Rising food prices continue to dominate the headlines, domestically and globally.
It is not unusual for one to see complaints about rising sunflower oil prices or broader headline food price inflation on the domestic front. This has, in turn, raised questions of how this could be in a year of an abundant agricultural harvest?
The answer goes back to the fact that South Africa is interlinked to the global food system, which at the present moment is facing an uptick in prices. Consider sunflower oils; South Africa is a net importer of sunflower oils, importing on average 197 342 tonnes per annum in the past five years. Additionally, South Africa imports, on average, 477 185 tonnes of palm oil a year. The global prices of these products have been on an upward trajectory for months, with palm oil reaching the highest level since 2011 in May this year. These increases are caused by the combination of lower supplies in Southeast Asian countries, specifically for palm oil, and rising demand for sunflower oils and soybeans, particularly in China and the global biodiesel sector.
South Africa gets to experience these shocks, hence even if one observes the recent consumer food price inflation data, the oils and fats were amongst the categories showing the fastest increases within the food basket in the May 2021 CPI release. Also, worth noting is that, unlike other domestic summer crops, which are set to increase in the 2020/21 season, South Africa's sunflower seed production is down by 9% y/y, which once again necessitates the need for imports.
In May 2021, South Africa's consumer food price inflation accelerated at the fastest pace since July 2017, measured at 6,8% y/y, from 6,7% y/y in April 2021. The underpinning drivers of this increase were the aforementioned oils and fats, meat, vegetables, and to an extent, staple grain-related products. The grains products prices are at relatively higher levels, not because of supply constraints in the domestic market, but the surge in global prices. South Africa has its second-largest grains harvest on record, and maize prices are at export parity levels. The second-largest maize harvest on record in the 2020/21 production season has not led to a decline in domestic maize prices. This is mainly because of the 56% increase in export parity prices in the 2020/21 season. Export parity prices are derived from the global maize price multiplied by the exchange rate minus transaction costs and can be regarded as a "floor price" for domestic maize prices. As domestic prices trade closer to export parity levels, South African maize becomes more competitive in international export markets, triggering an increase in volumes of exports or demand by foreign buyers.
Meat, which also underpinned the increase in food price inflation in May 2021, could likely soften in the coming months, albeit South Africa's supplies being roughly balanced in red meat, while an importer of poultry products. This time around, the unique factor to South Africa, which stakeholders in the food industry will have to monitor consistently, is the impact of biosecurity challenges. The most recent announcements of a foot-and-mouth disease outbreak in parts of KwaZulu-Natal and Limpopo and the subsequent ban of South Africa's beef in various export markets is one such matter to monitor, along with the African swine fever and avian influenza. While these diseases are damaging and costly for farmers, they tend to lead to a decline in domestic meat prices due to the ban in exports, then bode positively for local consumer food price inflation in the near-to-medium term.
Beyond our borders, the IMF released a note on 24 June 2021, highlighting four facts about the soaring consumer food prices. The first point of the note was that food inflation started increasing in 2018, before the pandemic. The price increases were induced by an outbreak of African swine fever in China, which wiped out much of China's pig herd, which represents more than 50% of the world's pig. This event led to an overall increase in global animal protein prices, which also filtered into countries such as South Africa. The intense trade conflict between the US and China at the time also contributed to animal protein price increases.
Secondly, the early lockdown measures, globally, and supply chain disruptions induced a spike in consumer food prices. This specifically refers to the shift in consumption patterns when lockdown started, from dining out to the retail grocery. Moreover, the stockpiling that occurred at that period across the globe also added to price increases. Nevertheless, this was a temporary event, and prices had moderated in the second quarter of 2020 for several countries.
Thirdly, the rising shipping and transport costs also contribute to increased global food prices. Lastly, global food producer prices have rallied, reaching multi-year highs because of supply concerns. Such concerns include the consistent downward revision of Brazil and Argentina's maize and soybean harvest because of dryness there and the drier weather conditions in Russia, Ukraine, and the United States at the start of the 2021/22 production season. The production conditions have since improved in Russia, Ukraine, and the United States, pointing to a reasonably good crop this season. Perhaps, the central point to make here is that while production conditions for the 2021/22 global harvest are promising for all major crops, there are generally lower stocks. This causes global prices to remain volatile or sensitive to any reports of unfavourable weather conditions in major producing countries, even if such weather events will have minimal impact on crops.
Ultimately, the rising consumer food price inflation in South Africa, which consumers have complained about, is not solely a domestic phenomenon but a global one. With that said, we still believe that South Africa's food price inflation could soften in the second half of 2021. We base this view on the expected sizeable domestic harvest, the expected softening in global grains prices due to anticipated large harvest in 2021/22, and recent developments in the domestic meat industry, which we have discussed above.
Weekly highlights
IGC maintains an optimistic view on 2021/22 global grains and oilseed production
The global grains supply constraints concerns, which at the start of the pandemic led some countries to place temporary export restrictions, have dissipated. This is despite the recent price increases which are driven by a combination of factors such as unfavourable weather conditions in the 2020/21 crop in South America, China’s rising demand for agricultural products, and also weather concerns about the current season of 2021/22 in various Northern Hemisphere countries.
