It has become increasingly challenging to forecast agricultural production seasons with some level of confidence.
One of the factors that have contributed to this challenge is the more unpredictable weather conditions, especially over the last decade. South Africa has not only experienced a frequent occurrence of drought, but also a significant change in the frequency, patterns and intensity of rainfall. Regions such as Mpumalanga and KwaZulu-Natal that would typically receive first rains around October have in the past few seasons experienced nearly a month delay in rains. This has led to farmers adjusting their typical planting schedules for summer crops. Even the 2019/20 season, which is set to yield the second-largest grains harvest in the history of South Africa, started with prolonged dryness which led many to doubt the prospects of a good harvest. Fortunately, when it finally rained, it was sufficient and consistent to boost the fortunes of the farmers.
The preliminary indications for the 2020/21 season, at least for weather conditions, are showing some encouraging signs. We might not have a drier start of the season as in the 2019/20. This past week, the South African Weather Service (SAWS) released its Seasonal Climate Watch which highlighted that “likelihood of a La Niña phase during the coming summer months has drastically improved in the last few months, and it will be closely monitored as we move closer to the summer forecasts”. The local weather bureau is not alone in this view. This past week, the Australian Bureau of Meteorology indicated that “the chance of a La Niña event forming in the coming months has increased to around 50% - twice the normal likelihood.” As a general reminder, the La Niña weather events typically result in above-average rainfall in most of South Africa over the summer months (this is except for the Western Cape, which is a winter rainfall region and has been receiving good rains lately).
What is also encouraging is that these rains may not be delayed as in the past few seasons. The SAWS further noted that during spring, which is from September to November, “forecasts indicate increased chances of above-normal rainfall over the eastern parts of South Africa”. These are regions that would traditionally receive rainfall in this period so that plantings could commence at the beginning of October as illustrated in Exhibit 1 in the attached file. In such a scenario, it is plausible to assume that the central and western regions of South Africa would possibly receive rainfall early enough to keep up with the typical planting schedule for summer crops, which is the beginning of November for central South Africa and mid-November for western South Africa. As we have discussed in the past, late plantings come with a much higher risk of lower yield due to possible frost later in the season.
Encouragingly, this could potentially be a second consecutive good season, which would allow farmers to improve their financial situation. Over the past decade, the good seasons have generally been followed by droughts in most parts of South Africa, which meant that farmers finances have generally been constrained, as most farming entities would require several good seasons for financial conditions to recover. This would be an improvement for not only field crop and horticulture farmers, but also for the livestock sector which would benefit from improved grazing veld conditions and available supplies of grains.
For summer grains such as maize, soybeans and sunflower, the years of large harvests, as the 2019/20 production season, would typically experience a notable decline in prices. Such an event unfolded in 2016/17 production season, whereby July 2017, maize prices had already declined to levels below R2 000 per tonne. This time around, maize prices have been remarkably steady in an environment of a second-largest harvest. In the week of 24 July 2020, maize prices were still hovering at levels above R2 500 per tonne, which, however, is lower than this period last year for both white and yellow maize.
There are several factors that partially explain this relative firmer price levels. This include the (1) weaker domestic currency which has a strong correlation with the domestic maize price movement, (2) strong demand from regional and deep-sea markets, and (3) a slight delay in producer deliveries compared to the normal seasons because of the late start of planting. For farmers who have experienced droughts in the past seasons and have seen rising debt levels, such steady prices provide a slight benefit. Meanwhile, consumers are also not as pressured as shown in the recent food price inflation data by Statistics South Africa where grain-related products price inflation has been subdued for some months.
In a nutshell, early indications suggest that South Africa might experience another good agriculture season in 2020/21 because of the expected higher rainfall. If this materializes, it will be beneficial to all subsectors of agriculture – field crops, livestock and horticulture. And for the first time in many years, the available forecasts suggest that the summer crop season could start in its traditional period, which is the beginning of October each year. Of course, weather conditions can change and we will be closely monitoring guidance from the weather forecasting institutions ahead of the planting period.
WEEKLY HIGHLIGHTS
The International Grains Council maintains an optimistic view about 2020/21 global grains and oilseeds production
The International Grains Council (IGC) released its monthly update for global grains production prospects this past week. While having slightly revised down its production estimates for 2020/21 maize and wheat because of drier weather conditions in parts of the US and Europe, almost in line with the United States Department of Agriculture (USDA), this could be one of the good seasons.
