Down with logistics costs

Down with logistics costs

Despite being a leader in transport and logistics among middle-income countries, South Africa needs to reduce its logistics costs – especially in the agricultural sector, which sit at R189 billion. MARISKA MORRIS investigates

In 2016, logistics made up 11,8 percent of South Africa’s gross domestic product, and amounted to approximately R499 billion. Transport costs formed the largest portion of the logistics sector, at 55 percent, with land-freight transport volumes at 856-million tonnes by the end of 2016.

According to the Logistics Performance Index, published by the World Bank, South Africa is a leader in transport and logistics among middle-income countries, but its infrastructure remains a challenge, which is common among BRICS countries (comprising Brazil, Russia, India, China and South Africa).

“The country has long inland transport distances, relies heavily on non-beneficiated exports and has a much smaller economy than the other BRICS countries, which is also growing more slowly than most.

“South Africa is, therefore, vulnerable to external shocks, and reducing the cost of logistics needs to be a priority,” Professor Jan Havenga, from Stellenbosch University, and his co-authors write in their 2016 Logistics Barometer report.

This is especially true for the agricultural sector. Along with mining, agriculture was responsible for
76 percent of the total land-freight volume in 2016. The industry transports 83-million tonnes of agricultural products annually – which represents ten percent of the total freight volume in the country.

“The transport costs for agriculture amount to R57 billion, which is 21 percent of the total for South Africa. Logistics costs are even higher at R132 billion, which is more than 26 percent of the total for the country,” says Havenga. These high costs are affected by circumstances such as distribution, low-density freight, seasonal patterns and a low rail market share.

While it is unknown how much farmers spend on contracted transport, deputy executive director at Agri SA, Johan Pienaar, estimates farmers spend around R12 billion on fuel annually.

“Changes in the fuel price and the cost of road tolls impact transport costs to a large extent – especially for farmers who deliver fresh produce. Although not quantifiable, the poor condition of infrastructure in many areas leads to vehicle damage and increased maintenance costs,” Pienaar notes.

While grain production is expected to be higher this year, the lower grain prices will not help to ease transport costs for the agricultural sector.

Despite the drought and armyworm infestation, figures released in February, by the Crop Estimates Committee, predict South Africa will harvest 13,9-million tonnes of maize in 2017, which is a 79-percent increase in production from 2016. South Africa is expected to regain its status as net exporter in May.

While the increase in production will motivate buyers, the price of maize has dropped significantly. In early 2016, white maize and wheat traded at R5 000 per tonne, due to concerns about the drought. With the new estimates made by the Committee, the price of white maize for July delivery will have fallen to
R1 932 per tonne in March.

“Shipping costs will, obviously, have to be accounted for with respect to exporting surplus grain. The fact that there is no need to import grain will lead to cost saving for the industry, but not for the grain farmers,” he comments. “Instead, these farmers, especially those who did not adjust their prices before planting, will struggle with lower earnings.”

Currently, only three percent of agricultural products are transported by rail. Havenga suggests that the increase in grain production could be a good opportunity for farmers to make use of rail to save on transport costs.

“Higher grain volumes create better opportunities for rail block trains, which can reduce costs. It
also means, however, that the transport component of grain delivery will be relatively higher in a
low-cost commodity environment,” Havenga says. He also suggests redirecting some of the
national road expenditure to improve rural road networks.

“Improved infrastructure will decrease the overall cost of transport for all products, provide better access to markets for farmers in rural areas and support efforts to create more commercial farming opportunities for subsistence farmers.” This will, arguably, also reduce vehicle maintenance costs for farmers.

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