One of the most controversial discussions in global agriculture in the recent past has been about genetically engineered crops (GE).
Much of the African continent -- except for South Africa -- and the European Union, amongst other regions, have generally opposed the cultivation of GE crops. Meanwhile, the US, Argentina, Brazil, Australia, Bolivia, Chile, Colombia, Uruguay, and Paraguay, amongst other countries, have embraced the GE crops. The opposing arguments for adopting GE crops have ranged from food sovereignty to doubts about the health aspects of the crops, and their potential impact on biodiversity.
Nevertheless, the EU is re-evaluating its policy against GE crops. On 29 April 2021, the European Commission released a study focused on the "new genomic techniques", which is simply GE. A striking passage that hints at a potential change of heart reads, "the study has confirmed that new genomic techniques products have the potential to contribute to sustainable agri-food systems in line with the objectives of the European Green Deal and Farm to Fork Strategy. Any further policy action should aim at enabling new genomic techniques products to contribute to sustainability while addressing concerns. At the same time, new genomic techniques applications in the agricultural sector should not undermine other aspects of sustainable food production, e.g., organic agriculture."
The European Commission will now spend the next couple of weeks consulting and sharing the study results with its members' states before drafting a final view on the policy as we advance. Notably, the study points out that respondents to the consultation thus far have expressed diverse, sometimes opposite opinions regarding the level of safety of new genomic techniques and their products and on the need and requirements for risk assessment. This suggests that there could still be a strong lobby group against the change of the current EU policy on this new genetic engineering technology.
A potential change in the EU's policy regarding the cultivation of the new genomic techniques crops or genetically engineered crops would have implications for global agriculture, including the South African market. Strictly focusing on the economic perspective, in the aforementioned countries that have embraced GE crops, there has been a lower insecticide use, more environmentally friendly tillage practices and crop yield improvement over the years. On the last point of yield gains, an improvement in EU grains output would add pressure on global grain prices. Another essential aspect would be increased competition for major grains exporting countries such as the US, Ukraine, Argentina, Russia, Brazil, Canada, and South Africa, amongst others (in the case of maize).
On the aspects of yield benefits of GE crops, there is also compelling evidence of the increase in yields in South Africa, which produces nearly 20% of sub-Saharan Africa maize, utilising a relatively small area of an average of 2.5 million hectares since 2010. In fact, in the 2019/20 production season, South Africa produced 19% of the region's overall maize output of 79 million tonnes. In contrast, Nigeria planted 6.5 million hectares but only harvested 11.7 million tonnes of maize, which equates to 15% of the sub-Saharan region's maize output, according to the International Grains Council. Irrigation has only been an added factor in South Africa. Still not large, as only 10% of the country's maize is irrigated with 90% being rainfed as in the other sub-Saharan Africa countries. South Africa began planting GE maize seeds in 1998, and widely from 2001/02 season. Before its introduction, average maize yields were around 2.4 tonnes per hectare, and that has now increased to an average of 5.9 tonnes per hectare as of the 2019/20 production season. Meanwhile, the sub-Saharan Africa region's maize yields remain negligible, averaging below 2.0 tonnes per hectare.
In the world of rising population and increasing competition for land use, producing more in a smaller area does seem like an economically and environmentally important decision. But the national policies, in the case of Africa, have to consider the economic conditions of farmers. For example, some smallholder farmers might not have the ability to purchase seeds season after season consistently. In such cases, the adoption of GE crops might introduce challenges for farmers. With that said, for the commercialization of agriculture at a reasonably large scale and to remain competitive in the global environment, embracing new technologies might be a helpful policy action that African countries will have to consider.
In sum, the European Union's policy on new genomic techniques crops is an important event to keep a close eye on because of its implication on global agricultural markets. The growing appetite to explore the economic benefits of the new technologies should also not be ignored by African countries where improvement in agricultural output could have positive spinoffs for the economy, environment and food security. Interestingly, Kenya has planted its first GE cotton this season, which hopefully will lead to more openness about these technologies for other crops such as maize. But each policy action will have to consider domestic farming structure. These technologies are perhaps more effective in commercial farming entities than smallholdings, which remain dominant in the greater Sub-Saharan region.
Weekly highlights
SA’s large maize harvest might not lead to a notably decline in prices in the near term
Last week, the South African Crop Estimates Committee (CEC) mildly lifted its forecast for 2020/21 maize, soybeans and sorghum from the March 2021 estimate to 16,1 million tonnes (up 5% y/y – the second-largest harvest on record), 1,8 million tonnes (up 44% y/y, a record harvest), and 189 885 tonnes (up 20% y/y), respectively. Meanwhile, sunflower seed and groundnut production estimates were left unchanged from March 2021, at 696 290 tonnes (down 12% y/y) and 57 900 tonnes (up 16% y/y), respectively. The dry beans were the only crop whose estimates were slashed by 9% from March 2021 to 56 577 tonnes (down 13% y/y).
