The outlook for global agricultural conditions is once again in the spotlight this week as the United States Department of Agriculture (USDA) is scheduled to release its projections for the 2021/22 production season.
Another major global agricultural organisation, the International Grains Council (IGC), released its estimates last week and painted a generally optimistic view for key grains and oilseeds production for 2021/22. We start this week’s Viewpoint by focusing on the latter.
Starting with maize, the IGC forecasts global production at 1,2 billion tonnes, which is up by 5% from the 2020/21 production season. This optimism is underpinned by expectations of a large crop in the US, Brazil, Argentina, Ukraine, China, EU and Russia. The reaction to the release of this data was generally muted. Some market participants are currently more focused on the near-term issues affecting the crop, such as persistent dryness in Brazil, which negatively affects the country’s 2020/21 second maize crop, also known as “safrinha”. The 2021/22 maize crop will only be planted towards the end of the year across the Southern Hemisphere and is therefore not an immediate focus. Another concern in the market is dryness in parts of the US and Canada, threatening and slowing the 2021/22 maize crop. Moreover, parts of the EU have also experienced delays in planting because of the cold spell. Nevertheless, the IGC maintains a reasonably positive view of maize production estimates of all the aforementioned countries, as they are evidently amongst those underpinning the expected 1,2 billion tonnes of maize in 2021/22, as we previously stated.
The one question that will remain on analysts’ minds after the release of the USDA’s data on Wednesday is whether the global maize stocks would recover after an anticipated improvement in production. How the market interprets this data in this respect could have an effect on global maize prices. These are currently at the highest levels since 2013, because of the dryness in parts of South America, combined with rising maize demand from China. So far, the IGC estimates global maize stocks at the end of 2021/22 to be the smallest in nine years, at 264 million tonnes (down 3% y/y), in part, due to rising global consumption.
Moving to wheat, the IGC forecasts a 2% y/y increase in 2021/22 production to a record 790 million tonnes. This is primarily attributed to better outlooks in Europe and North Africa, the US, Ukraine, China, UK, and India, amongst other countries. There are expectations of better yields compared to the 2020/21 season and an increase in area plantings. Unlike maize, the 2021/22 global wheat stocks could recover by 3% y/y, partly because of expected large global wheat production. While we are yet to see what the USDA will present, rising production and stocks would ideally lead to a softening in prices. This would be beneficial for importing countries such as South Africa.
The IGC forecasts a 6% increase in 2021/22 global soybeans production to a record 383 million tonnes. The current higher global prices are expected to incentivize farmers to lift plantings, and there are also expectations of better yields which would also boost the output. The major contributing countries to this IGC forecast are the US, Brazil, Argentina, India, Paraguay, Russia and Ukraine. For the Southern Hemisphere countries, we will only know if the optimism in plantings holds at the end of this year. At this stage, the focus is on the 2020/21 production season, which for Brazil is not looking well because of dryness, as we have already stated. Importantly, if everything were to go as the IGC estimates, the 2021/22 global soybeans stocks would recover by 8% y/y to 50 million tonnes. Such a recovery would have slight downward pressure on prices which have remained fairly elevated primarily because of strong Chinese demand.
Lastly, we consistently keep an eye on another important grain, mainly as South Africa imports all of its million tonnes annual consumption, i.e., rice. Here the 2021/22 production outlook is positive; the IGC forecasts a global crop of 509 million tonnes, which is up by 1% y/y. India, Vietnam, Thailand, Pakistan, Indonesia, Bangladesh and the Philippines are all amongst the key countries set to contribute positively to a large global rice harvest for the 2021/22 production season. The planting activity in many of these countries will only begin in June. Still, the weather conditions and soil moisture are reportedly good, which should support cultivation when the season commences. An exogenous negative factor for key producing countries is the ongoing spread of Covid-19 infections as currently being witnessed in India. We continue to monitor if these could negatively impact farmers activities in the fields. Notably, the IGC forecasts a 25 y/y increase in 2021/22 global rise stocks to 176 million tonnes. Similar to wheat, a recovery in stocks would potentially add downward pressure on prices in the coming months, which is beneficial for importers like South Africa.
Ultimately, the initial production forecasts for the 2021/22 global grains and oilseeds production paint a slightly better picture than many had feared. If more on-the-ground evidence emerges to support these forecasts, then in the coming months, the global agricultural prices would potentially cool off from the current higher levels as illustrated by the FAO Global Grains Price Index in Exhibit 1 (in the attached file). We look forward to observing if the USDA’s estimates will concur with the IGC’s view or if there is material deviation. If they agree, then this would bring about some additional optimism in the market and the current spell of elevated commodity prices could be somewhat short-lived.
