This past week, the US and China signed a ‘phase one’ trade agreement, following months of tensions, negotiations and uncertainty.
There are many questions about the future of USChina trade relations that remain unanswered from this agreement but it has certainly brought a sense of relief. In this week’s opening note, we take a somewhat unusual approach and do a Q&A on the agreement and possible implications for agricultural activity.
What does the recently signed US-China phase one trade agreement mean for agriculture? From an agricultural perspective, the agreement states that during the two-year period from January 1, 2020, through December 31, 2021, China shall ensure agricultural goods of “no less than US$12.5 billion above the corresponding 2017 baseline amount is purchased and imported into China from the United States in the calendar year 2020, and no less than US$19.5 billion above the corresponding 2017 baseline amount is purchased and imported into China from the United States in the calendar year 2021.” The value of US agricultural exports to China in 2017 was US$24.0 billion. The phase one agreement then means that China has pledged to buy $36.5 billion worth of US agricultural goods (including ethanol) in 2020, rising to $43.5 billion by 2021.
This, however, will be done under commercial considerations and market conditions. Which products will be a key focus? The agricultural products that the US intends to export to China as part of this agreement include oilseeds (mainly soybeans), cereal (wheat, barley, maize, sorghum, rice, etc.), meat (beef, pork, poultry, sheep, goats, etc.), cotton and other agricultural commodities (milk, cheese, horse meat, honey, etc.). It is unclear, however, at this stage how much of each product will China buy. Also, worth noting is that the commodity prices, such as maize, wheat and soybeans, surprisingly showed limited reaction following this announcement. What does this mean for global agricultural value chains? The US-China trade friction caused trade diversion from 2018 to 2019. One of the countries that benefited the most from this was Brazil, which saw its agricultural exports to China growing by 35% from 2017 to 2018 to US$31 billion.
The question in mind now is whether the supply chains will re-adjust back to pre-2017 stages in the wake of the commitments made in phase one trade agreement? We doubt this will be the case as the ever-increasing Brazil soybean production, combined with the weaker domestic currency, makes its agricultural products attractive and affordable from the international buyers (including China). Moreover, the caveat included in the agreement which states that China will purchase the agricultural products on “commercial considerations” and dictated by “market conditions” is another factor that introduces uncertainty.
What does this mean for South Africa? This means very little for South Africa’s agricultural value chains as the country has minimal exposure to the Chinese agricultural market. South Africa remains a small player in China’s agricultural market, although its share of exports has grown over the past 18 years. The value of South Africa’s agricultural exports increased 26 folds between 2001 and 2018 to US$676 million. But this is only a 0.5% share of the value of China’s agricultural imports in 2018, which were worth US$129 billion. From a product perspective, wool, citrus, nuts, sugar, wine, beef and grapes were amongst the top-ten agricultural products that South Africa exported to China. Concluding remarks The recently signed phase one agreement between the US and China is a good development in terms of bringing stability to global agricultural markets.
But it remains to be seen if the supply chains will be recalibrated to pre-2017 (pre-trade friction time), as China had begun increasing its agricultural imports from South America. From a South African perspective, China remains an attractive market, which the country should continue pursuing to earn trade agreements for various products. What has constrained South Africa’s agricultural exports growth in the Chinese market over the past few years is not only the fact that the products in demand there are not produced in South Africa, but rather trade barriers. In part, this is because of the way China facilitates agricultural trade agreements – mainly focusing on one product line at a time – which ultimately slows trade. If China is to be an area of focus for South Africa’s export-led growth in agriculture, then a new way of engagement will be essential to softening the current barriers to trade. Most importantly, both South Africa and China are members of BRICS – a platform which should help improve economic activity across its member countries. South Africa should also encourage foreign direct investment in agriculture, specifically for potentially new production areas such as Eastern Cape, KwaZulu-Natal and Limpopo, who still have large tracts of underutilised land.