We generally share the CEC’s assessment in these estimates, except for maize, where we have long held a more optimistic view. The feedback we continue to receive from farmers as harvesting picks up momentum is that maize yields are generally good in a number of areas across the country. Hence, we are inclined to believe that the CEC could still adjust its maize production estimate upwards in the coming months. Our view has been that South Africa’s commercial maize production estimate could reach 16,7 million tonnes this year. Others such as the Bureau for Food and Agricultural Policy's estimated 17,0 million tonnes. The current maize production data essentially mean that South Africa would remain a net exporter in the 2021/22 marketing year, starting this month, May 2021 (corresponds with the 2020/21 production season). South Africa's annual maize consumption is roughly 11,4 million tonnes, which means there will likely be over 2,8 million tonnes of maize available for export markets, all else being equal.
As in the previous month, we believe that when harvesting gains momentum, the expected large harvest could also add downward pressure on domestic maize prices, although marginal because the higher global maize market remains supportive of domestic prices. Such a supportive environment is clear on the maize spot prices which are up notably from last year. On 29 April 2021, South Africa's yellow and white maize spot prices were up by 32% y/y and 23% y/y, trading at R3 393 per tonnes and R3 238 per tonne, respectively. Over the same period, the US maize prices were up by 107% y/y US$296 per tonne. The firm Chinese maize demand, rising concerns for Brazil’s maize crops due to drought, very dry soils in Canada where planting is about to start, as well as dryness in parts of the US, are amongst the factors driving the increase in global maize prices, which are now at highest levels last seen in 2013.
Over the past few months, the weaker domestic currency, growing demand for South Africa's maize in the Southern Africa region and the Far East, coupled with generally higher global grain prices, provided support to the domestic maize prices. Southern Africa’s demand will soften this time around as the region is expecting a large harvest, across all major maize-consuming countries. The domestic currency has also firmed of late. The only major upside driver of domestic maize prices is the rally in global maize prices, regardless of large domestic supplies.
In the soybean case, the price drivers are somewhat similar to maize. Nevertheless, an increase in the soybean harvest will still not change much because South Africa remains a net importer of soybean meal (although this volume will fall notably this year on the back of the large domestic harvest from the usual half a million tonnes a year imports). Hence, global soybean market dynamics will continue to influence local prices. On 29 April 2021, the domestic soybean spot price was up 10% y/y, trading around R7 175 per tonne.
In sum, the broadly large summer grain and oilseeds production estimate this season is on the back of increased area plantings for summer crops and favourable rainfall since the start of the season. We expect the maize production estimate to be adjusted somewhat in the coming month as farmers on the ground continue to express optimism about yield prospects. Nevertheless, domestic grain prices will likely not be reflective of the expected large harvest because of generally higher global grains prices, which continue to support the domestic market. Our rough calculations using high-frequency data show that the correlation between domestic and international maize prices remains positive, about 60% for white maize and 85% for yellow maize. This means as the global maize markets show an increase, domestic maize prices tend to also rise.
Farmers’ intentions to plant winter crops paint a mixed picture
The CEC also released the farmers' intentions to plant winter crops. As we expected after a large crop and glitches caused by the alcohol ban, there is pessimism about barley plantings. South African farmers intend to reduce barley plantings in the 2021/22 season by 33% to 95 000 hectares, which would be the smallest area since the 2017/18 production season. The decline in barley planting will likely be taken up by canola and oats, whose area plantings are set to increase by 28% y/y and 325 y/y, respectively, to 95 000 hectares and 34 500 hectares. For canola, this would be the largest area since the 2014/15 season, while for oats, this will be a record area planting. For wheat, the 2020/21 planting intentions are at 512 500 hectares, up by 1% y/y. The planting activity has started in canola areas of the Western Cape, but still at initial stages. The region currently needs rain to replenish soil moisture and for plantings to gain momentum.
Data releases this week
We start the week with the US Crop Progress report on the agricultural data calendar, which will be released by the USDA today. The previous report of 25 April showed that US maize planting has started, but lagging from the previous season’s pace on the same day because of drier weather conditions. Another essential data on the global market is the US weekly export sales data due for release on Thursday.
On the domestic front, we have the Weekly Producer Deliveries data for 30 April, released by SAGIS on Wednesday. This data cover summer and winter crops, although we only focus on summer crops for now as the harvesting process gains momentum, particularly on oilseeds. To recap, on 23 April, about 341 752 tonnes of soybeans were delivered to commercial silos. This placed the soybean producer deliveries for the first eight weeks of the 2021/22 marketing year at 1,10 tonnes out of the expected harvest of 1,79 million tonnes. Similarly, 170 287 tonnes of sunflower seed for the 2021/22 season had already been delivered to commercial silos in the same week, out of the expected crop of 696 290 tonnes.
On Thursday, SAGIS will release the Weekly Grain Trade data for the week of 30 April. In the previous week of 23 April, South Africa's 2020/21 total maize exports were 2,49 million tonnes, which equates to 89% of the seasonal export forecast of 2,79 million tonnes. The last week of April is the closing month for this marketing year and will enable us to assess if the target export volume was met. In terms of wheat, South Africa is a net importer. On 23 April, imports amounted to 900 460 tonnes, which equates to 57% of the seasonal import forecast of 1,58 million tonnes.
