Then as global economies started to reopen, the demand push accelerated further, driving maize, soya, wheat and sunflower prices higher.
The outbreak of the Russia-Ukraine war in February 2022 turbocharged the surge in softs amid concerns that two of the world’s largest exporters would be removed from the market. This led to price spikes and resulted in record highs for maize, wheat and sunflowers.
They have since abated as the Ukraine situation, despite challenges, has seen exports of softs into the global market and Russia had its largest-ever wheat crop. Market nerves were calmed.
The surge in global oil prices linked to the war further heightened the strong connection between maize and oil. Maize is the key feedstock in ethanol blending in petrol, especially in the US. As the oil price rose, the profitability of ethanol became highly attractive and again fed into the softs price.
To put it in context, since the start of 2020 the global maize price has risen 75%. Wheat, a basic of most manufactured food products, increased 34%. Soya, a key constituent in animal feed, is up 55%. It is these increases — allied to the continuing global supply chain disruption and elevated shipping costs — that have fed into the global inflationary push in foodstuffs over the past 18 months.
On the domestic Safex market, despite three good seasons of softs production with commercial maize above the average trend at 15Mt annually, prices remained elevated, notwithstanding the large surplus.
South Africa consumes 11.8Mt of maize per annum, with the balance exported. The country produces good wheat crops with 2Mt harvested in the past couple of years, but is still a net importer of about 1.6Mt.
With a depreciating and volatile rand in the past two years and prices of softs being driven not in Randfontein but in Chicago and Shanghai, Safex softs have remained robust.
Since 2020, in rand terms, yellow maize has risen 81%, white maize 87%, soya 71% and wheat 53%. The biggest increase has been in sunflower oil, ahead by 97%. This has been superb for farmers but a catastrophe for the food production value chain, given the inflationary cost push and the inability to fully recover these sudden price shocks.
This has been evident in the eggs and poultry sector, where these significant input cost increases have caused a material margin squeeze and profit declines.
These elevated softs prices have been a boon for the agricultural production sector and the allied companies that support and supply them with inputs, requisites and services.
Over the past three years, healthy returns per hectare of field crop production have powered agricultural capital equipment sales to a 40-year high.
Underlying results from the listed agricultural stocks that service the farming sector, such as Kaap Agri, Senwes and TWK Investments, have been robust and will continue to be so into 2023 as a fourth successive year of solid production is seen. IM remains positive on all three counters for now.
This anomaly of above-average domestic softs production is allied to the La Niña weather oscillation pattern, which brings a wetter rain period aiding crop production to South Africa.
With 2023 the fourth successive year of La Niña the sector will, from an agricultural and retail perspective, fare well.
The best season was 2020/2021 when low input costs of fertiliser, diesel and field chemicals, combined with rising softs pricing, saw bumper farm revenues. That extended into the 2021/2022 season, though the push from higher farm inflationary costs was starting to rear its head.
The 2022/2023 season saw the full effect of global geopolitical inflationary activity on the domestic agricultural sector.
The real concern is the 2023/2024 season, as the expectation of a reversion from La Niña to El Niño looms large, with a move after four good harvest years from a wetter period to a hotter and dryer agricultural period.
This could lead to lower production output, with a reversion to norms possible in commercial maize to the 11Mt-12Mt range. This will meet domestic needs but sharply reduce agricultural sector income, given lower tonnage and the recent declines in softs if the weather phenomenon is confirmed by global climate scientists. This casts a cloud on the sector.
The sector is also beset by rising input costs. In the past year, oil prices and the cost of diesel and chemicals soared. Global shortages and fertiliser supply chain disruptions also led to hefty price increases. This was a win for JSE-listed company Omnia Holdings but the farming sector, though still making good profits, was hit by an average year-on-year inflationary push in key inputs of between 50% and 70%, depending on production province.
With a fourth good agricultural season ahead and the Crop Estimates Committee finalising the 2022 maize crop at a bumper 15.47Mt, the market is looking ahead at the current season. But this may be the last of the recent bumper harvest run.
The present season has started with a solid outlook for field crops production. Despite a trim in maize hectares of 5%, there has been a 19% uplift in soya hectares. Much of this can be ascribed to firm global pricing for soya and the fact that soya is a less fertiliser-demanding crop per hectare than maize, thus materially lowering production cost.
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Safex, despite firm global prices and a weak rand, has seen material reduction since November 2022 in softs pricing. At the time of writing, yellow maize is 16% lower to R4,445 a ton, while white maize is down 20% and soya 14%.
These will all be welcome benefits to food producers, and especially the poultry sector. But the sector, which is in dire need of relief, will only feel the effect of a near-R850 a ton decline in yellow maize in the late third quarter and into the fourth quarter of 2023 as procurement books and the production chain benefit from the recent lower prices.
Some relief will also come into the food production chain with a trim in key input costs. Wheat, as an example, is down 19% from its mid-2022 high.
However, it’s all a game of swings and roundabouts as the escalating and erratic nature of Eskom load-shedding has played havoc with corporates, as recent updates have detailed.
As an example, leading poultry producer Astral Foods recently announced its interim results to March will decline by up to 90% as rising input costs and load-shedding add to its cost base.
The company detailed at its recent AGM that it spends R30m a month on diesel when load-shedding is at stages 2 to 4. At stage 5, the cost leaps to R45m, and at stage 6 it’s R60m a month. These costs are borne by the company, but will ultimately be passed back on to the consumer through higher pricing.
RCL Foods has also announced a profit decline, and IM forecasts a series of weak updates from the food producer sector ahead. Something to watch for.
While IM remains cautious of all the mainstream food producers, it still favours the domestic fishing sector, with Oceana upgraded to a price target of R80 — even if the easy money was made from last year’s levels of R56.39.
Meanwhile Sea Harvest, having issued a profit warning for its year ended December 2022 with headline earnings to decline by a third, looks like an attractive recovery play as many of the factors affecting the stock in 2022 could be seen as one-off events. IM would recommend angling for Sea Harvest at R10.40, with a target of R16.
Despite a dire profit warning for the first quarter and a worsening outlook detailed at its AGM for the second quarter, Astral Foods has defied the gloom and is still trading at about R160. This is perplexing as everything the company has detailed — from its inability to raise pricing to fully recover costs, production bottlenecks and a decline in abattoir volumes — should have seen the stock buckling.
One might assume the market is looking past these travails to the benefits of lower input costs and the ability to force though a reasonable price increase to recover margin and boost profits. This seems a risky bet, and IM would still not recommend Astral Foods (despite its superb management and farming skills).
In summary, 2023 will be a mixed year for the food producer sector but agriculture will continue to perform well into at least the first quarter of 2024.
Lower domestic soft commodity prices will aid the food sector later in the year. But if the El Niño cycle does indeed hit the harvest in 2024 — coupled with a weak rand and ongoing load-shedding — the food sector will get a respite for six to nine months from the third quarter of 2023 to the first half of 2024 due to lower inputs costs. The outlook thereafter is clouded.
