- We are now roughly a month and a half from the start of South Africa’s 2020/21 summer crop planting season. The two most important indicators to be observed to get a sense of farmers’ potential planting decisions for the season ahead are (1) commodities prices and (2) the weather outlook. We have discussed the latter in our notes over the past few weeks, highlighting that the prospects of a La Niña weather event this summer signals higher rainfall, which is conducive for crops. The former is the one that we find most interesting and supportive of a potential increase in plantings in 2020/21 season.
- We are surprised that domestic grains and oilseeds prices have remained firm for so long, given the underlying supply and demand conditions. In the week of 13 August 2020, yellow and white maize spot prices were up by 5.3% y/y and 0.2% y/y, trading at R2 895 per tonne and R2 880 per tonne, respectfully. At the same time, sunflower seed and soybean prices were up by 22% y/y and 27% y/y, trading at R6 698 per tonne and R7 317 per tonne, respectively. Such price levels would be expected in years of scarcity when there has been droughts or lower plantings. But that is not where the country is. The 2019/20 harvest was an abundant one, with the maize harvest up 38% y/y and the second-largest on record at 15.5 million tonnes; sunflower seed harvest is up 13% y/y at 765 960 tonnes, and the soybean harvest up by 8% y/y with 1.3 million tonnes expected. This raises a question then of what are the underlying drivers of prices and whether prices could be sustained at these levels for some time. In our understanding, there are three major drivers of maize prices currently. First, the strong demand from the Southern Africa region and deep-sea markets has been one of the underlying drivers of prices.
- In the week of 07 August 2020, about 1.1 million tonnes of maize, which equates to 41% of the expected 2.7 million tonnes, had already been exported to the aforementioned markets. This is slightly faster than in a typical season where exports, specifically to the Southern Africa region, would gain momentum towards the end of the year. This is an indication of strong external maize needs and we expect exports to continue, specifically to bigger markets in the region such as Zimbabwe, and outside the continent to the likes of Japan, Taiwan and South Korea. Second, the delay in maize deliveries because of the late start of the season has also been supportive of maize prices. Third, the weaker domestic currency is also a contributor to the uptick in prices as we have recently demonstrated. The correlation between maize prices and the exchange rate over the past year is 79% (see here). Simply put, this means as the currency weakens, the maize prices tend to rise. The global commodity prices, specifically Chicago maize prices, might have had minimal influence on domestic maize prices at this point, as they have softened by 7% y/y on 13 August 2020. Hence, we are inclined to believe that the aforementioned factors have thus far had a major influence on prices.
- In terms of soybeans and sunflower seed prices, the interaction with the global market is different as South Africa is a net importer of these commodities. This means the domestic market tends to be sensitive to global developments. To this end, the Chicago soybean and EU sunflower seed prices were up by 8% y/y and 10% y/y on 13 August 2020, which are supportive of the higher price trends witnessed in the domestic market. The weaker domestic currency is an additional factor that adds support to the domestic oilseed market. We think these factors have managed to overshadow the news of a large harvest, which would typically be associated with lower commodity prices.
- This environment provides a greater incentive for farmers to maintain or increase plantings in the 2020/21 production season which begins in October 2020. This is particularly the case as we expected the demand for maize in East Africa to remain robust as the La Niña event typically leads to dryness in that region, the opposite of Southern Africa. The only key challenge there is regulations, as imports of genetically modified maize are still prohibited. It is unclear how much of a recovery Zimbabwe will realize. After all, the 2019/20 season had a dry start for the entire Southern Africa region, but Zambia and South Africa emerged with the bumper harvest, while the opposite is true for Zimbabwe. In the event of the Zimbabwe plantings improving, their maize shortfall in 2021/22 marketing year might be less than the million tonnes we are currently projecting in 2020/21. This essentially means that South African farmers might be in a better position if they extend yellow maize plantings in 2020/21 season as that would find a market in the deep-sea regions, while white maize largely depends on African demand. In the case of oilseeds, an increase in plantings would still be contributing to the local market. The important date to look forward to in all this is 28 October 2020, when the national Crop Estimates Committee will be releasing the farmers’ intentions to plan data.
WEEKLY HIGHLIGHTS
Some good news about global grains for the 2020/2021 season
- Last week the United States Department of Agriculture (USDA) released its monthly world agricultural supply and demand estimates report for August 2020, which made minor yet mixed adjustments from the previous month’s estimates.
