Over the past few days, we have reflected on 2020/21 global grain and oilseed production estimates from the International Grain Council (IGC).
These painted a positive picture of the supplies although there were a few minor downward revisions. We are now increasingly convinced that the recent unfavourable weather conditions in parts of Europe, Asia and even the US will not have a severe adverse effect on global production estimates. The United States Department of Agriculture (USDA) released its monthly update of World Agricultural Supply and Demand Estimates report on 11 September 2020, which painted a somewhat similar picture of abundant supplies as the IGC.
The 2020/21 global maize harvest was revised down marginally by 1% from last month to 1.16 billion tonnes, primarily on expectations of lower yields in the US, Ukraine, EU and Russia, amongst others. Nonetheless, the total projected output is still 4% higher than in the previous season. These slight reductions in monthly production estimates, coupled with the growing demand for maize, specifically in China, have in the past couple of days supported global maize prices. Also, it is worth noting that it is only in the northern hemisphere where production has advanced. The planting is only commencing this month in parts of the southern hemisphere. This means the production estimates for the latter are tentative and much will depend on the weather conditions for the coming month.
The implications of this for South Africa have been through price transmission, as the uptick in global maize prices adds, to some extent, support to domestic maize prices, even though South Africa is generally a net exporter of maize. Shows that the USDA has also maintained a fairly positive outlook of 14.0 million tonnes for South Africa’s 2020/21 maize production, although this would be 13% lower than the 2019/20 harvest. This projection accounts for both commercial and non-commercial maize. Admittedly, it is too early to know where the maize harvest will be in 2020/21 as the planting intentions data for the season will only be released next month. That said, 14.0 million tonnes harvest is plausible in an environment that might present above-normal rainfall, coupled with higher commodity prices to encourage increased planting. Moreover, the expected harvest is well above the 10-year average total maize production of 12.9 million tonnes in South Africa, and domestic annual usage of about 11.2 million tonnes.
In the case of wheat, the USDA is more optimistic than the IGC, having lifted its 2020/21 global production estimate by 1% from last month to 770 million tonnes (compared to 768 million tonnes of the IGC). This is primarily underpinned by prospects of a large harvest in Canada and India, amongst other countries. This new production estimate is now 1% higher than the 2019/20 season. The increase in the harvests of these countries will compensate for the expected slight crop declines in the US, EU, UK and Ukraine. The estimates of a slight uptick in global wheat production bode well for wheat-importing countries like South Africa, which could continue to enjoy relative contained prices in the medium term. As previously stated in our notes, over the past 10 years, South Africa has imported on average about 51% of its annual wheat consumption of about 3.1 million tonnes. The figure, could, however, decline somewhat in the 2020/21 season as the domestic wheat harvest is set to be the largest in a decade, estimated at 1.96 million tonnes.
The USDA is rather a bit more pessimistic than the IGC is on 2020/21 global rice production, which is estimated at 499 million tonnes, slightly lower than the previous month. This is 1% lower than the IGC estimate for the same season, while above the previous season’s harvest of 495 million tonnes. The USDA sees a notable decline in rice production mainly in Thailand, which also happens to be the key supplier of rice to South Africa. On average over the past five years, 65% of South Africa’s rice imports originated from Thailand. The other key supplier was India, whose 2020/21 harvest is set to increase marginally from the previous year. The IGC estimates South Africa’s 2020 rice imports at 1.1 million tonnes, up by 10% y/y.
In terms of soybeans, the USDA lowered its 2020/21 global production estimate only slightly by 0.2% from last month to 369 million tonnes. This downward revision was mainly in the US following an expectation of lower yields in states such as Iowa after the recent windstorms. With that said, this is still 10% higher than the previous season’s harvest. The prices, however, are not reflective of a year of an abundant harvest because of growing demand, specifically in China. This is a similar case as in maize. The price increases in soybean products such as soybean meal increase the cost of animal feed for importing countries such as South Africa. The country currently imports nearly half a million tonnes of soybean meal a year.
Overall, the USDA’s monthly report reinforces the view that the IGC had already painted, which is that there will be large supplies of grain and oilseed in the global market in 2020/21. The price increases of the past couple of weeks are not caused necessarily by fears of a decline in supply, rather the shifts in demand in markets such as China. These developments have implications for South Africa as briefly explained above, although the country is a net exporter of major grains such as maize and barley. For commodities where South Africa is a net importer, the implications are even more significant. Therefore, we continue to keep a close eye on these global developments.
