Next ten years – Navigating sustainable pome and stone fruit production

By Kandas Cloete & Tracy Davids

While the combined turnover value of the pome and stone fruit industries remained stable at R19.7 bn year-on-year, and, business confidence improved, several producers are yet to recover from the losses accumulated over the previous two seasons. Under increasingly difficult market conditions, the rand’s weakening supported net export realisation, but on the other side, there were sharp rises in input costs. From January 2021 to April 2024, the prime interest rate increased from 7% to 11.75% (SARB, 2024), input costs increased by 34-69 percent (SARS, 2024; StatsSA, 2024), and global reefer container freight rates in dollar terms increased by about 13% (Portnews, 2024). Some of these input cost increases already reflect the impact of the rand’s depreciation, whereas the true effect of the freight rate hikes on the South African perishable export industries is further exacerbated by a 25% depreciation in the value of the rand over the same period.

While the exchange rate is an important driver of profitability and role-players in the industry make decisions based on the nominal values realised, transitioning from nominal to real terms for export prices and inputs indicates price movements relative to inflation. Essentially it asks the question: are profitability changes sufficient to yield real income growth? In the process, it accentuates other variables that may have changed over time that producers and other role-players in the industry should take note of in their decision-making frameworks. Without accounting for an increase in input use as a result of higher yields and/or better pack-outs, the increase in the cost of a typical basket of inputs increased, on average, at 8.0% per annum over the last 10 years, whereas inflation in the economy was measured at 5.5%, on average. Hence, per unit, horticultural input costs increased faster than inflation. Returns from the market dissipate very quickly in such a high-cost environment.

From 2014 to 2022, export prices declined in real terms, except apricots. Prices came under pressure as a combination of global and local factors suppressed gross returns, with the impact on net returns exacerbated by the sharp increase in costs in the value chain. In 2023, however, recovery of prices was observed, largely driven by a post-pandemic normalisation of global logistics and consequent freight rate spike (pre-Red Sea tension), a return in buying power in combination with emptier markets, where the decline in Peruvian production, which was severely affected by El Nino, played a role.

While prices recovered in the short term, the projected long-term real price trend is slightly negative. Many factors contribute to this projection, but amongst others is the competition (global, Southern Hemisphere and/or South Africa) in the market as the general trend in production and export volumes are positive. To remain sustainable in this environment, investment with justifiable repayment terms at the producer level is paramount – providing cost-effective, higher-yielding, higher-density plantings with improved pack-out percentages to maximise output and revenue per input unit.

Consequently, while total planted hectares are projected to remain similar to the status quo for apples, pears, apricots and plums, areas under peaches are expected to continue their downward trend, with a marginal contribution of nectarine area expanding to buffer the decline in the category somewhat. Despite these projections on area, a positive trend from a production perspective is projected. Both young orchards coming into production and average yield improvements per hectare are the primary drivers of the projections. In addition to yield increases over time, which is consistent with the historic trend, the marketing split is projected to shift slightly more to exports.

Additional market access, changes in the tariffs imposed on imports from South Africa, and more fruit-friendly SPS measures could contribute to an improvement in average returns from the market, changing the outlook for the industry from an area and production perspective. As an example, a scenario where the Chinese market opens up for stone fruit is compared to a business-as-usual baseline in Figure 3. The only Southern Hemisphere countries currently directly supplying China with peaches and plums is Australia and Chile. Chinese imports of apricots are negligible, but their peach and plum imports are growing, with current seasonal import volumes exceeding the total size of South Africa’s seasonal export volume. Also, Chile – which is the dominant supplier – can realise higher per unit export prices at the port of loading than their average export price to all markets. It is expected that South Africa would be able to benefit similarly.

South African producers and exporters would still have to compete for the favour of the consumers’ Yuan. While a small, but gradual increase in marketing to China is simulated – increasing uptake in China of 1% to 5% from 2025 to 2029 of the current Chinese import volumes – the impact is positive for the South African stone fruit industry. Accelerating the market penetration by leveraging on existing connections in the market established through other commodities and doubling the tempo could further generate benefits for South African producers as it could improve average export prices even further, mitigating some of the negative projections illustrated in Figure 1.

The opening of the market would enable an increase in the profitable export of harvested volumes, as the better prices in the Chinese market and a slight reduction in volumes shipped to other markets combined to create a positive trend. The price premium for peaches and nectarines in China is somewhat higher than for plums, resulting in faster growth in the average export price for South African peaches and nectarines, in comparison to plums. Over time, the change in prices and volumes could instigate additional investment at the farm level in terms of orchard establishment, but the slowdown in the incremental price benefit by 2029 would also diminish the incremental rate of export volume expansion. Despite the slowdown, the combination of slightly higher prices and higher export volumes would still increase the value of exports, projected under baseline conditions to equate to R1.13 bn for peaches and nectarines and R2.04 bn for plums to increase by 12 and 8 percent respectively considering the simulated scenario on gaining access to the Chinese market.

Although the risk of negative returns will be reduced, projections indicate marginal movement on planted hectares as the long-term sustainability of production units remains concerning. However, volumes are expected to continue to grow as cost-effective yield improvements reduce the impact of input cost which increases faster than market returns. Despite the challenges with exports, it remains the marketing channel generating the bulk of revenue. As long as the price of an export carton covers its post-production cost and generates more income at farm-gate, opportunities to improve pack-out percentages should be prioritised.