Maize
- In a positive development for these uncertain times, the 2020/2021 global maize production estimate was lifted 1% to 1.17-billion tonnes from the July estimate, which is also 5% higher than 2019/2020 production. The upward revisions were mainly on the US and Ukraine’s maize production estimates. In the case of Ukraine there is a consensus in the market that the heatwave that raised concerns in the past few months might have caused lower-than-expected damage, hence the level of optimism about the harvest.
- However, there are doubts about the size of the US maize harvest as traders believe the unfavourable weather conditions of the past few weeks might have caused damage to the crop. Moreover, the recent storms in Iowa State might have also caused additional damage in US maize harvest. This is something we will keep an eye on, and the USDA numbers for October should account for such crop damage. Be that as it may, my sense looking at all the recent data releases — from the USDA and the International Grains Council (IGC) — is that the world will have abundant maize supplies in the 2020/2021 season. This, of course, is a northern hemisphere story. The southern hemisphere’s maize plantings will only start around October, but the medium-term weather forecasts point to a potentially good season, which is also supportive of the optimistic view coming out of the US.
Soybeans
- Moreover, the USDA has lifted its estimate for 2020/2021 global soybean production by 2% from July’s estimate to 370 million tonnes — a 10% annual uptick. This is supported by prospects of a large crop in the US and South America. Brazil has made large shipments to China in recent months, which should incentivise farmers to increase plantings in the 2020/2021 season to serve ever-growing Chinese demand. This projection is supported by solid growth in feed demand as China recovers from African swine fever and expands its poultry industry.
Wheat
- On the negative side, in terms of wheat, the USDA has trimmed its estimate for 2020/2021 global production by 0.4% from July to 766 million tonnes. The downward revision was mainly to the EU’s estimate, which is unsurprising as that region has experienced dryness in the past couple of weeks. Nevertheless, this is 0.3% higher than the previous season’s record global wheat production. This also underscores the aforementioned optimism around global grain supplies. This is comforting news for countries, such as South Africa, that are dependent on imports. South Africa imports roughly half its annual wheat consumption. Increased production means global prices could soften or remain flat in the near term, which is beneficial to local consumers. Most importantly, this also means the key wheat-producing countries won’t need to restrict exports during the pandemic, as they attempted to do at the start of the year.
Rice
- The 2020/2021 global rice production estimate was also cut by 1% from July’s estimate to 500 million tonnes, primarily on the back of expected lower yields in parts of the US, Thailand and Vietnam. The current estimate, however, is still something to celebrate; it is up 1% from the 2019/2020 season and promises to boost rice stock levels. Similar to wheat, South Africans take a keen interest in the global rice production conditions as the country is a net importer to augment domestic consumption. The IGC currently estimates South Africa’s 2020 rice imports to be 1.10-million tonnes, up 10% year on year. Hence a forecast year of relatively large global rice supplies bodes well for importers such as South Africa. It also signals that there won’t be a need for protectionist policies by major producers, even in the case of the rice trade — earlier in the year, Vietnam and Cambodia were among the countries that attempted to place protectionist trade policies on rice, which were later reversed.
- In a nutshell, the USDA revisions in August 2020 were mixed with downward revisions in some crops and upward in others. But the big picture is that all expected harvests will be larger than the 2019/2020 season, which means the world will be awash with grains. This should keep global food price inflation in check in the medium term.
DATA RELEASES THIS WEEK
- From a global perspective, today the USDA will release the weekly crop progress data. This data will provide insight into the US 2020/21 grains and oilseeds growing conditions following reports of crop damage by the storms, specifically in Iowa. In the week of 09 August 2020, the overall US grains and oilseeds crop conditions were still relatively good compared to the corresponding period the previous year.
- 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 in recent weeks experienced heightened confrontation. Moreover, the Chinese agricultural purchase of US goods is way behind the levels agreed on as part of “phase one” trade agreement between the two countries.
- 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 14 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 07 August 2020, about 73% 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 Thursday, SAGIS will release the weekly grain trade data for the week of 14 August 2020. In the previous week of 07 August 2020, about 1.1 million tonnes of maize had already been exported, mainly to neighbouring countries, as well as Vietnam, Ethiopia, Japan, Taiwan and South Korea, as previously stated. This equates to 41% 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 07 August 2020, about 88% of the expected 1.80 million tonnes of imports in the 2019/20 season had already landed on the domestic shores.
