Despite the drop in South Africa’s diesel price in April, macadamia farmers say the cost of fuel to run generators during Eskom’s rolling blackouts is crippling operations.
Against the backdrop of a bumper harvest, hundreds of farmers who expected to cash in on the growing popularity of macadamia nuts and had planted vast acreages of macadamia trees since 2018 – mainly in KwaZulu-Natal – are under the cosh.
Industry body SAMAC has revised its 2023 crop estimations to 81 556 tons, which is 18.5% higher than the 2022 crop of 68 840 tons. And production has increased by 12 716 tons this year compared with the previous harvest.
But these numbers come at a time when the world is over-supplied and nut prices are at rock-bottom.
Power crisis
The government’s failure to avert the ongoing collapse of the country’s power utility and to introduce an integrated power supply programme that includes wind and solar has not only flatlined economic growth, but the production of food, adequate for domestic and export demand, is under severe threat.
Because of the electricity crisis, South Africa is now deemed to have entered a technical recession, as economic activity contracted by 1.7% in the first quarter for this year, while Bloomberg analysts peg growth at just 0.2% for the remainder of the year.
William Davidson, who farms macadamias near Empangeni in Northern Zululand, said the Eskom crisis coupled with the diesel price increase from about R17 a litre in February 2022 to about R21 a litre a year later has seen the cost of maintaining the integrity of his macadamia crop rise beyond sustainable levels.
“Stage 6 load shedding means our power is off for ten hours a day, on week days and weekends.”
His generator, he added, consumed eight litres an hour at R21 per litre an hour, totalling R168 an hour or R1 680 per day. Service costs are at R4 200 every 250 hours, “which we are doing roughly every 30 days”.
“Three years ago, it took six to eight months before servicing was required. It’s crazy,” he said.
The biggest issue for macadamia farmers was the power required to keep air blowing through the bins in which nuts were stored and dried. While it might be acceptable to have the fans off for 10 to 20 minutes at a time, to shut them off for anything up to four hours or more was problematic.
Installing solar energy would require an exponential capital investment to handle the power required to get the fans up and running for each bin. “Most farmers have between 15 and 20 drying bins, with fans dedicated to each bin. One fan requires about 55kw to run but at least three times that amount of energy is required to start it up. To invest capex now and install solar power when the global macadamia market has crashed is not the best thing to do,” he said.
The cost of inputs like fertiliser had also increased exponentially, particularly in 2022, and while the price had dropped slightly, it was still very expensive.
Further, as banks are using interest rate hikes to target high inflation in the face of an international cost of living crisis, the cost of borrowing money was exponentially higher that before the pandemic, Davidson added.
“Banks are cranking up their rates as the Reserve Bank increases its rates, so the cost of borrowing money is huge right now.”
Banking support
Abrie Rautenbach, head of AgriBusiness at the Absa Group agreed the power crisis and its impact on farming was of concern. “This comes as large parts of the sector are already under pressure due to increasing input costs. Producers therefore have limited capacity to invest in alternative energy.”
But, he added, the bank was well aware of the cyclical nature of agriculture and there was a good understanding at Absa that farmers were going through a difficult time. “As such we are seeing some clients who are unable to meet debt repayments and/or carrying over debt from the previous season. Based on the track record and risk profile of each of these producers, the bank will provide bridging finance or restructure their debt,” Rautenbach said.
Nico Groenewald who is the head of AgriBusiness at Standard Bank agreed that banks could not apply a blanket approach to their clients.
“The macadamia industry has been experiencing difficulties particularly around the commodity price and carryover stock levels. The impact thereof is finding its way in different layers of intensity into the industry depending on where in the value chain a client finds himself. Having said that, the unique composition of each client’s financial standing, size of his macadamia operation within his broader farming operation and also the age composition of the mac trees, among other result in each business operation’s experience of the market pressures being different.”
Groenewald added that large-scale expansion in such conditions would therefore be difficult to fund with large portions of debt. The focus should now be on cost containment and where possible balance sheet and debt restructuring, he said.
He warned farmers to increase their focus on financial planning, cashflow management and consultation with financiers and suppliers to reach solutions before the impact of the adverse conditions got to a point where they could not recover.
Agriculture information and marketing head at First National Bank Dawie Maree urged farmers who were in trouble to speak to their bankers sooner rather than later. He said the bank was more concerned about the sustainability of processors rather than that of macadamia farmers.
“When processors need to run back-up generators at huge cost to process the macs, that is where there will be impact,” he said.
All three pointed to “clever funding solutions” around alternative energy solutions provided by financiers. They said farmers and processors were making use of these solutions on an ever-growing scale.
Price crash
Karen Carlton-Shields, who with her husband Robert farms macadamias on the KwaZulu-Natal South Coast, said they were “battening down the hatches”.
“We saw the power crisis coming so started investing in alternative power about five years ago. That means we can manage the load shedding, but the prices are so low for our crop, and because of the glut in the market, processors are only prepared to take nuts of very low unsound kernel. We are in for very, very tough times,” she said.
She urged the industry to develop the domestic market as a back-up, saying South Africans seldom had a chance to experience the taste of the high-quality nuts produced by local growers, as at least 98% of the crop was exported.
“Another problem is because many will become desperate to sell their crop, the possibility exists for dumping of poor-quality product on the South African market and that is not good for the industry at all,” she said.
In 2022 farmers were realising on average about R190 a kilogram for kernel and R188 per kg in 2121. This season they will be lucky if they get R160 a kg.
Allen Duncan, chief executive at the Green Farms Nut Company, said most “destinations” were well stocked with product, and retail sales had yet to adjust to the significant drop in kernel prices since 2022. While demand for nut-in-shell from China was “buoyant”, the quality specs were high and prices low, he added.
Russia’s war
While Carlton-Shields said she believed questionable strategies used by some marketers post the pandemic were partly responsible for the world glut and rock-bottom prices, Duncan put the blame for the crisis squarely at the feet of Russia’s invasion of Ukraine. “The Ukraine issue has affected the whole world and the man in the street is dealing with higher interest rates, high energy costs, and high inflation resulting in less discretional spending money available. Most tree nut types are seeing lower prices and the demand for cheaper snacking options has increased.”
The collapse of Eskom, he added, was an additional pressure. “The high load shedding schedules are putting pressure on growers, processors and the country. Costs are increasing where the industry can ill afford it.”
The weak local currency will offer some assistance in the short term but in time, will increase costs through the whole value chain, he added.