Weekly highlights
Large agricultural harvest and higher commodity prices continue to support tractors and harvesters’ sales
South Africa's agricultural machinery sales have remained on a positive footing since May 2020. The figures released by the South African Agricultural Machinery Association last week show that tractors' and harvesters' sales were up by 23% y/y and 115% y/y in April 2021, with 540 and 40 units sold, respectively. Improved farmers' finances have supported the sale. This is on the back of the large harvest in 2019/20, prospects for yet another good agricultural season in 2020/21, and higher commodities prices. The relatively stronger exchange rate has also been a positive buffer for the imported agricultural machinery.
We focus on the major summer grains to illustrate the positive prospects of the 2020/21 production season. The South African Crop Estimates Committee (CEC) currently forecasts maize, soybeans and sunflower seed production at 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 696 290 tonnes (down 12% y/y), respectively. The expected decline in sunflower seed harvest is because of a reduction in area plantings as farmers switched some areas to maize. Generally, the expected large grains harvest is also mirrored on other subsectors of agriculture and underpinned by favourable weather conditions.
While South Africa is now in a busy period of the agricultural calendar – planting for winter crops and harvesting for summer crops, we remain cautious that the excellent momentum of agricultural machinery sales might slow in the coming months. In our view, the expected large harvest in the 2020/21 production season might not lead to sustained sales and another year of higher agricultural machinery sales. Typically, a relatively good sales year, such as 2020, is likely to be followed by a somewhat lower sales period. The replacement rate of machinery with new ones would usually be down from the previous years. Moreover, another factor to keep a close eye on is the exchange rate, although the current firmer levels support the sales. Any changes into a weaker domestic currency will likely lead to higher prices for imported agricultural machinery and discourage sales.
Global food prices remain elevated
Global agricultural commodity prices remain elevated and this picture was illustrated by the Food and Agriculture Organization of the United Nations (FAO) Global Food Price Index results of April 2021, which was up by 2% from the previous month and 31% from the corresponding period last year, currently measured at 121 points. This is the eleventh consecutive monthly rise and the Index is now at its highest level since May 2014. This was underpinned by the increase in all subindices; sugar, vegetable oils, meat, dairy, and grains.
In grains, the smaller-than-anticipated planting intentions in the US, coupled with rising concerns about crop conditions there, as illustrated by slower maize plantings on the back of dryness have added upward pressure on prices. In addition, 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, are amongst the factors driving the increase in global grains prices. In vegetable oilseeds, the rising soybean demand from China, combined with slower-than-expected production growth of palm oil in major exporting countries have supported prices these past couple of months. The stronger Chinese demand is the driver of the increase in global dairy prices. Similarly, meat prices are supported by the strong demand from East Asia, with China currently experiencing other outbreaks of the African Swine Fever. In sugar, the dryness in Brazil and frost in France are the primary factors currently supporting prices.
These global agricultural commodity factors matter for South Africa both through influencing the domestic commodities prices, and also for commodities that South Africa is a net import of, such as vegetable oils and grains (wheat and rice). If the higher current price trends persist, globally and domestically, we might be inclined to slightly adjust our South Africa’s consumer food price inflation view form the current forecast of 5% y/y on 2021.
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 02 May showed that US maize planting is gaining momentum, but lagging from the previous season’s pace on the same day because of drier weather conditions. Another essential piece of data on the global market is the USDA’s World Agricultural Supply and Demand Estimates report, which is due on Wednesday. The focus will be on South America’s crop estimates given the current dryness there, and also preliminary views on the next 2021/22 season. The US weekly export sales data is due for release on Thursday.
On the domestic front, on Wednesday, Stats SA will release the Consumer Price Index (CPI) data for April 2021. As a recap, South Africa's consumer food price inflation accelerated to 5,9% y/y in March 2021 from 5,4% y/y in the previous month. The product prices underpinning the uptick were mainly bread and cereals; fish; milk, eggs and cheese; and oils and fats. The increase in prices of these products is unsurprising and reflects the elevated farm-level prices we observed at the end of 2020 and into 2021.
Still, on Wednesday, the South African Grain Information Service (SAGIS) will release the Weekly Grain Producer Deliveries data for 07 May. 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 30 April, about 216 566 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 1,32 tonnes out of the expected harvest of 1,79 million tonnes. Similarly, 209 373 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 07 May. In the week of 30 April, which is the last week of South Africa's 2020/21 maize marketing year, exports amounted to 2,50 million tonnes for the year, which is slightly lower than the estimate of 2,79 million tonnes. In terms of wheat, South Africa is a net importer. On 30 April, imports amounted to 920 688 tonnes, which equates to 58% of the seasonal import forecast of 1,58 million tonnes.