The IGC forecasts 2020/21 global maize production at 1.2 billion tonnes, which is up 4% y/y and a new record high. This improvement in harvest forecast is underpinned by an expected large harvest in South America, the Black Sea and China, amongst other regions. In the case of China, however, we are still monitoring the impact of the recent floods on agricultural activity, which makes their estimate as uncertain as other regions experiencing dryness.
The 2020/21 maize crop is currently at its growing stages in the northern hemisphere which means the weather is an important factor to monitor in the coming months since it will continue to influence crop conditions. In the southern hemisphere, however, the 2020/21 maize season's planting will only begin around October. The long-term weather forecasts, specifically for South Africa, look favourable as discussed in the opening section of this note. This increases a prospect of yet another good maize crop for South Africa in the 2020/21 season. The IGC, however, currently forecasts South Africa’s 2020/21 maize harvest at 14.0 million tonnes, which is down 11% y/y. While it is still too early to provide estimates for the next season, this figure is plausible if the country is set to experience good rains, and is well above the average long-term maize production of 12.0 million tonnes.
In terms of wheat, the IGC slashed its estimate for the 2020/21 production season back to 762 million tonnes, which is in line with the previous season. This, however, is 1% lower than the USDA’s estimate of the same season. This is on the back of expected lower yields in parts of the EU, the Black Sea and the US due to drier weather conditions. Nevertheless, this is up by 2% compared to the prior five-year average, which means the world could still have large wheat supplies.
· As noted at the beginning of this month when we commented on the USDA data, the wheat-importing countries like South Africa stand to benefit from large global supplies. South Africa imports roughly 50% of its annual wheat consumption. In the 2019/20 marketing year, which ends on 30 September, imports are estimated at 1.8 million tonnes. About 85% of this has already landed on South African shores. The import volume requirements for the 2020/21 marketing year, which starts on the first of October 2020, will be clearer once we have a reliable estimate of the size of the harvest of the crop which is currently underway. It is this marketing year that consumers will benefit from both cost and availability perspective from the expected decent global wheat harvest.
In the case of rice, the IGC forecast 2020/21 production at 505 million tonnes, up 2% y/y on the back of an expected large crop in Asia. This is slightly above the USDA’s estimate of 502 million tonnes. This prospects for increased rice production have added a bearish pressure on prices across all major producing countries and, in turn, beneficial to import countries like South Africa, which is set to import 1.1 million tonnes in 2020 (up 10% y/y). The IGC has placed its estimate for 2020/21 global soybean production at a record 365 million tonnes, which is up 8% y/y. This is on the back of an expected recovery in production in the US, Argentina, Brazil, Paraguay, China and India, amongst others.
DATA RELEASES THIS WEEK
In this week’s data releases, from a global perspective, today the USDA will release the weekly crop progress data. This data provides insight into the US 2020/21 grains and oilseeds growing conditions in the wake of reported dryness in parts of the US. In the week of 19 July 20202, various regions of the US were experiencing a strain from dryness and crop growing conditions had deteriorated from the previous week’s ranking. We expect today’s data to show further deterioration as the past week presented continuous dryness in some maize and soybean-growing regions of the US. On Thursday, the USDA will release the weekly export sales data, which also helps in tracking the agricultural trade activity between the US and China, which are experiencing heightened confrontation.
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 24 July 2020. This covers both summer and winter crops. But the focus is on summer crops which are currently being harvested. The winter crops are still at early growing stages for the 2020/21 season. In terms of maize, in the week of 17 July 2020, about 52% of the expected 15.5 million tonnes of harvest had already been delivered to commercial silos. While in oilseeds, the harvest process is virtually completed.
On Thursday, SAGIS will release the weekly grain trade data. In the week of 17 July 2020, about 861 918 tonnes of maize had already been exported, to neighbouring countries, as well as Vietnam, Ethiopia, Japan, Taiwan and South Korea. This equates to 32% of the seasonal export forecast of 2.7 million tonnes, which is up by 89% from the 2019/20 marketing year because of an expected large harvest. In terms of wheat, South Africa is a net importer. In the week of 17 July 2020, the country’s 2019/20 wheat imports amounted to 1.5 million tonnes, which equates to 85% of the seasonal import forecast.
Also, on Thursday, Stats SA will release the Consumer Price Index (CPI) data for June 2020. For background, South Africa’s food price inflation accelerated to 4.8% y/y in May 2020, from 4.6% y/y in the previous month. This uptick was mainly underpinned by relative price rises of milk, eggs and cheese; oils and fats, and fruit. Meanwhile, other products’ price inflation slowed and some remained roughly unchanged.
