Periods of uncertainty tend to lead to countries taking drastic self-interested policy measures.
Since the start of the Covid-19 pandemic, several countries have placed temporary bans on exports of grains, ostensibly to protect domestic consumers. In July 2021, China went as far as banning exports of fertiliser in an attempt to ensure adequate domestic supply. Such inward-looking policy actions often have a notable disruption on the highly interconnected global agricultural market. In the case of China's ban on fertiliser exports, for instance, the impact was felt through a sharp rise in prices across the global fertiliser market as China is the second-largest fertiliser exporter by value after Russia, accounting for roughly 12% of global exports. As the world increasingly came to better manage the worst of the pandemic’s health aspects through the use of vaccination and other health measures, we saw a reversal of grain export bans by the likes of Vietnam and Kazakhstan. The G7 agriculture ministers had criticised the actions of banning exports at the time.
The destruction brought by Russia's invasion of Ukraine has had a direct and more severe impact on the agricultural market as both countries contribute substantial volumes of grains, oilseeds and fertiliser exports. Collectively, these two countries make up nearly 30% of wheat exports, 30% of barley exports and roughly 60% of global sunflower seed exports. Russia alone accounts for about 14% of global fertiliser exports. For this reason, global grains and oilseed prices have remained elevated in recent months. The FAO Global Food Price Index averaged 156 points in April 2022, down marginally from the all-time high recorded in March, although still 30% up from April 2021. This was a temporary blip, in our view. Prices will likely show an uptick to a fresh high in May data due to be released on 03 June.
These price increases have put pressure on consumers worldwide just as households are emerging from the economic shock of Covid-19. We are starting to see the second round of export bans of key commodities, all with the purported aim of protecting domestic consumers. The first significant agricultural exporter to introduce restrictions was Indonesia at the end of April, temporarily banning palm oil exports. This was a significant shock to the vegetable oil market because of Indonesia's significance in global supplies. This country accounted for an average of 54% of global palm oil exports in value terms over the past five years. Before this ban on palm oil exports, the impact of the Black Sea export disruption and tighter palm oil supplies in Asia have been visible in prices. For example, this past March, the FAO's Vegetable Oil Price Index was up by 23% from February to a new record of 249 points. Thus, these recent export policy changes in Indonesia will likely lead to further increases in vegetable oil prices, and result in a further increase in the overall FAO Global Food Price Index. Hence, we view the April slight reprieve as temporary.
Most recently, India has followed with similar steps announcing a ban on wheat exports this past week. This move will likely fuel further price increases in the wheat market at a time when the 2022/23 global wheat stocks are expected to be tight as a result of the expected reduction in production in key areas of the EU and the Black Sea. India's reasoning for this move isn't all that different from Indonesia's. The official statement said the country wants to manage the overall domestic food security of the country and support the neighbouring countries' needs. India is a substantial player in the global wheat market and is ranked the eighth largest wheat exporter in the world. We are yet to see the full impact of these policy actions on prices.
Over the weekend, G7 agriculture ministers condemned India's decision to ban wheat exports, noting that such export bans would worsen the global food crisis. The G7 agriculture ministers’ official communiqué further stated that "we will continue to avoid any unjustified restrictive measures on exports that could exacerbate the increases in food and input price volatility already seen in international markets, and that could thereby threaten the continued recovery of all facets of global food supply chains and, more broadly, food security and nutrition."
Overall, with heightened uncertainty, the ban on exports of essential commodities should not be a preferred policy instrument, especially by major agricultural producers such as India and Indonesia, among others. The focus should be on supporting the farmers to increase production and fill the gap in supplies created by the closure of Black Sea exports due to Russia's invasion of Ukraine. The frequent export bans present additional uncertainty to agricultural markets and heightened price volatility, so the G7 agriculture ministers must take a stand against such actions. Governments worldwide should do all they can within their fiscal abilities to support agricultural production, avert a global food crisis, and not rely on trade policy instruments that hurt the developing world.
