As countries continue to implement “risk-adjusted” responses to COVID-19, global leaders and analysts alike continue to assess the evolving implications of the pandemic on global markets.
What makes COVID-19 unique is that it is a health shock that has fundamentally affected both the supply and demand side of the global economy. In the food industry, government policy responses have mainly hinged on three major interventions since the pandemic started. These include (1) an initial intent to implement protectionist trade policies in major agricultural producing countries, followed by a pullback of direct trade restrictions (2) supply-side support for the agricultural industries in the form of historic budgetary support for small and large companies, and (3) demand-side support through a boost in household incomes through wage support.
First, in the early days of the pandemic, countries such as Russia, Kazakhstan, Cambodia and Vietnam, amongst others, introduced export quotas and bans on rice and wheat. This was an attempt to ensure stable domestic staple food supplies amid uncertainty about how long the pandemic will last. But these policies were soon abandoned after a month, as aforementioned countries signalled a return to the open market trading terms within the next two months. One of the reasons that contributed to this change included the exemption of agriculture and food supply chains from COVID-19 restrictions that had affected other sectors of the economy. The International Grains Council has lifted its 2020/21 global grains harvest by 2% year-on-year to 2.2 billion tonnes. This is a welcome development for grain-importing countries who feared the risk of food insecurity when the protectionist policies were announced. This includes South Africa and the African continent at large, which relies on rice and wheat imports from the global market.
Second, as initial worries about production abated, it became clear that the biggest challenge was not a lack of food in the market, but logistical disruptions. However, the closure of meat processing plants in the US, Ireland, Canada and Brazil, amongst others due the outbreaks of the virus in production facilities is now bringing renewed fears that the longer the pandemic continues, the more likely those parts of the food system will cease to function. The risks of meat shortages in the global market, as well as the negative ripple effects in other parts of the food system linked to the meat sector, imply that the food system remains extremely vulnerable. The emerging concerns of potential meat shortages – and potential shortages in other parts of the food system – are putting intense pressure on political leaders to respond more aggressively, as seen in the US, where President Trump ordered meat plants to re-open to avert an inevitable spin-off crisis.
This specific aggressive intervention is just part of a much broader set of unprecedented policy responses from global leaders, which have been underpinned by large fiscal spending eclipsing those of the 2008 financial crises and the Great Depression. Richer countries have implemented financial relief programmes to support small and large businesses, including farmers, to cope with the deep negative impacts of the pandemic. In South Africa, the Department of Agriculture, Land Reform and Rural Development ring-fenced R1.2 billion for financially distressed small-scale farmers. This prioritises the poultry, livestock and vegetable sectors, amongst other agricultural commodities which will be selected on a case-by-case basis. The farmers within the Proactive Land Acquisition Strategy programme are also included in this package.
Third, governments tried to preserve incomes and livelihoods, and in turn supported the demand side for the food sector. Rapid increases in already high levels of unemployment in most parts of the world translates to a weak demand for food, particularly high-value products in the near-to-medium term. Income protection and support in countries such as the UK and the US is expected to mitigate the weakening demand, and somewhat keep demand at levels that ensure that the economy can bounce back quickly once the economies are fully opened up post-COVID-19. Meanwhile, in the emerging markets, South Africa has been amongst countries that provided support through an increase in social grants and food vouchers and aid. While these are short term assistance, they help improve household demand for food products somewhat. These measures are short term and are being implemented with the expectation that the pandemic will keep the economy closed for three months.
But if the global economy does not bounce back sooner, under the pressure of a new wave of infection which leads to a much slower opening of the economy, then household income and purchasing patterns might be altered over the short to medium term. In this case, the implications for the agricultural and food sector could be dire. We suspect that the demand for higher-value products will inevitably decline somewhat post-COVID-19, but the longevity of this decline could lead to a shift in the supply chains. Depending on the extent and time of the impact over time, the shift could be permanent, due to irreparable damage to the supply chains - if critical businesses shut down permanently.
This is crucial for countries like South Africa whose agricultural sector is export-orientated, with roughly 49% of the produce in value terms exported. South Africa’s high-value export products are mainly fruit, wine and beef. These are mainly destined for the EU and Asia market which accounted for nearly US$10 billion in 2019.
In a nutshell, the resilience of global agriculture will continue to be tested as the pandemic impacts both the supply side and demand side of the global economy. There is no telling how long the global food system – as currently configured – will continue to sustain the pressure from COVID-19. What is becoming increasingly clear is that, the longer the pandemic continues to impact on the supply and demand sides of the global food system, the more likely we are going to see structural shifts that will fundamentally reconfigure it as it adapts to the changing effects of the pandemic.
What is particularly worrying is the lack of support measures for businesses and households in developing countries. In resource-poor nations – especially those in the African continent, who are already under the weight of worsening debt levels – governments do not have the wherewithal to support private businesses and farming communities to the same degree as the United States, the United Kingdom, China, and others. This means that the developing world is a part of the global food system and economy that remains extremely vulnerable to the pandemic. There have been relatively lower numbers of COVID-19 cases in sub-Saharan Africa so far, perhaps due to a lack of testing capacity. But if what is happening in the global north is a harbinger of what is to occur in sub-Saharan Africa over the next couple months, then the largely informal food systems in the continent will likely come under extreme pressure, a scenario which will evoke a food insecurity catastrophe.
