Some African countries are still sceptical about planting Genetically Modified (GM) crops. However, farmers in the southern tip of the continent, South Africa, have long been planting GM crops for over a decade and there seem to be greater benefits in terms of yields and savings on input costs.

There is a broad consensus that agricultural development is key to unlocking the economic possibilities of the communal areas in SA. The National Development Plan confirms as much.

I am sure many will agree that this has been an eventful year for the South African sugar industry, particularly from a trade perspective. A few months ago, hardly a week would go by without seeing stories of sugar imports threatening the local industry.

This week, we will commemorate World Food Day on Wednesday, 16 October 2019. This event also presents an opportunity to review South Africa’s standing in the food security ladder. 

Food security is achieved when three objectives are met: when food is available, accessible in the right quantities and at the appropriate nutritional levels for all citizens at all times. In 2018, South Africa was ranked 45th most food-secure country out of 133 countries measured in The Economist Global Food Security Index. This was relatively good, compared to other BRICS countries. For example, although South Africa’s average income was 25 spots behind Russia, 23 behind China and 19 behind Brazil, the county’s food security status was a relatively closer match-up, ranking just six spots behind Brazil, three spots behind Russia and one spot ahead of China (see Table 1 in the attached file).

What is worth reiterating is the fact that despite South Africa’s relatively lower average income, the country still manages to punch above its weight in terms of food security. This is a testament to the country’s competitive agricultural sector, and its ability to supply food at a relatively low cost.

Although the Food Security Index indicates South Africa is food-secure, there are pockets of food insecurity within the country when you consider a household-level perspective. This speaks to the general inequality in the country, where some households are food secure, and a sizable portion of other low-income households are not, primarily due to affordability. This scenario is more prevalent in Limpopo, KwaZulu-Natal and the Eastern Cape.

While there are a number of interventions that can assist in supporting households’ access to nutritious food, one form of intervention that can boost rural households’ income is through job creation in the agricultural sector. There is anecdotal evidence that in areas where government and private sector have collaborated in agricultural development, some level of success in terms of job creation could be achieved.

With agriculture having gained prominence as one of the sectors that could bring about rural economic development and job creation in South Africa, the government’s approach to realising this vision should be regionally focused. Meaning, the aforementioned provinces should be the key priority in resource allocation, as the frontiers of agricultural expansion. Such an approach not only makes sense in terms of reducing poverty but also in exploiting the potential of underutilised land. Limpopo, KwaZulu-Natal and the Eastern Cape arguably have about 1.6 million to 1.8 million hectares of underutilised land which can be sustainably farmed for increased food security over the long term. This is according to a 2015 study by McKinsey Global Institute.

Admittedly, the current land governance system -- communal land -- has been cited as one of the hindrances in agricultural development in these provinces, as it limits investment. But, solving such matters can take a long time and land reform policy is still being debated across the country.

The near-term practical approach that can make a difference is structuring an innovative agricultural finance instrument -- such as blended-finance -- which pulls in the capital and human capital from both private and public sectors. In parts of the Eastern Cape, agribusinesses such as The Co-op, are currently engaged in such arrangements with the provincial government and in areas where projects have been implemented there has been some level of success. These are some of the approaches that are needed for boosting households’ income so they can have access to nutritious foods in the near term, while broad development policies are yet to be operationalised or implemented.

Large global grains supplies

The United States Department of Agriculture (USDA) reaffirmed the view that the world has relatively large grains supplies this year. In its October 2019 update, the agency maintained its 2019/20 global wheat production estimate at 765 million tonnes, which is 5% higher than the previous season. As a consequence of this, the stocks could increase by 4% y/y to 287 million tonnes. This will essentially keep global wheat prices are relatively lower levels, which is beneficial for consumers in importing countries such as South Africa.

Moreover, the USDA left its 2019/20 global maize production estimate roughly unchanged from September 2019, at 1.1 billion tonnes. Admittedly, this is 2% less than the previous season because of a poor harvest in parts of the US and Argentina amongst other countries, but these are still comfortable levels in covering the world’s maize needs. The reduction in production, while consumption is relatively strong, means that the stocks could fall by 7% y/y in 2019/20 season.

