the right to challenge the European Union if it can be proved that increased imports of agricultural products are harming or threatening to harm the domestic industry.

In terms of the agreement, tariffs will be reduced on 61 per cent of agricultural exports to the European Union. This should benefit South Africa’s positive agricultural trade balance with the European Union, which amounted to approximately R5,5 billion in 1998. Although the agreement has potentially significant advantages for agriculture, the various role players in the agricultural sector in South Africa need to realise the opportunities offered by the agreement. Some teething problems can, of course, be expected, and it is important to solve these problems quickly so that the benefits for the agricultural sector as a whole can be maximised.

In addition to this agreement, the agricultural sector has a major interest in a number of other trade negotiations, such as the SADC Trade Protocol, the Southern African Customs Union Agreement and the World Trade Organisation. A careful analysis has therefore been made of agriculture’ s interest in further multilateral negotiations by the National Department of Agriculture over the past two years. These developments led to the formulation of a broad objective for further negotiations, namely: "To achieve a substantial improvement of market opportunities for all South African agricultural products with export potential, to improve fair trade conditions on agricultural products imported or exported and to ensure that South Africa’s rural development objectives are accommodated within the allowable range of World Trade Organisations disciplines"http://www.resbank/Address/2000/26072000.html - 4 Speech delivered by Miss G. van Dijk, Trade Agreements Agricultural Issues for 2000, 16 February 2000.. 4)

As a result, South African agricultural producers will approach upcoming negotiations from the perspective of a developing country, principally as an African agricultural exporter. However, success in a highly competitive market requires that all stakeholders in agriculture should increase their knowledge and understanding of the agreements. They should also refine their objectives to help create a united front that could best serve the interests of the agricultural sector of our country.

5. OTHER ISSUES

Besides these important structural changes relating to the new marketing of agricultural products, I also want to draw your attention to two other important issues that will have an important effect on the agricultural sector in the years to come. Firstly, the Letsema Framework for Agricultural Delivery and Empowerment has been established. The Framework outlines structures and systems of co-operative governance to facilitate service delivery to and the empowerment of farmers through their own organisations, and also defines the role that national, provincial and local governments and the private sector, service and community organisations will play in rural development.

Secondly, a Village Financial Services Co-operatives Programme has been launched. Village banks will be located across the country to mobilise rural savings among rural and farming communities. These banks are membership driven and controlled, and are obliged to have a formal link with a commercial bank to obtain authorisation to take deposits. The Reserve Bank played an important role in identifying suitable regulatory frameworks for these micro-finance industries.

6.    MONETARY POLICY AND THE AGRICULTURAL SECTOR

The Reserve Bank is, of course, also involved in the determination and implementation of monetary policy that could affect the agricultural sector. The objective of monetary policy in the new millennium will continue to be the establishment and maintenance of financial stability, i.e. price stability and stability in financial institutions and markets. Price stability is achieved when changes in the general price level do not materially affect the economic decision-making process. Stability in the financial sector is achieved when there is a high degree of confidence in the ability of financial institutions and markets to meet the requirements of market participants.

In order to achieve price stability, the government and the South African Reserve Bank have decided to adopt an inflation-targeting monetary policy framework in South Africa. The inflation target has been expressed as an average annual rate of increase of between 3 and 6 per cent in the consumer price index, excluding the effects of changes in mortgage rates, for the year 2002. The objective of monetary policy is now to hit this target, i.e. the inflation target is the overriding objective of monetary policy. The operational variable that the Bank uses to obtain the target is the level of short-term interest rates. Although the level of interest rates is determined primarily by total saving in the economy and the demand for funds, the central bank affects the cost of short-term funds through the impact of its actions on the repo rate, i.e. the interest rate at which it provides in the liquidity needs of the banks.

In fulfilling this function, the Bank does not take the interest of any individual economic sector of South Africa into consideration. The Bank will therefore not be influenced by general developments in the agricultural sector when considering its monetary policy stance. However, where developments in the agricultural sector could affect future price increases in South Africa, this is taken into account in decisions taken about the appropriate level of interest rates. The Reserve Bank believes that by creating a stable financial environment in this way, it will provide opportunities for all the sectors in the community, including the agricultural sector, to achieve maximum potential.

An important component of such a stable financial environment is the allocation of financial resources. It is important that all sectors of the economy should be able to make use of these resources. A critical aspect for South Africa’s growth prospects is that small businesses and small-scale farmers should be able to gain access to financial resources. A trade-off must therefore be established between giving access to finance to small businesses and farmers, and maintaining the soundness of the financial sector.

7. CONCLUSION

It can be concluded that the agricultural sector will face many challenges in the new millennium. Many of these challenges will arise from changes in the domestic and international regulatory framework. In this new environment, monetary policy will assist the agricultural sector, like all the other economic sectors, by creating and maintaining stable financial conditions.

Challenges are nothing new for the agricultural sector. In the past South Africa’s farming community has faced many adverse economic and climatic conditions with great success. As a result, South Africa is to a large extent self-sufficient in food production, while in some other fields such as agricultural research, we are at the forefront of international developments. To maintain this position, it is important that the agricultural sector should again be successful in adapting to the changed domestic and international environment during the new millennium.

1    Pretorius, C.J. and Smal, M.M.: Notes on the macro-economic effects of the Drought, Research Department, South African Reserve Bank. 1992.

2     Information obtained from the General Manager: Agricultural Markets Division, South African Futures Exchange.

3     As above.

4    Speech delivered by Miss G. van Dijk, Trade Agreements Agricultural Issues for 2000, 16 February 2000.