Two new developments will add to an already uncertain agricultural sector in South Africa, namely the potential rise in oil prices and weak demand in most agricultural export regions.
First, the oil prices were under pressure since the start of March following a dispute between Saudi Arabia and Russia which led to both countries increasing their oil production. This was beneficial to import countries such as South Africa, which over the same period, saw a drastic weakening of the domestic currency. In the absence of increased global oil production, the weakening domestic currency would have resulted in notable increases in oil prices, and in turn, fuel prices which are a key input in the agricultural and agribusiness sector.
Consider, the grain sector for example, which is approaching the harvest season - a busy period in the crop calendar. Fuel accounts for 11% of South Africa’s grain production costs. This means an increase in fuel price would be notable. What’s more, the agribusiness that is in the logistics business could feel a similar impact. About 80% of South Africa’s grain is transported by road and also a greater volume of other agricultural products.
But the country is not completely out of the woods, given that the aforementioned conditions which had necessitated lower oil production have changed. OPEC agreed to reduce oil production by 9.7 million barrels a day in May and June, which roughly equates to 10% of global supply. Moreover, there is a commitment to continue oil reductions until April 2022. This means that the decline we saw in oil prices could soon be reversed, and the impact of that could begin to appear in domestic fuel prices from May. This is a month where the summer grain harvest will be commencing, and the citrus harvest will be in full swing. Meanwhile, the winter grain planting season will be at the early stages. All these processes require more fuel consumption at a time where prices will potentially be higher than the current levels of R12.69 cents per litre of diesel (0.05%), for example.
Second, the prospects of slowing demand for South Africa’s agricultural exports is no longer a possibility limited to the European and Asian markets, which on their own are key markets accounting for 50% of South Africa’s agricultural exports of R142 billion 2019. The African market which generally accounts for 40% of South Africa’s agricultural exports could also experience a slowing demand in 2020. This might be the case, notwithstanding, the potential food shortage in various African countries this year.
While the rate of confirmed COVID-19 cases is currently low in the African continent (see Exhibit 1 in the attached file), except in South Africa, various factors could be the key contributing factors to a possibility of slowing demand. Chief amongst them is the relative weakness of currencies across the region amid COVID-19, which in turn could lead to rising food prices. Moreover, the disruptions in logistics and supply chains as various countries implement the strict border closures as a measure to reduce the spread of the COVID-19 pandemic. Also, worth noting is that the lower rate of confirmed coronavirus cases in most African countries might not necessarily mean that the continent has thus far managed to control the spread of the coronavirus, but might be linked to limited testing facilities, as recently noted by the World Bank in its Africa’s Pulse report.
In an event that lower demand for South Africa’s agricultural products becomes a reality in some markets, the impact could be felt across various agricultural subsectors. South Africa’s leading agricultural products to Africa, Europe and Asia were beverages, fruit, vegetables, sugar, wool and grains. Most importantly, these regions constitute about 90% of South Africa’s agricultural export markets, which means any glitches on trade activity could have a notable impact. Having said this, the evidence available so far remains encouraging that exports continue with limited glitches, which have mostly been from a South African ports side. Within the African market, aside from reportedly increased roadblocks, exports are continuing with limited interruptions.
Essentially, while the South African agricultural and agribusiness sector is not hard hit by the COVID-19 pandemic as other sectors of the economy, there are still various challenges that could weigh on profitability. On the aspect of the potential rising fuel prices in the near term, it would be advisable that businesses that have means, build stocks or hedge their fuel prices for use during harvest and post-harvest periods. In terms of trade, this is an area that could remain challenging especially if one considers the potential fall in consumer buying power in South Africa’s traditional markets.
WEEKLY HIGHLIGHTS
A mixed bag of grains
The United States Department of Agriculture (USDA) has recently released a monthly update of its World Agricultural Supply and Demand Estimates report. The commodities we typically follow in this report are wheat, maize, rice and soybeans, for various reasons, however.
Wheat
The South Africa is generally a net importer of wheat, so its key that one has a sense of global wheat supplies and other market developments. In the 2019/20 season, South Africa’s wheat imports could increase by 33% y/y to 1.8 million tonnes. This is 13% higher than the five-year average import volume, exacerbated by the decline in domestic wheat production on the back of unfavourable weather conditions in parts of the Western Cape late 2019.
As of April 3, South Africa had imported 42% of the volume of wheat the country intends to bring into its shores within the 2019/20 season. The leading suppliers thus far are Germany, Lithuania, Poland, Latvia, Ukraine, Russia and the Czech Republic.
While some countries have been instituting export controls, specifically on wheat and rice, there are large supplies in the global market. The USDA forecasts 2019/20 global wheat production at 764 million tonnes, up 4% y/y. What's more, the 2019/20 global wheat stocks are estimated at 293 million tonnes, which is 5% higher than the previous season. Therefore, the increases in global wheat prices over the past few weeks were not underpinned by the scarcity of the commodity, rather the restriction various countries placed on exports amid fears about the timeframe of the COVID-19 pandemic.