On 24 June 2021, the International Grains Council (IGC) released its monthly update of the global grains and oilseeds production forecasts for the 2021/22 season. The Council’s view is broadly optimistic pointing to an annual uptick in production of all major grains and oilseeds, a view similar to the previous months’ updates. The drier weather conditions in parts of the US and Canada, along with extreme cold in parts of Europe, which had slowed the planting and threatened the 2021/22 season have all subsided. As such, the IGC forecasts the 2021/22 global maize production at a new peak of 1,2 billion tonnes, up by 6% y/y. This is on the back of an expected large crop in the US, Brazil, Argentina, Ukraine, China, EU, and Russia.
Nevertheless, the stocks will be roughly unchanged from the previous season, at 267 million tonnes. This is well below the previous seasons when stocks were over 300 million tonnes because of firmer consumption in the global feed industry, primarily supported by China. These thin stocks are a source of volatility or sensitivity in maize prices, which typically lift on daily weather-related news in major producing countries, even if such news has minimal impact on crop conditions. Notably, while the production forecasts look promising, another important region that we continue to observe is the Southern Hemisphere crop (particularly in South America), which will only be planted in October. The outcome of the crop in this region will have a notable implication on the global harvest estimates.
Similarly, the global wheat production conditions have improved. The IGC now forecasts the 2021/22 global wheat production at a record 789 million tonnes, up 2% y/y. This is boosted by expected large crops in the EU, the US, Ukraine, Argentina, China, India, and the UK. Subsequently, the global stocks for the same year are at 283 million tonnes, up by 1% y/y. These improvements point to a possible softening of global wheat prices in the coming months from the current highs.
Also, worth noting is that the global rice supplies and stocks are also at comfortable positions, well above the 2020/21 production season. The IGC forecasts the 2021/22 global rice production at a record 512 million tonnes, up 2% y/y. This is on the back of possible expansions in area plantings in Asia, combined with expected better yields as a result of favorable weather conditions. As such, the 2021/22 global rice stocks will also possibly lift by 1% y/y to 171 million tonnes. The observations are similar in the global soybeans production prospects, with the 2021/22 harvest estimated at 383 million tonnes, up by 6% y/y. The beneficial weather conditions will likely boost the yields in the US, Brazil, Argentina, India, Paraguay, Russia, Ukraine, and Uruguay. The stocks will follow a similar pattern, with the IGC forecast at 53 million tonnes, up by 11% y/y.
Broadly, these production forecasts suggest that global crop prices from the second half of the year could soften slightly from the recent months' levels. That could also influence the South African consumer food price inflation outlook. However, the price developments in the case of soybeans will be influenced more by Chinese buying decisions and the broader vegetable oils market developments. The critical point is that global crop conditions are in a better state than in the past few months, which should be reflected in prices in the coming months. In May 2021, the global grains prices were elevated, with the FAO Global Food Price Index averaging 127,1 points, which is the biggest month-on-month gain since October 2010 and about 40% y/y higher. This trend could possibly change from the second half of the year.
Data releases this week
We start the week with the US Crop Progress Report on the global agricultural data calendar, which will be released by the USDA today. The previous report of 21 June 2021 showed that 72% of the US maize crop was rated good/excellent, slightly above the corresponding period last year where roughly 68% of the crop had such a rating. In soybeans, planting was near completion, with 97% of the intended area for the season already planted, and 91% of that emerged. Importantly, 70% of the crop that has emerged was rated good/excellent, compared with 62% in the corresponding period last season. The US Weekly Export Sales data is due for release also on Thursday.
On the domestic front, on Tuesday, the Crop Estimates Committee will release its fifth production forecast of the summer crop. We expect the Committee to lift its maize production forecast while other crops might remain roughly unchanged. The maize production estimate is currently at 16,2 million tonnes. We believe the number could be lifted to 16,7 million tonnes because of higher yields in various parts of the country.
On Wednesday, SAGIS will release the Weekly Grain Producer Deliveries data for 25 June 2021. 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 18 June, about 2 648 tonnes of soybeans were delivered to commercial silos. This placed the soybean producer deliveries for the first fifteen weeks of the 2021/22 marketing year at 1,78 million tonnes, which equals 93% of the expected harvest of 1,92 million tonnes. Moreover, 495 968 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 716 240 tonnes. In maize, the marketing year is different from oilseeds; we are still in the seventh week of the 2021/22 marketing year, which began at the start of May. The producer deliveries currently amount to 7,4 million tonnes, out of the Crop Estimates Committee's expected harvest of 16,2 million tonnes (compared to our estimated 16,7 million tonnes).
· On Thursday, SAGIS will release the Weekly Grain Trade data for the week of 25 June 2021. In the week of 18 June, which was the seventh week of South Africa's 2021/22 maize marketing year, total maize exports amounted to 538 285 tonnes. The seasonal export forecast is 2,8 million tonnes, slightly below the previous season because of an anticipated decline in regional demand. In terms of wheat, South Africa is a net importer. On 18 June, imports amounted to 1,1 million tonnes, equating to 69% of the seasonal import forecast of 1,6 million tonnes.