Having Chinese nationals as partners to agricultural development might be one of the ways of easing trade and a way of doing business amongst these countries. A number of instruments can be devised, but one thing for certain is that China should be key to South Africa’s agricultural sector as a place for export-led growth. The growing population and income provide a good base for the demand of higher value agricultural products which South Africa intends to focus on as part of its development agenda. Weekly highlights Some improvements in South Africa’s agriculture conditions The rains of the past few weeks have been quite beneficial to South Africa’s agricultural sector. Soil moisture has improved notably in most summer crop growing areas of the country, as shown in exhibit 1 below. There are also welcomed improvements in soil moisture in the central regions of the Eastern Cape and southern Free State – regions that experienced severe drought over the past couple of months. Aside from the Western Cape, which is a winter rainfall area, only the southwestern regions of the Eastern Cape, fringes of the Free State, North West and the northern regions of The recently signed phase one agreement between the US and China is a good development in terms of bringing stability to global agricultural markets.
China should be key to South Africa’s agricultural sector as a place for export-led growth. 3 KwaZulu-Natal are still experiencing soil moisture stress (see exhibit 1 below). This means that agricultural activity in these specific areas are still strained. With that said, the major summer grains and oilseeds growing areas of South Africa are in better shape, as this is clear, not only from exhibit 1 (below) but observations and feedback from farmers across the country’s maize-belt. As set out in our previous note, as of 10 January 2019, about 90% of the estimated 2.5 million hectares of maize in 2019/20 production season had already been planted.
A large part of this, however, was planted way beyond optimal planting dates, which means that the crop will mature much later than in normal seasons. This invokes concerns that any frost occurrence later in the season could negatively affect crop yields. Another important point to keep in mind is that; while soil moisture is good for now, more rain will still be needed during the season for crop development. To this end, there is some level of uncertainty as the South African Weather Service have recently noted a possibility of below-normal rainfall in the country between January and March 2020. Therefore, a lot can still happen in the coming weeks, and it might be too early to pencil a number of what South Africa’s summer grains and oilseeds harvest could be. Various market players estimate South Africa’s maize production at a range of 12.0 and 14.0 million tonnes, which is plausible if there are good rains in the coming weeks (a situation that there is still uncertainty about). This would be a notable improvement from the 2018/19 season have a harvest of 11.2 million tonnes. Be that as it may, it would help to first consider area plantings data which is due at the end of this month, and also the South African Weather Service’s weather outlook update also due around the same time, before putting out a firm position about the possible crop harvest for South Africa in 2019/20. We will release our initial estimates once these data points are published.
Data releases this week On Wednesday, the South African Grain Information Service (SAGIS) will release the grain producer deliveries data for the week of 17 January 2020. This covers both summer and winter crops. But we particularly monitor winter wheat data, whose harvest has recently been completed in most regions of South Africa. In the week of 10 January 2020, about 1.3 tonnes of wheat, which equates to 80% of the expected harvest in 2019/20 season, had been delivered to commercial silos. Also, on Wednesday, Stats SA will release the Consumer Price Index data for December 2019.
In November 2019, South Africa’s food price inflation stabilized at 3.5% y/y, the components adding downward pressure were mainly the relatively lower prices of meat; oils and fats; and dairy products.
On Thursday, SAGIS will release the weekly grain trade data (wheat and maize), also for the week of 17 January 2020. In brief, maize exports for the 2019/20 marketing year have thus far amounted to 811 522 tonnes, which equates to 68% of the import forecast for this season (1.2 million tonnes). At the same time, we expect maize imports of about 525 000 tonnes, all yellow maize, mainly for the coastal provinces of the country. This is up from an estimated 171 622 tonnes in the 2018/19 marketing year. The country has thus far imported 431 821 tonnes of yellow maize. In terms of wheat, South Africa’s 2019/20 wheat imports could increase by 14% y/y to 1.6 million tonnes because of expected lower domestic harvest on the back of unfavourable weather conditions in the Western Cape. In the week of 10 January 2020, South Africa’s 2019/20 season amounted to 437 303 tonnes, which equates to 27% of the aforementioned seasonal import forecast. Also, worth noting is that South Africa’s wheat import tariff has been revised down to R776.20 per tonne -- a 23% decline from the previous rate. This adjustment follows to an uptick in global wheat prices (particularly, US No.2 HRW).
Also, on Thursday, Stats SA will release the Producer Price Index data for December 2019. South Africa’s food producer price inflation slowed to 3,4% y/y in November 2019 from 4.3% y/y in the previous month.