Weekly highlights
SA agriculture machinery sales remained robust in April, but we expect a change in the coming months
South Africa's agricultural machinery market remained robust in the first four months of 2022. The data released by the South African Agricultural Machinery Association this past week show that in April 2022, tractor and combine harvester sales were up, marginally, by 0,3% year-on-year (y/y) and 2,0% y/y, with 559 units and 44 units sold, respectively. Monthly, however, tractor sales, in particular, are softening (see Exhibit 1 in the attached file), while the opposite is true for combine harvesters. The generally healthy sales are welcome developments, as they indicate a primary agricultural sector that is still in a better financial condition and continues to invest in movable assets. We, however, believe that the monthly decline in tractor sales could start a break from the two years of a positive trend.
First, the rising farm input costs, such as fertilisers, fuel and agrochemicals, and increasing interest rates will likely weigh on farmers' finances in the coming months. Second, the strong agricultural machinery sales in 2020 and 2021 could lead to a lower replacement rate this year. For example, South Africa's tractor sales for 2021 amounted to 7 680 units, up by 26% from the previous year. Combine harvester sales amounted to 268 units in the same period, up by 46% from 2020. Notably, 2020 was also an excellent year for South Africa's agricultural machinery sales, so surpassing it meant 2021 was exceptional. In 2020, tractor sales were up by 9% from 2019. Combine harvester sales increased by 29% from 2019. Last, the summer crop harvests this year is down from the 2020/21 season, which will likely have negative financial implications for farmers and could mean that, for the harvesting period that is commencing, there could be less demand for harvesters than in 2021. For example, South Africa's 2021/22 maize harvest is estimated at 14,72 million tonnes, down by 10% y/y.
The improved farmers' finances from large harvests and higher commodity prices, specifically in grains and oilseeds, mainly underpinned the agricultural machinery sales of the past two years. The grains and oilseeds prices were supported by global events such as dryness in South America and Indonesia and rising demand for grains and oilseeds in China. Had it not been for higher global agricultural prices, the local grain and oilseed prices would have softened due to large harvests.
What to make of the Department of Agriculture, Land Reform and Rural Development Budget Vote Speech and Master Plan Launch?
We had a budget vote speech and the signing off of the Agriculture and Agro-processing Master Plan this past week. Both are key for the medium and long-term growth of the sector. As is typically the case, the budget vote speech for 2022/23 contained a round figure of R17.3 billion for the department. This figure includes an allocation for the provincial departments of agriculture and agricultural entities such as the Agricultural Research Council and the National Agricultural Marketing Council.
Notably, the budget vote speech also gives the sector insight into the department's policy focus, which are areas that will likely utilize a sizable portion of the allocation. To this end, the speech focused on climate resilience, agricultural finance, biosecurity, locust outbreaks, the hemp industry and market access. For all these points, some work is underway, to an extent, as issues like biosecurity, agricultural finance, climate resilience, locust outbreaks, and access constraints to some export markets present threats to the sector's growth.
One area that we have been focused on is the blended finance instrument. The budget vote speech noted that "the department has transferred R400 million of the committed R1 billion grants to the Agri-Industrial Fund as per a Memorandum of Agreement with the Industrial Development Cooperation (IDC)." Agricultural finance is key to boosting inclusion and bringing a new crop of black farmers into the commercial scale. However, these funds are rather limited if you want to make a major difference in inclusive growth. The more focused and bolder allocations for blended finance instruments would be instrumental in implementing the Agriculture and Agro-processing Master Plan. The master plan also reflects more deeply on the cross-cutting constraints to agricultural growth that we have mentioned above, taking a commodity-specific approach. The master plan is a social compact approach and requires all stakeholders to be fully committed. The positive outcome of the signing off is that all key stakeholders, except labour, supported the plan. The hope is that labour will join in the subsequent phases. The country is now moving towards the next step of the master plan, which includes its practical implementation.