Unlike the aforementioned grains, the 2019/20 global soybean production was revised down by 1% from levels seen in September 2019 to 324 million tonnes. This was largely on the back of anticipated poor yields in the US and Paraguay. The current estimate is now 6% less compared to 2018/19 production season. The poor harvest in the US because of wet weather conditions at the start of the season is central to this anticipated reduction in global soybean harvest.

Another important factor that we continue to monitor in the soybeans space is its consumption, specifically because of fears that African swine fever could have a negative impact. So far, however, global soybean demand remains solid. The consumption trend and a decline in production could be supportive of soybeans and its by-products prices in the near term. Similar to wheat, South Africa is a net importer of soybeans and a notable importer of soybean oilcake (see Figure 1 in the attached file), then an uptick in global prices could influence the domestic market and business.

Harvest activity picking up momentum in parts of the Western Cape winter crop regions Not much has changed in the Western Cape weather conditions since our previous note. But rainfall at this point would rather cause damage in some winter crop growing areas rather than help boost yields as we would have liked to see in the past couple of weeks. Farmers in parts of the Southern Cape and Overberg are in full swing with canola harvesting and at initial stages of wheat and barley harvesting. This means drier weather conditions will be ideal for the next couple of weeks, which is precisely what the forecasts for the next two weeks show – see Figure 2 in the attached file.

With that said, the drier weather conditions and heat experienced over the past couple of weeks within the Western Cape has caused yield losses. As previously highlighted, the Western Cape is a major producer of winter crops, accounting for 61% of area plantings in winter wheat and nearly all canola, hence we placed greater emphasis on crop conditions within this province.

Other major winter crop producing provinces -- Northern Cape, Free State and Limpopo, amongst others -- are mainly under irrigation and can, therefore, withstand harsh conditions as dams are at levels over 50% on average as of 07 October 2019. Farmers’ reports out of the Free State suggest that the wheat crop in the province generally appear very good. The same is true for the Northern Cape.

South Africa’s Crop Estimates Committee (CEC) currently forecasts the 2019/20 wheat, barley and canola production at 1.81 million tonnes, 389 260 tonnes and 88 800 tonnes, which is 3%, 8% and 15% down from the previous season.

Looking ahead, we see a risk that the CEC might revise down further its winter crop production estimates when the next update comes out on 24 October 2019 given that weather conditions have been harsh in parts of the Western Cape, and in turn, resulted into yield losses.

From a data front

The data calendar is quite light this week. On Monday, the US Department of Agriculture will release its weekly update of the US crop conditions data. This will give us a sense of the US crop-growing conditions, and thereafter the potential size of the harvest.

On Wednesday, SAGIS will release the grain producer deliveries data for the week of 11 October 2019. This covers both summer and winter crops. In the coming weeks, the deliveries data will give us a sense of the pace of the winter crops harvest activity.

On Thursday, we will get the weekly grain trade data (wheat and maize) for the week of 11 October 2019. In brief, maize exports for the 2019/20 marketing year have thus far amounted to 495 645 tonnes. Looking ahead, we expect South Africa to remain a net exporter of maize this marketing year, although the volume will most likely fall by half from 2018/19 to about 1.1 million tonnes. At the same time, we expect maize imports of about 450 000 tonnes, all yellow maize, mainly for the coastal provinces of the country. This is up from an estimated 171 500 tonnes in the 2018/19 marketing year. The country has thus far imported 251 708 tonnes of yellow maize, all from Argentina.

In terms of wheat, South Africa remained a net importer in the 2018/19 marketing year, although the recovery in the country’s domestic wheat production led to a decline in the volume of imports. South Africa’s 2018/19 wheat imports fell by 36% from the previous season to about 1.4 million tonnes. Looking ahead, South Africa’s 2019/20 wheat imports could increase to 1.6 million tonnes because of expected lower harvest on the back of unfavourable weather conditions in the Western Cape. The first import consignment of the 2019/20 marketing year was 32 841 tonnes, from Germany, Russia and Poland. This week we will receive data for activity in the week of 11 October 2019, which is the second week of this marketing year.

