We remarked that South Africa could have the biggest wheat harvest in a decade in our note on 27 August 2019.
This view was informed by both favourable weather conditions at the time and also the Crop Estimates Committee’s (CEC) preliminary forecast for the 2019/20 wheat harvest of 1.92 million tonnes. The two weeks following this period, however, turned out much warmer and drier than expected, specifically in the Western Cape. And, thus, there were crop damages in a number of areas within the province. Because of these developments, we now believe that there will be a substantial downward revision of the 2019/20 wheat production estimate when the CEC releases its update figures on 26 September 2019.
The crop damage in some areas is likely to continue this week, as weather forecasts for the next eight days show clear skies across the Western Cape. It appears that relief could only be in the week between 23 September and 01 October 2019. If this materialises, it will only ensure that there are no excessive crop damages, but it will not reverse the losses already occurred. The impact is not limited to wheat, but also other winter crops such as barley and canola, although the extent remains unclear at this stage. The CEC had placed its preliminary forecasts for South Africa’s 2019/20 barley and canola production at 401 640 tonnes and 103 600 tonnes, which is down by 5% y/y and 1% y/y, respectively.
If damages had occurred in crops that South Africa is typically a net exporter of, such as maize, the impact on prices would have been noticeable. But this is not the case for wheat, as South Africa imports about half (an average of 1.6 million tonnes) of what is consumed annually and prices generally trade along with the import parity price, as shown in Figure 1 (see attached file). This means the drought might not result in major movements in the domestic wheat prices, and wheat farmers will not be compensated with better prices as production declines.
What essentially has a notable impact on domestic wheat prices is the global wheat market conditions and also the exchange rate, amongst other factors. But global wheat prices are likely to remain at softer levels in the coming months because of a recovery in production in the EU and the Black Sea regions. The US Department of Agriculture (USDA) forecasts 2019/20 global wheat production at 766 million tonnes, up by 5% from the previous season.
Growing optimism about South Africa’s 2019/20 maize harvest
With South Africa’s 2019/20 maize production season set to commence in a month from now, we continue to monitor what major crop forecasters say about the potential harvest. This past week the USDA placed its estimate for South Africa’s 2019/20 season at 14 million tonnes, which would be a notable recovery from the current season’s harvest of 11.6 million tonnes (commercial and non-commercial maize). This far surpasses the International Grains Council estimate of 12.8 million tonnes, and is also above the long-term average production.
The two factors underpinning this, which we generally concur with, are the prospects of higher rainfall and also a potential uptick in area planted. In 2018/19 season, South Africa’s maize plantings fell by 1% from the previous season partly because of dryness and the late start of the season. This was the case for both commercial and non-commercial maize planting. The hectares that went unplanted in the 2018/19 season are likely to come into production in 2019/20, especially if the weather turns out favourable as the South African Weather Service suggests.
Under such conditions, South Africa would remain comfortably a net exporter of maize. In the current season, where the harvest is down by 12% from the 2017/18 production season, South Africa is a set to remain a net exporter of at least a million tonnes of maize.
What will be important to monitor for October 2019 and February 2020 is the weather. The weather conditions within this period would have a material impact on the area planted, crop-growing conditions and ultimately yield. The outcome would then be reflected on price movements of the commodity.
Taking stock of global grains and oilseeds supplies
Last week, the USDA placed its 2019/20 global maize production at 1.1 billion tonnes, down by 2% from the previous season, owing to expectations of a poor harvest in parts of the US, Argentina and Ukraine, amongst other countries. This meant that the ending stocks for the season would be at 306 million tonnes, down by 7% year on year. Soybean production prospects also painted a similar picture, with the 2019/20 harvest set to fall by 6% year-on-year to 341 million tonnes. This was primarily underpinned by expectations of poor yields in parts of the US and Argentina. This subsequently meant that global soybean stocks would fall by 12% from the 2018/19 season to 99 million tonnes.
From a data front
On Monday, the Agricultural Business Chamber of South Africa (Agbiz) will release the South African Agribusiness Confidence Index results for the third quarter of 2019.
Also, on Monday, the U.S. Department of Agriculture will release the US crop conditions data. This will give us a sense of the US crop-growing conditions.
On Wednesday, SAGIS will release the grain producer deliveries data. While the data will present producer deliveries data for the week of 13 September 2019, it essentially gives us an indication of the volume of summer grains and oilseeds that have been delivered to commercial silos after the harvest process.
On Thursday, we will get the weekly grain trade data (wheat and maize) for the week of 13 September 2019. Briefly, in terms of maize, the exports of the 2019/20 marketing year have thus far amounted to 381 762 tonnes. Looking ahead, we expect South Africa to remain a net exporter of maize this year, although the volume will most likely fall by half from the previous year to about 1.1 million tonnes. In terms of wheat, South Africa remains a net importer, although the recovery in the country’s 2018/19 domestic wheat production will lead to a decline in imports this season. South Africa’s 2018/19 wheat imports could fall by 36% from the previous season to about 1.4 million tonnes. So far, the country has imported about 76% of the seasonal forecast.