Maize
South Africa is a net exporter of maize, so one looks into the USDA data for two reasons; (1) to get a sense of their estimate for South Africa’s maize production at a particular season, (2) and for a view of global maize supplies, which partially influences domestic maize prices. The USDA forecasts South Africa’s 2019/20 maize production at 16.0 million tonnes, which is up 36% from the previous season. This data comprises both commercial and non-commercial production and therefore not comparable to South Africa’s Crop Estimates Committee’s number of 14.8 million tonnes released last month, which accounts for only commercial production. This promises to be the second-largest summer maize harvest on record after the 2016/17 season (which was 16.8 million tonnes for total maize).
Aside from a favourable food price inflation outlook, this data essentially means that South Africa would remain a net exporter in the 2020/21 marketing year which starts in May 2020 (the 2020/21 marketing year corresponds with 2019/20 production season). This is at a time where Southern African maize import needs could outpace the previous year, with Zimbabwe in need of maize supplies to an extent that the country lifted a ban on the importation of genetically modified maize, which eases access for South African maize exporters.
Moreover, a maize harvest of 16.0 million tonnes would enable South Africa to export maize beyond the continent to other typical markets such as Japan, Taiwan, Vietnam and South Korea who are not prominent in the current marketing year. With that said, the COVID-19 pandemic remains a key threat to global agricultural trade and may disrupt South Africa’s agricultural exports in various markets.
Globally though, maize production is set to fall by 1% y/y to 1.1 billion tonnes in 2019/20. This will subsequently lead to a 6% y/y decline in stocks to 297 million tonnes. While this will be supportive of global maize prices, its influence on the South African maize market is likely to remain minimal, especially when the domestic harvest gain momentum.
Soybeans
South Africa imports, on average, 550 000 tonnes of soybeans oilcake (meal) a year. About 97% from Argentina. Hence, we are compelled to pay close attention to global soybean market dynamics. The USDA forecasts 2019/20 global soybean production at 338 million tonnes, down 6% y/y. As a result, the 2019/20 global soybean stocks are down 9% y/y, estimated at 100 million tonnes. China, which is the source of the COVID-19 is the leading importer of soybeans, accounting for 58% of the global soybean import forecast for 2019/20 season. The disruptions caused by the virus there could have implications on soybean imports activity. Fortunately, various firms are reopening as the virus seems to be controlled, to a certain extent.
Rice
As set out in last week’s note, rice is one of the key staple foods that South Africa is fully dependent on imports. South Africa does not have a conducive climate for rice production and therefore the country imports all of its rice consumption. The International Grains Council estimates South Africa’s 2020 rice imports at 1.1 million tonnes, which is a 10% increase from the previous year. The imports are usually evenly spread across the year, with a slight peak in volumes in the last quarter of each year. About 70% of South Africa’s rice is usually imported from Thailand, with other notable suppliers being Thailand, India, Pakistan, China and Vietnam. These are countries that South Africa will have to monitor closely during this COVID-19 pandemic as disruptions in agricultural trade there could impact South Africa’s rice market.
From a supply perspective, the global rice market is in relatively good shape, although the USDA revised down marginally its production estimate for the 2019/20 season to 496 million tonnes from 499 million tonnes last month. This is 1% lower than the previous season. However, the 2019/20 global rice stocks are currently estimated at 182 million tonnes, which is 4% higher than the previous season. Similarly, with wheat, the recent drastic increases in global rice production are not necessarily induced by lower global supplies, rather the export restrictions implemented by some key rice-producing countries amid the COVID-19 pandemic.
Concluding remark
Overall, this is a “mixed bag of grain market dynamics”; global wheat and rice prices could remain elevated in the near term owing to the aforementioned export restrictions. The opposite could be true for maize because of the anticipated improvement in domestic supplies. Meanwhile, soybeans prices will most likely trade sideways in the near term.
DATA RELEASES THIS WEEK
These dates could change because of interruptions caused by the COVID-19 pandemic. We tentatively expect that on Thursday, the South African Grain Information Service (SAGIS) will release the weekly grain producer deliveries data for the week of 10 April 2020. This covers both summer and winter crops. With summer grains still at growing stages, the focus remains on winter wheat data whose harvest was completed in January 2020. We will also monitor the early deliveries of oilseeds, mainly soybeans and sunflower seeds, whose harvest has recently started in a few regions of the country.
In the week of 03 April 2020, about 2 306 tonnes of wheat were delivered to commercial silos. This placed total wheat deliveries at about 1.4 tonnes, which equates to 96% of the expected harvest in the 2019/20 season. There are still very small volumes delivered thus far in the oilseeds (soybeans and sunflower seed) market, both still at levels below 50 000 tonnes.
Also, on Thursday, the United States Department of Agriculture will release the weekly export sales data. This is important data to monitor as it will give an indication of the US agriculture exports to China, and help us monitor the progress on commitments made in phase one trade deal and impact of COVID-19 pandemic on trade.
On Friday, SAGIS will release the weekly grain trade data (wheat and maize), also for the week of 10 April 2020. In brief, maize exports for the 2019/20 marketing year have thus far amounted to 1.3 million tonnes, which equates to 74% of the export forecast for this season.
At the same time, we expect maize imports of about 545 000 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 509 684 tonnes of yellow maize. In terms of wheat, in the week of 03 April 2020, South Africa’s 2019/20 season amounted to 748 739 tonnes, which equates to 42% of the seasonal import forecast.