There is a broad consensus that agricultural development is key to unlocking the economic possibilities of the communal areas in South Africa. The National Development Plan confirms as much.

The growing need to boost rural economic activity through agricultural development hasre-introduced the discussion on the subdivision of land to create as many small farms as possible that will benefit communities in South Africa.

Today I will participate in a roundtable discussion in East London, organised by the Provincial Department of Rural Development and Agrarian Reform. My focus area will be to provide a brief update on South Africa’s agricultural economy with a key focus on the role that the Eastern Cape can potentially play going forward, particularly from a job creation perspective.

The first Russia-Africa Summit that was held last week concluded with an announcement that urged all participants to increase cooperation in security, science, environmental protection, trade and economic matters. On this last point, the declaration highlights that participants should “make efforts to substantially expand the trade between the Russian Federation and the African States and diversify it, including by increasing the share of agricultural products in import and export operations.”

 Russia is an important player in global agricultural markets, ranked as the 13th largest importer, valued at US$28.8 billion annually, on average, over the past five years. The countries that have benefited from Russia’s agricultural import needs are Belarus, China, Germany, Brazil, Ecuador, Italy, Turkey, Paraguay, Indonesia and France, amongst others. The African countries are down on the list of key agricultural exporters to Russia. In fact, while Russia’s agricultural trade balance is negative, the country has a trade surplus with the African continent. In 2018, Russia had an agricultural trade surplus of US$2.8 billion with the African continent, according to data from Trade Map.

 Over the past five years, wheat has been the dominant product in Russia’s agricultural exports to Africa. It accounted for an average of 79% of all exports into the continent over the past five years (Figure 1 of the attached file). The other products that Africa imports from Russia are sunflower oil, soybean oil, barley, maize, and linseed. Also, this is not widespread across the continent. Nearly half of Russia’s agricultural exports into Africa go to Egypt, and it is mainly wheat. Sudan, Nigeria, Algeria and Kenya are other key markets for Russia, which when collectively added to Egypt account for about 73% value of Russia’s agricultural exports to Africa.

 Here at home, South Africa, the picture is different. South Africa enjoys an agricultural trade surplus with Russia. The products that South Africa exports to Russia include citrus, apples, pears, wine, grapes, apricots, cherries, peaches and fruit juices. These are amongst the products that Russia generally imports from the world (Russia’s top ten agricultural imports are citrus, bananas, wine, soybean, cheese, beef, palm oil, apples, pears and tobacco).

In 2018, Russia was South Africa’s 16th largest agricultural market. The call for increased agricultural trade between Africa and Russia sets a good basis for South Africa to explore the means of increasing its share within the Russian agricultural market. In terms of reciprocity, Russia is already a notable supplier of wheat to South Africa and could increase its share if it were to compete comparatively with wheat suppliers such as Ukraine and Lithuania, amongst others.

Overall, the announcement of increased agricultural trade by the Russia-Africa Summit is positive for South Africa’s agricultural sector. The growth that South Africa envisages in this particular sector will be export-led, therefore, any talks that encourage trade should be viewed positively. In 2018, South Africa’s agricultural sector exported nearly half of its production in value terms which means the sector is export-orientated. South Africa’s agricultural sector already participates within Russia’s market, although ranked as the 29th country supplying agricultural products to Russia in 2018.

The current engagements with Russia should seek to improve South Africa’s position by promoting more exports in that market. If Russia was to insist on reciprocity within the agricultural sector, wheat would be their targeted space. In there, South Africa imports roughly half of its annual consumption. An increase in Russia’s wheat would displace other suppliers rather than add pressure to the local market in the near term.