The first step is for the government and the private sector to have provincial sessions communicating the master plan and ensuring a common understanding of the interventions outlined in it and the allocation of responsibilities. The planning happens in Pretoria, but the implementation is at the provincial and municipality levels. Additionally, the Department of Agriculture, Land Reform and Rural Development also needs to communicate the master plan clearly to other line departments that are crucial for its implementation and perhaps didn't fully participate in the drafting process. Here we specifically have in mind the likes of the Department of Public Works and Infrastructure, which are vital for the vibrancy of the network industries such as roads, water, electricity, railway lines and ports. The poor maintenance, neglect and lack of investment in these areas are currently a significant threat to the growth and sustainability of the South African agricultural sector. If these areas are not attended to, the master plan could be undermined.
Overall, these are not perfect plans by any stretch but are better than no plans. Perhaps, the better way of viewing the documents is through the lens of "better is good", which means having a policy document that is better than a current position is good, to an extent. All social partners had to make compromises in the process. The real action lies in implementing an urgent intervention in the network industries. This is also when rising input costs challenge agriculture, and therefore farmers have limited space for performing maintenance of roads, as has been the case in some regions these past few years.
At the same time, some low-hanging fruit in implementing the master plan is for the Department of Agriculture, Land Reform and Rural Development to rapidly improve its productivity and efficiency. It is also important to deal immediately with critical regulatory matters related to Act 36, Act 35, Agricultural Product Standards, animal diseases, etc. The area that the budget vote speech was muted on is land reform. We take it that the minister will make pronouncements on this area during the Land Reform and Agricultural Development Agency launch that the SONA 2022 indicated would be launched this year.
Data releases this week
We start this week focusing on global data release; today, the United States Department of Agriculture (USDA) will release its weekly US Crop Progress data. In the previous release, in the week of 08 May 2022, maize and soybean plantings were still at preliminary stages and quite behind the 2021 pace because of dryness in some regions of the US. For example, about 22% of the US maize hectares had been planted compared with 64% on 08 May 2021. Moreover, 12% of the soybeans had been planted compared with 39% in the corresponding period last year. On Thursday, the USDA will release the US Weekly Export Sales data.
Domestically, on Wednesday, SAGIS will release the Grain Producer Deliveries data for the second week of the new marketing year for summer crops, 13 May 2022. The producer deliveries data helps us get an indication of the harvesting process. Last week, about 54 082 tonnes of maize were delivered to the commercial silos out of the overall expected maize harvest of 14,72 million tonnes. This data could show some improvement from the previous week. But the following week’s data could be somewhat muted as farmers will be at NAMPO this week (week of 20 May), with minimal harvest activity on the fields.
Also on Wednesday, Statistics South Africa will release the Consumer Price Index (CPI) for April 2022. In these data, our focus will be on the food category. This past month’s release shows that the country's consumer food price inflation moderated to 6,6% y/y in March 2022 from 6,7% y/y in February. This is on the back of softer price increases in fish; milk, eggs and cheese; oils and fats; and vegetables.
On Thursday, SAGIS will release the Weekly Grain Trade data for the week of 13 May. In the previous release on 06 May, which was the first week of South Africa's 2022/23 maize marketing year, exports amounted to 62 936 tonnes. The key markets were Taiwan, Vietnam and the Southern Africa region. The South African Grains Supply and Demand Estimates Committee forecasts 2022/23 maize exports at 3,2 million tonnes, slightly down from 4,1 million tonnes the past season due to an expected reduction in the harvest. South Africa is a net importer of wheat, and 06 May was the 32nd week of the 2021/22 marketing year. The total imports are now at 969 984 tonnes out of the seasonal import forecast of 1,48 million tonnes (slightly below the 2020/21 marketing year imports of 1,51 million tonnes because of a large domestic harvest).