WEEKLY HIGHLIGHTS
SA’s agricultural trade surplus expanded by 32% y/y in the second quarter of 2020
The ongoing COVID-19 crisis has brought uncertainty in global trade because of disruptions it is causing in global supply chains and weakening demand. South Africa’s agricultural sector, which is export-orientated, is one of the sectors we had feared would be disrupted by the pandemic, as we witnessed a couple of disruptions in some of the local ports. But the data show that the country has managed to maintain trade as shown by the trade surplus which expanded by 32% y/y in Q2 to US$1.05 billion. Exhibit 2 (attached file) illustrates that exports remained flat compared to last year, while imports declined notably.
The growth in exports was underpinned by citrus, wine, maize, apples, sugar cane, pears, avocados, grapes and macadamia nuts, amongst other agricultural products. These products will continue underpinning South Africa’s agricultural exports in the next two quarters of 2020. Citrus features prominently throughout the year as its exports for 2020 are expected to reach a record 142.6 million cartons, up by 12% y/y. Similar to citrus, maize will dominate this year; we estimate South Africa’s maize exports to reach 2.7 million tonnes, up 89% y/y because of higher domestic harvest.
From a destination point of view, the African continent and Asia were the largest markets for South Africa’s agricultural exports in the second quarter of this year, respectively accounting for 33% and 29% in value terms. Europe was the third-largest market, taking up 28% of South Africa’s agricultural exports in the second quarter of 2020. The balance of 10% value was spread across other regions of the world. In terms of imports, the leading products included wheat, palm oil, rice, poultry meat, sunflower oil and sugar. For the year, we think rice, wheat and palm oil will continue to dominate the agricultural import product list.
Although the pandemic will result in a loss of incomes in various regions of the world, and in turn, a decline in demand for goods; the agricultural sector is one of the few that might not be as hard hit. Hence, for the year, South Africa’s agricultural exports could increase from the US$9.9 billion of 2019 to levels above US$10.0 billion. The catalyst this year will be the increase in grains and horticulture output and the weakening domestic currency.
SA farm economy on a firm footing
As highlighted in our note last week, South Africa’s agricultural sector was the only shining light in the second quarter of this year. The sector’s gross value-added expanded by 15.1% q/q on a seasonally adjusted and annualised basis following an expansion of 27.8% q/q in the first quarter. This is, in part, because most of the sector was classified as essential and didn’t close down during the strict lockdown period, whose effect extended to the second quarter. Most importantly, the growth is underpinned by the fact that this is a recovery year in agricultural output across all subsectors (field crops, horticulture and livestock) following prolonged periods of drought, and a surge in exports (supported by the weak exchange rate). These were also the key drivers of the expansion in the first quarter of the year.
Unfortunately, however, this did very little to change the overall GDP picture of South Africa as primary agriculture is a small share of the economy. The overall economy contracted by 51% q/q on a seasonally adjusted and annualised basis, largely reflecting the effects of lockdown restrictions put in place to slow the spread of the pandemic that negatively affected productivity across various sectors. Overall, we are of the view that South Africa’s agricultural gross value-added could expand by at least an average of 10% y/y this year (compared to a contraction of 6.9% y/y in 2019).
DATA RELEASES THIS WEEK
From a global calendar, today we have the US weekly crop progress data which will be released by the USDA. The previous report of 06 September 2020 showed that maize and soybean crop conditions were rated in better condition compared to the corresponding period in 2019. This corroborates the aforementioned optimistic view of the 2020/21 global grain and oilseed harvest that the USDA recently released.
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. The available data shows that China is behind the levels agreed on as part of “phase one” trade agreement between the two countries, although the country has been aggressively buying US agricultural products over the past couple of weeks.
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 11 September 2020. This data covers both summer and winter crops. But the focus is on summer crops where the harvest process has recently been completed. In terms of maize, in the week of 04 September 2020, about 83% of the expected 15.5 million tonnes of harvest had already been delivered to commercial silos. While for oilseeds, the harvesting process has been completed and the majority of the crop delivered.
On Thursday, SAGIS will release the weekly grain trade data also for the week of 11 September 2020. In the previous week of 04 September 2020, about 1.31 million tonnes of maize had already been exported, mainly to Southern African countries, as well as Vietnam, Ethiopia, Japan, Taiwan and South Korea. This equates to 49% of the seasonal export forecast of 2.70 million tonnes, which is up by 89% from the 2019/20 marketing year because of a large harvest. In terms of wheat, South Africa is a net importer, and in the week of 04 September 2020, about 92% of the expected 1.80 million tonnes of imports in the 2019/20 season had already landed on domestic shores. This marketing year ends this month.