SA farmland is dry

In a normal season, by this period, farmers would be hard at work planting, especially in the central and eastern regions of South Africa. But this has not been the case because of dryness that has prevented farmers from planting. Soil moisture in South Africa’s farmland is rated very short (dry) in nearly all regions of the country with the exception of a few areas near the border of Eastern and Western Cape where soil moisture was rated marginally adequate on 25 October 2019, as illustrated in Figure 2 in the attached file.

Over the weekend, some regions in the central parts of South Africa received light rainfall, which is a welcome development. But this was not sufficient to make meaningful improvement on soil moisture. The country needs a consistent and slow rainfall which will help to replenish soil moisture and thereafter support planting and growing of the crop.

We are generally positive that such rainfall is likely. The weather forecast for the next two weeks – Figure 4 in the attached file – shows prospects of rainfall across the summer rainfall (or crop-growing) areas of South Africa. More importantly, the South African Weather Service forecasts above-normal rainfall in the central and eastern regions of South Africa between November 2019 and January 2020. As encouraging as this is, it comes with some level of uncertainty and hence it will be important to monitor the weather conditions over the coming weeks as that will influence farmers decisions to plant.

From a data front

We start off on Monday, with the US Department of Agriculture’s US crop conditions data for the week of 27 October 2019. This data should give us a sense of the US crop-growing conditions, and thereafter the potential size of the harvest.

On Tuesday, the Quarterly Labour Force Survey data for the third quarter of 2019 will be released. To recap, Quarterly Labour Force Survey data for the second quarter of this year showed that South Africa’s primary agricultural employment fell by 0.2% from the corresponding period last year to 842 000. The subsectors that faced a notable reduction were mainly field crops, the game industry and forestry. In the case of field crops, the reduction in employment was unsurprising following a reduction in activity in the fields on the back of a poor harvest in the 2018/19 season, all of which is underpinned by unfavourable weather conditions earlier in the season. From a regional perspective, a notable decline in employment was recorded in the Northern Cape, Free State and Limpopo, whilst other provinces saw a marginal uptick.

 On Wednesday, the South African Grain Information Service (SAGIS) will release the grain producer deliveries data for the week of 25 October 2019. This covers both summer and winter crops. What we will particularly be interested in, however, are data for winter crops. This provides an indication of the progress in harvest activity which recently started in parts of the Western Cape wheat-producing regions. In the week of 18 October 2019, about 93 563 tonnes of the expected 1.8 million tonnes of wheat in the 2019/20 season had been delivered to commercial silos.

On Thursday, we will get the weekly grain trade data (wheat and maize) for the week of 25 October 2019. In brief, maize exports for the 2019/20 marketing year have thus far amounted to 532 045 tonnes. Looking ahead, we expect South Africa to remain a net exporter of maize this marketing year, although the volume will most likely fall by half from 2018/19 to about 1.1 million tonnes. At the same time, we expect maize imports of about 450 000 tonnes, all yellow maize, mainly for the coastal provinces of the country. This is up from an estimated 171 500 tonnes in the 2018/19 marketing year. The country has thus far imported 320 617 tonnes of yellow maize. About 88% from Argentina, with 12% from Brazil.

 In terms of wheat, South Africa’s 2019/20 wheat imports could increase by 14% y/y to 1.6 million tonnes because of expected lower domestic harvest on the back of unfavourable weather conditions in the Western Cape. The third import consignment of the 2019/20 marketing year was 67 476 tonnes. This placed total imports for the 2019/20 season at 135 270 tonnes, which equates to 12% of the seasonal import forecast. This week we will receive data for activity in the week of 25 October 2019.

 Also, on Thursday, Stats SA will release the Producer Price Index (PPI) data for September 2019. In August, South Africa’s food producer price inflation slowed to 5.4% y/y, from 6.1% y/y in the previous month.

At a gala event held in Stellenbosch on Friday evening, the Agricultural Writers SA announced the winners of the 2018 National Farmer, New Entrant into Commercial Agriculture and Agriculturist of the Year. The main sponsors of the event are Bayer, Santam Agriculture, Sanlam and Rovic Leers.