WEEKLY HIGHLIGHTS
Positive prospects for the 2020/21 global grains harvest
This past week, the United States Department of Agriculture (USDA) released the World Agricultural Supply and Demand Estimates data – arguably among the most anticipated data releases in global agricultural markets. The agency reinforced the message painted by the International Grains Council (IGC) last month, that there are large supplies in the global market. This message also allays the fears of countries that had placed export bans fearing for a global shortage of grain commodities.
To start with maize, the USDA forecasts the 2020/21 global production at 1.2 billion tonnes, up 6% y/y. Similar to the point made by IGC, this will mainly be underpinned by an expected expansion in area plantings and higher yields in the US, Mexico, Canada, Brazil and the EU. The planting of this crop has begun in the northern hemisphere and progressed with minimal interruptions, albeit with the additional coronavirus-related precautions on farms. Moreover, input supply chains appear to be functioning well across the globe. In the southern hemisphere, planting will only begin around October for the 2020/21 season.
In terms of wheat, the USDA forecasts a 1% y/y increase in 2020/21 production to a new high of 768 million tonnes. The improvement is expected in Australia, India and Russia boosted by an increase in area planted and expected higher yields. This will compensate for a potential production reduction in the EU, Ukraine, the US and North Africa. This will mean that the 2020/21 global wheat stocks could increase by 5% y/y to 310 million tonnes.
The wheat-importing countries such as South Africa stand to benefit with such an outlook, assuming there are no further restrictions on exports imposed as the data shows that there should be no global supply worries.
South Africa’s 2020/21 wheat production season recently commenced and the outlook is not encouraging. Plantings are set to fall by 8% y/y to 495 000 hectares, mainly in the Free State. This means that South Africa will continue to have a large dependence on imports, about 50% of annual consumption. Fortunately, the lockdown regulations have had minimal interruptions on wheat plantings, and now the “level 4” regulations mean that the sector is largely operational, albeit observing all health protocols.
In the case of rice, the USDA forecasts a 2% y/y increase to a record 502 million tonnes. This is boosted by a potential increase in area planted in Asia, Africa and the Americas. Under this production estimate, the USDA forecasts a 2% y/y increase in global rice stocks in the 2020/21 season, which would add bearish pressure to prices and, in turn, be beneficial to net importing countries such as South Africa.
While the road ahead is remarkably uncertain because of the COVID-19 pandemic, export restrictions on agricultural products should not be a policy option that countries pursue. Fortunately, Russia and Kazakhstan have recently indicated that they intend to abolish their recently imposed export quotas on wheat. This comes as it is increasingly becoming clear that there are prospects for large supplies in the market. There are currently large carryover supplies in the market from the 2019/20 season, and the 2020/21 production season promises to be even more bountiful. Over the coming month, we will closely monitor the production developments and weather conditions in key grain-producing countries.
DATA RELEASES THIS WEEK
From a global perspective, on Monday, the United States Department of Agriculture (USDA) will release the weekly crop progress data. This is important data to monitor grains and oilseeds planting activity across the US for the 2020/21 production season, which promises to be a good one, despite the pandemic.
There has already been an enormous progress in planting activity across the US. On the 10 of March 2020, about 67% of the intended area for maize in 2020/21 season had already been planted. This compares to 28% in the corresponding week the previous year, and a five-year average of 56%. In the same day, about 38% of the intended area for soybeans had already been planted, compared to 8% on 10 March 2019 and a five-year average of 22%.
On Thursday, the USDA 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 the COVID-19 pandemic on trade.
On the domestic front, on Wednesday, the South African Grain Information Service (SAGIS) will release the weekly grain producer deliveries data for the week of 15 May 2020. This covers both summer and winter crops. But the focus is on summer crops since the winter crops are still at planting stages. In the second week of the 2020/21 maize marketing year, which was on 08 May 2020, about 89 924 tonnes of maize were delivered to commercial silos. About 59% was yellow maize, with 41% being white maize. This brought 2020/21 maize deliveries at 95 150 tonnes, which is a small fraction of the expected harvest of 15.2 million tonnes.
Unlike maize, where the harvest season is still at its very early stages, there has been progress in the soybean harvest. In the week of 08 May 2020, about 630 598 tonnes had been delivered to commercial silos. This equates to 49% of the expected harvest of 1.3 million tonnes in the 2019/20 season. Also, on 08 May 2020, about 139 755 tonnes of sunflower seed, which accounts for 19% of the expected harvest in 2020/21 marketing year had already been delivered to commercial silos.
On Thursday, SAGIS will release the weekly grain trade data. In the second week of the 2020/21 marketing year, about 37 054 tonnes of maize were exported, all to the neighbouring countries. South Africa’s 2020/21 maize exports could amount to 2.7 million tonnes, up by 90% y/y. This is supported by the expected large harvest, which is set to be the second largest in the history of South Africa, at 15.2 million tonnes. In terms of wheat, in the week of 08 May 2020, South Africa’s 2019/20 wheat imports amounted to 1.1 million tonnes, which equates to 61% of the seasonal import forecast.
