The reports of a potential La Niña event during the coming summer months present different risks for Southern and East Africa’s agriculture.
For parts of the East Africa region, the La Niña weather event typically correlates with below-average rainfall in the months December to February. Meanwhile, the opposite is true for Southern Africa. What makes this important for East Africa is that this is a period just before the start of the summer grains planting, which is typically in February of each year. Therefore, a La Niña event would raise the risk of yet another poor agricultural harvest for countries in this region.
In the 2019/20 season, the major grain-producing and consuming countries in East Africa, which are Kenya and Ethiopia, had mixed fortunes. The United States Department of Agriculture (USDA) estimated Kenya’s 2019/20 maize production at 3.4 million tonnes, down by 11% y/y on the back of unfavourable weather conditions at the start of the season. With Kenya’s annual maize consumption at about 4.7 million tonnes, the aforementioned production estimate means the country could require imports of about 1.3 million tonnes within the 2020/21 marketing year, which is still underway. This was a second consecutive season of large maize imports, as the previous season’s imports amounted to 900 000 tonnes. The prospects of a La Niña event means that Kenya could remain a net importer of maize for a third year in a row.
By comparison, however, Ethiopia promises to have a fairly good maize season in 2019/20, although there is a constant threat of the locust invasion. The country’s 2019/20 maize production is estimated at a record of 8.6 million tonnes, up by just 1% y/y, according to data from the USDA. This will be sufficient to cover the domestic annual consumption needs. Other countries such as Tanzania and Uganda also have a roughly balanced supply for the year. The challenge could be in the 2020/21 production season.
The conditions for Southern Africa could be different as set out above. The occurrence of an expected La Niña event, which the Australian Bureau of Meteorology d recently increased to around 50% — roughly twice the normal likelihood – could lead to increased moisture and potentially higher yields in the 2020/21 production season. Already in the 2019/20 production season, South Africa and Zambia had bumper harvests in major crops and various horticulture produce. These countries collectively have supplies to fill the shortfall of just over two million tonnes of maize in Southern and East Africa countries in 2020/21 marketing year, primarily for Kenya and Zimbabwe. This means that the coming season, which could be dominated by a La Niña event will continue from this already favourable path of large harvests in this region.
Aside from the climatic weather conditions., there are two additional risks for East and Southern Africa’s agricultural sector. First, the desert locust swarms which continue to persist in Ethiopia, Kenya, Somalia, South Sudan and Sudan could stall the agricultural recovery if not successfully controlled. On 07 August 2020, the ground and aerial control operations using biopesticides were underway in the aforementioned countries. The progress of this control operations over the coming months will be important in assessing whether the next season, which begins in February 2021, will be a success. The weather will also have an impact on the locust spread.
Second, the COVID-19 pandemic and associated regulations to curb its spread remain a major risk for agriculture in several countries, specifically amongst smallholder farmers and informal markets, which thrive on the movement of people. With the exception of South Africa, the official numbers of the COVID-19 infections remain relatively low in some African countries. It is unclear if the infections will remain under control in the coming months or if there is yet to be a surge or peak, as we have witnessed in various countries.
In the event of a surge in infections, especially if that is in the planting period, which is from October in Southern Africa and from February in East Africa, there could be disruptions of activity in the fields. This could be either because of the effect of spreading infections or potential government regulations such as lockdowns and other strict social-distancing measures. The only countries whose agricultural activity could be less impacted by a potential surge in infections are the highly mechanized ones. In the case of the Southern and East Africa region, only South Africa has such capabilities. This implies that some countries’ agricultural sector is at risk. The same is true for informal agriculture and food markets, which are quite common in various African countries. Ultimately, these climatic conditions and virus risks would weigh on agricultural output and farm profitability in 2020/21 season, and in turn the livelihoods of those who are largely dependent on the sector. That said, while the climate and the evolution of the pandemic in the coming months are critical, the level of uncertainty around both remains high. Therefore, these risks warrant close monitoring in the weeks and months for ahead.
WEEKLY HIGHLIGHTS
SA agriculture machinery sales on a firm footing
South Africa’s tractor and combine harvester sales were up by 21% y/y and 38% y/y in July 2020, respectively, with 444 units and 11 units sold. An important driver of sales in July and the preceding two months has primarily been farmers’ decision to buy the existing stock at relatively affordable prices, ahead of the inevitable price increases which will prevail as a result of the weaker rand. Also, the large summer grains harvest in 2019/20 production season and relatively favourable prices have somewhat improved the farmers’ financial position to acquire additional machinery.
While South Africa’s agricultural machinery sales this year could largely be positive than we initially expected because of the aforementioned reasons, we expect subdued performance going into 2021. As we have previously stressed, the drag on South Africa’s agricultural machinery industry will likely emanate from weak exogenous macroeconomic fundamentals. First, the weaker domestic currency will lead to higher prices for imported agricultural machinery, which will reduce farmers’ ability to acquire tractors and combine harvesters. Second, the further downgrade of South Africa’s sovereign credit rating to the sub-investment grade could negatively influence the financing of agricultural equipment. Ordinarily, the South African Reserve Bank would have responded to the downgrade by raising interest rates in anticipation of possible exchange rate depreciation and associated inflation risks, which would have increased the cost of capital.
However, now the situation is different. The global supply chain disruptions associated with the COVID-19 pandemic has led to deteriorating economic conditions. Several central banks, including South Africa, have responded by reducing interest rates to ease financial conditions. With that said, while the implied prime rate after the recent policy rate cuts would suggest easier financing conditions, the commercial banks are likely to be more risk-averse in the current unprecedented environment. This, in turn, would influence the farmers’ ability to continue purchasing the agricultural equipment in high volume. Lastly, a year of relatively good sales is likely to be followed by a subdued period as the rate of replacement of machinery with new ones would generally be low.
DATA RELEASES THIS WEEK
From a global perspective, on Wednesday the USDA will release the World Agricultural Supply and Demand Estimates report, which will provide an update of the 2020/21 global grains and oilseeds production forecasts. In July 2020, there were broadly minor adjustments in production estimates of many countries, aside from the US, whose maize and wheat production estimates were revised down, notably. In the case of wheat, the EU’s 2020/21 production prospects were also revised down from June 2020. This was in part on the back of a reduction in area plantings and expectation on lower yields in some regions of the US and EU, specifically wheat-growing region. The drier weather conditions in June and the beginning of July proved to be a challenge in the EU region and the US. Meanwhile, rice and soybean production estimates were left roughly unchanged from June. On Thursday, the USDA will release the weekly export sales data, which helps in tracking the agricultural trade activity between the US and China, which in recent weeks experienced heightened confrontation.
On the domestic front, on Thursday, the South African Grain Information Service (SAGIS) will release the weekly grain producer deliveries data for the week of 07 August 2020. This data 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 31 July 2020, about 66% of the expected 15.5 million tonnes of harvest had already been delivered to commercial silos. While in oilseeds, the harvest process is virtually done.
On Friday, SAGIS will release the weekly grain trade data for the week of 07 August 2020. In the previous week of 31 July 2020, about 1.05 tonnes of maize had already been exported, mainly to neighbouring countries, as well as Vietnam, Ethiopia, Japan, Taiwan and South Korea. This equates to 39% of the seasonal export forecast of 2.70 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, and in the week of 31 July 2020, about 88% of the expected 1.80 million tonnes of imports in the 2019/20 season had already landed on the domestic shores.