However, while food price inflation eased from double digits in 2017 to 0.5% year on year in October following a general recovery in agricultural production, the country is not completely out of the woods.

A recently published research paper by agricultural economists Jan Greyling and Philip Pardey in the Agrekon Journal brings home some key points about South Africa’s maize production in terms of commercial and smallholder share contribution. This is timely given the current debates about transformation in South Africa’s agricultural sector, with questions about the progress of smallholder black farmers arising.

 The fears about the potential disruptions that the novel coronavirus (COVID-19) could cause global supply chains have raised questions of whether South Africa could experience food shortages in the near-to-medium term. From a national perspective, we doubt this would be the case, at least for most food products. South Africa is an agriculturally endowed country, generally a net exporter of agricultural and food products, as illustrated in Exhibit 1 (in the attached file). What’s more, there are prospects for an abundant harvest of staple grains and fruit this year, which will increase the local supplies.

There are, nonetheless, essential imported food products that South Africa is dependent on such as; rice, wheat, and palm oil. Key palm oil suppliers are Indonesia and Malaysia. The typical suppliers of rice are Asia and the Far East, namely Thailand, India, Pakistan, China and Vietnam, some of which are hard hit by the pandemic. In the case of wheat, the suppliers are usually Germany, Russia, Lithuania, USA and the Czech Republic, some of which are also hard hit by the pandemic. Some of the countries which have reported cases of COVID-19 have not taken drastic measures of limiting business activity (apart from Italy and China) to reduce the spread of the virus. This means the importation of some agriculture products mentioned above into South Africa could continue unabated, barring any unforeseen eventuality. Aside from the major products, South Africa also imports poultry products and sunflower oil; but these are products that can be replaced by local supplies, should there be disruptions in global supply chains.

 In the unlikely event of potential shortages, it will be due to glitches in the logistics of shipping imports rather than a decline in global essential grains supplies. For example, the 2019/20 global wheat production could amount to 764 million tonnes, up by 5% y/y, according to data from the United States Department of Agriculture. Moreover, the estimated 2019/20 global rice production is 499 million tonnes, which is roughly unchanged from the previous season.  The global palm oil market is also well supplied, with about 8.0 million tonnes, according to data from SUNSEEDMAN.

Therefore, the readiness of the domestic food supply chains will perhaps be the ones to be tested in the coming weeks and months if panic-buying arising from fears of the spread of COVID-19 were to peak to levels seen in the UK and USA, amongst other countries. So far, however, there is relative calm in local food markets at retail levels, except for the rising demand for sanitizers.  As set out in our note last week, the implications of COVID-19 on food price inflation remains unclear in the near term. We continue to monitor the consumer buying behaviour for signals of rising demand. Suffice to say, South Africa has ample food supplies for 2020, and therefore, there is no need for panic buying. Hence, we have placed our forecast for food price inflation this year at about 4% y/y compared to 3.1% y/y in 2019. The uptick in food price inflation compared to the previous year is associated with a potential increase in meat prices, rather than the COVID-19 pandemic.

 Where negative pressures of the virus are likely to hit are on farmers and agribusinesses through the potential slowdown of export demand, and a likely subsequent decline in agricultural commodity prices. As we consistently pointed out in the previous notes, South Africa’s agricultural sector is export-orientated and heavily reliant on global markets. Nearly half of the value of what the country produces, is exported. Asia and Europe, which accounted for half of the US$10 billion of South Africa’s agricultural exports in 2019, are the hardest hit areas by COVID-19 thus far. There is likely to be disruptions in supply chains in these regions as governments strive to limit the spread of the virus.

WEEKLY HIGHLIGHTS

 A mixed bag of grains

 Last week the United States Department of Agriculture (USDA) released a monthly update of its World Agricultural Supply and Demand Estimates report. The commodities we typically study in this report are wheat, maize and soybeans, for various reasons, however.

