Agro-processing has been the largest component of the manufacturing sector since the 1970s. John Hudson, head of agriculture at Nedbank Commercial Banking, shares why expanding the agro-processing sector and overcoming hurdles could lead to SA becoming a leading participant in the agro-processing sector.
Primary agriculture contributes around 2.5% to South Africa’s gross domestic product (GDP), which is a relatively small proportion considering that agricultural land represents almost 80% of the country’s total land area. However, the sector’s overall contribution, including the value chain, is substantially higher, contributing 10.3% in 2023 (up from 7.8% in 2021).
The agricultural sector’s prominent role in the economy stems from its connections to other sectors. These connections include backward interactions with farmers through the purchase of goods such as fertilisers, chemicals and implements, as well as forward connections through the export of primary products, distribution into the food chain, and the supply of raw materials for agro-processing.
About 70% of agricultural output serves as intermediate products in the agro-processing sector. Agro-processing, which has been the largest component of the manufacturing sector since the 1970s, consistently contributes an average third of the total manufacturing output over the past 50 years, and its share has been growing since 2010.
In agriculture’s favour
The agricultural value chain is thus considered an important growth engine for the rest of the South African economy and, in many instances, the lifeblood of the rural economy.
Numerous documents, including the Agriculture and Agro-processing Master Plan of 2022, have identified agro-processing as a driver of industrialisation, with huge potential to contribute to the structural transformation of the economy.
Primary production and several agro-processing industries are labour-intensive, which is an important factor in terms of job creation, while agro-processing industries promote the growth of small and medium enterprises, which can contribute to economic transformation by promoting broader participation in the economy.
Processed exports could yield better returns
However, based on growing yields over the past few years, a case can be made for further processing of the country’s agricultural produce for the export market. Export value per tonne for agro-processed goods is up to three times higher than non-agro-processed goods, which implies higher export earnings for the industry.
Expanding the agro-processing sector could also generate more local value by creating employment opportunities, particularly for unskilled and semi-skilled workers, and increasing the potential to replace agro-processed imports.
The recent performance of the South African wine industry relative to grape exports illustrates the motivation behind expanding the country’s agro-processing sector. Between 2018 and 2022 the export value of wine per tonne was on average 2.5 times more than the grape export value per tonne.
Based on these results, it would make sense to focus more on increasing export volumes and sales of wine, or processed grapes in the form of juice or raisins, rather than table grapes.
Opportunities in avocado industry
A similar assessment was conducted for avocados and avocado oil, revealing that South African avocados are used as an input for avocado oil production across most of the markets to which they are exported.
This also warrants the avocado industry expanding its avocado oil production and renegotiating with export markets to prioritise exporting avocado oil rather than avocados. Such a stance would deliver more value for South Africa, as the average export value per tonne of avocado oil between 2018 and 2022 was almost twice the export value per tonne of fresh or dried avocados.
The challenge, of course, is access to funding and governmental support, but private sector funding is readily available through the banking sector, and appropriate incentives and finance solutions can be put in place to attract private investment.
Besides that, other challenges such as load shedding and infrastructure limitations must be addressed for the agro-processing industry to grow and thrive. But if we can overcome these hurdles, I do not doubt South Africa can leverage its agricultural produce to become a leading participant in agro-processing.
Join Nedbank to unpack this topic at Nampo’s Nation in Conversation
Nedbank is a sponsor of the Nation in Conversation panel discussions at Nampo, and will host a discussion about the importance of the agricultural value chain, the challenges that secondary agriculture faces, and the opportunities it presents on the Nation in Conversation stage on Thursday, 16 May, at 11:00.
Nedbank representatives will also be panellists on three additional discussions: “Elections and agriculture – impact and expectations”; “Collaborative solutions in times of adversity”; and “Commitment and impact – making a difference in South Africa”.
Visit the Nedbank stand at Nampo Harvest Day in Bothaville, Free State from 14 to 17 May 2024 to meet their agricultural specialists and debate these topics and more.
- John Hudson is the head of agriculture at Nedbank commercial banking. The views and opinions expressed in this article are those of the author and do not necessarily reflect the views or positions of Food For Mzansi.
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