Wheat

 As South Africa is a generally net importer of wheat; hence we must monitor global wheat supplies and other market developments. As previously stated, in the 2019/20 season, South Africa’s wheat imports could increase by 33% y/y to 1.8 million tonnes. This is 13% higher than the five-year average import volume, exacerbated by the decline in domestic wheat production on the back of unfavourable weather conditions in parts of the Western Cape late 2019.

  Fortunately, there are large supplies in the global market. The USDA forecasts 2019/20 global wheat production at 764 million tonnes, up 5% y/y, as previously stated. What's more, the 2019/20 global wheat stocks are estimated at 288 million tonnes, which is also 4% higher than the previous season. This means there are sufficient supplies for importing countries such as South Africa in the global market. The main challenge for trade in the near-term, however, is likely to be COVID-19 due to potential disruptions in supply chains. With that said, we haven’t noticed any major hiccups thus far.

Maize

  What’s more, South Africa is a net exporter of maize, so one looks into the USDA data for two reasons; (1) to get a sense of their estimate for South Africa’s maize production at a particular season, (2) and for a view of global maize supplies, which partially influences domestic maize prices. With that said, the correlations between the global and South African maize prices tend to be weak in years of maize abundance in the domestic market.

 The USDA has lifted its estimate for South Africa’s 2019/20 maize production by 10% from last month to 16.0 million tonnes. This is up by 35% from the previous season. This data comprises both commercial and non-commercial production and therefore not comparable to South Africa’s Crop Estimates Committee’s number of 14.6 million tonnes released last month, which accounts for only commercial production. Nonetheless, this doesn’t change the view we expressed last month, which is; if it materialises, this could be the second-largest summer maize harvest on record after the 2016/17 season (which was 16.8 million tonnes for total maize).

Aside from a favourable food price inflation outlook, this data essentially means that South Africa would remain a net exporter in the 2020/21 marketing year which starts in May 2020 (the 2020/21 marketing year corresponds with 2019/20 production season). This is at a time where Southern African maize import needs could outpace the previous year, with Zimbabwe in need of maize supplies to an extent that the country lifted a ban on the importation of genetically modified maize, which eases access for South African maize exporters.

 Moreover, a maize harvest of 16.0 million tonnes would enable South Africa to export maize beyond the continent to other typical markets such as Japan, Taiwan, Vietnam and South Korea who are not prominent in the current marketing year. With that said, the coronavirus remains a key threat to global agricultural trade and may disrupt South Africa’s agricultural exports in various markets.

Globally though, maize production is set to fall by 1% y/y to 1.1 billion tonnes in 2019/20. This will subsequently lead to a 7% y/y decline in stocks to 297 million tonnes. While this will be supportive of global maize prices, its influence on the South African maize market is likely to remain minimal.

Soybeans 

As stated in our note last week, South Africa imports, on average, 550 000 tonnes of soybeans oilcake (meal) a year. About 97% from Argentina. Hence, we are compelled to pay close attention to global soybean market dynamics. The USDA forecasts 2019/20 global soybean production at 342 million tonnes, down 5% y/y. As a result, the 2019/20 global soybean stocks are down 8% y/y, estimated at 102 million tonnes. China, which is heavily affected by COVID-19 is the leading importer of soybeans, accounting for 58% of the global soybean import forecast for 2019/20 season. The disruptions caused by the virus there could have implications on soybean imports activity.

Concluding remarks 

Overall, this is a “mixed bag of grain market dynamics”; global wheat prices could be favourable in the near term for importing countries (and South African consumers), assuming minimal disruptions from the coronavirus. The same is true for maize but the benefit will be from the anticipated improvement in domestic supplies. Meanwhile, soybeans could be the opposit

DATA RELEASES THIS WEEK 

On Wednesday, Stats SA will release the Consumer Price Index data for February 2020. To recap, South Africa’s food price inflation was at 3.7% y/y in January 2020, while the previous month was 3.8% y/y. This deceleration, however, was not across the food basket. Only price inflation of bread and cereals; fish; and vegetables decelerated. But this was enough to overshadow the increases in meat; milk, eggs and cheese; oil and fats; fruit; sugar, sweets and desserts.

Also, on Wednesday, the South African Grain Information Service (SAGIS) will release the weekly grain producer deliveries data for the week of 13 March 2020. This covers both summer and winter crops. With summer crops still at growing stages, the focus remains on winter wheat data, whose harvest was completed in January 2020. In the week of 06 March 2020, about 4 052 tonnes of wheat were delivered to commercial silos. This placed total wheat deliveries at about 1.42 tonnes, which equates to 95% of the expected harvest in the 2019/20 season.

 On Thursday, SAGIS will release the weekly grain trade data (wheat and maize), also for the week of 13 March 2020. In brief, maize exports for the 2019/20 marketing year have thus far amounted to 1.15 million tonnes, which equates to 87% of the export forecast for this season (1.32 million tonnes).

 At the same time, we expect maize imports of about 525 000 tonnes, all yellow maize, mainly for the coastal provinces of the country. This is up from an estimated 171 622 tonnes in the 2018/19 marketing year. The country has thus far imported 477 671 tonnes of yellow maize.

 Also, on Thursday, the United States Department of Agriculture will release the weekly export sales data. This is important data to monitor as it will give an indication of the US agriculture exports to China, and help us monitor the progress on commitments made in phase one trade deal.

Noticing another notable move in the South African maize (white and yellow) and sunflower seed prices . Both nearest and new season contract month prices of these commodities increased by more than R100 a tonne from levels seen on Friday (December 7).

Durban harbour is key to South Africa’s grain trade. In the 2017/18 marketing year, South Africa exported 2.3 million tonnes of maize (white and yellow). About 74% of this went to markets through Durban harbour (nothing through other harbours), with the rest exported by road and rail to the continent.

A bit of background — the South African livestock industry has somewhat recovered from the 2015/2016 drought, and that has led to increased slaughtering activity.

The inherent uncertainty around weather conditions remains a major risk to global wheat production in the foreseeable future. Whether one looks at Europe, North America or Southern Africa, there are increasing reports of drier weather conditions. If dryness persists for a prolonged period, it could threaten wheat yields and, in turn, lead to a downward revision of the optimistic outlook of 2020/21 global wheat production of a record 768 million tonnes that the United States Department of Agriculture (USDA) currently forecasts. Over the past week, Romania, Russia and Ukraine are amongst countries which saw their 2020/21 wheat production forecasts revised down because of expected poor yields in some spring wheat-growing regions. What's more, the UK, France, Belgium, Netherlands and parts of Germany are also amongst the European regions currently experiencing inadequate moisture.

 The same is true for the US where analysts now have some doubts that the USDA wheat yields forecasts will materialise if there aren’t sufficient rains in the coming days or weeks. We now look to the USDA’s crop conditions report which will release the results of crop conditions for the week of 24th of May 2020 on Tuesday. In the week of 17th May 2020, about 52% of the US winter wheat was rated good or excellent, which is slightly behind the 66% rating in the corresponding day in the previous year.  To a certain extent, this shows the impact of dryness in some regions of the US wheat industry.

For a broader update of the 2020/21 global wheat production estimates, we look to the USDA’s World Agricultural Supply and Demand Estimates report which will be released on the 11th of June 2020. In the meantime, various crop forecasts from governments and analysts suggest that the USDA might have to revise down the optimistic estimate of a record 768 million tonnes in the next release. The magnitude of such revisions, however, will largely depend on the weather conditions in the coming weeks.

In Southern Africa, there aren’t many major wheat producers, with South Africa being the only major producer in the region. The winter wheat planting activity in the country commenced at the start of April and will continue until the end of this month or first week of June, which is when the optimal planting window closes. By the week of the 24th of May 2020, nearly two-thirds of the estimated 495 000 hectares for the 2020/21 season had been planted. Various regions of the major wheat-producing province, Western Cape, have experienced persistent dryness which somewhat slowed the planting activity. Moreover, the aforementioned intended planting area for the 2020/21 wheat season is down by 8% from the previous season.

South Africa’s Crop Estimates Committee will release its first winter wheat production forecast on the 27th of August 2020. It is only on that day that we will have a sense of how big the 2020/21 wheat crop could be. The preliminary estimates from the International Grains Council (IGC) paint an optimistic picture of 22% y/y increase in South Africa’s 2020/21 wheat production to 1.8 million tonnes. While it is still early to make a concrete judgement, we doubt if this will materialise under the expected area plantings and dryness. Perhaps, the IGC took a leaf from the South African Weather Service in drafting the underlying assumptions for this estimate.

 On the 30th of April 2020, the local weather bureau estimated an increased chance of above-normal rainfall in the south-western regions of South Africa, which included the Western Cape between May and August 2020. So far, the forecast rainfall hasn’t materialised. Notwithstanding that the rainfall forecast for this week promises widespread showers over most regions of the Western Cape, which could be a welcome relief and conducive for the planting activity currently underway.

In a nutshell, the weather remains a major risk that requires constant monitoring in the global wheat market. This means, while the fears about lower global wheat supplies have eased following the release of the 768 million tonnes production estimate for 2020/21 season, a lot will depend on weather conditions for the coming weeks. With that said, we still think there is no need for panic at this point or for major wheat-producing countries to re-consider the restrictive trade policy they had intended to implement at the start of the pandemic when they feared for wheat shortages. The current weather forecast only suggests that global production might not be as large as initially expected, but there aren’t signs of potential shortages.

WEEKLY HIGHLIGHTS

 SA maize harvest process slightly delayed

The late start of the 2019/20 maize production season because of dryness when farmers commenced planting, means that the harvest process will be slightly later than usual. This is clear from the maize producer deliveries data for the first three weeks of the 2020/21 marketing year (corresponds with the 2019/20 production season), which are down by 19% compared to the corresponding period last year, with about 277 178 tonnes delivered in the week of 15th of May 2020. This is the case, although the 2019/20 maize harvest is expected to be up by 35% y/y, estimated at 15.2 million tonnes, which is the second largest harvest on record . Essentially, the harvest process has started across all provinces, but still at very preliminary stages.

Nevertheless, with the weather outlook for maize-producing regions of the South Africa showing clears skies for the next two weeks, the harvest activity could gain momentum around mid-June 2020. This means that in the coming months, the increase in harvest activity could add downward pressure on maize prices, which at the end of the past week traded at roughly the same levels as in the previous year (21 May 2019). White and yellow maize prices were at R2 674 per tonne and R2 682 per tonne, respectively, on 21 May 2020. The downward pressure on prices is likely, particularly as the country is expecting a bumper maize harvest. The one factor that could somewhat minimise the potential decline on maize prices and other agricultural commodity prices is the weaker domestic currency, which currently shows a strong correlation (see, The recent sharp price increases in South Africa’s white maize shouldn’t be a worry: a temporary market blip, published on 25 April 2020 for maize price and USD/ZAR correlation).

 DATA RELEASES THIS WEEK

 From a global perspective, on Tuesday the United States Department of Agriculture (USDA) will release the weekly crop progress data. This is important data to monitor grains and oilseeds planting activity across the US for the 2020/21 production season, which promises to be a good one, despite the glitches caused by the COVID-19 pandemic and drier weather conditions.

There has already been enormous progress in planting activity across the US. On the 17th of May 2020, about 80% of the intended area for maize in 2020/21 season had already been planted. This compares to 44% in the corresponding week the previous year and a five-year average of 71%. In the same day, about 53% of the intended area for soybeans had already been planted, compared to 16% on the 17th of May 2019 and a five-year average of 38%. Also, worth noting is that the planting activity in the US in 2019 was far behind schedule because of excessive rains at the start of the season.

 On Friday, the USDA will release the weekly export sales data. This is important data to monitor as it will give an indication of the US agriculture exports to China, and help us monitor the progress on commitments made in phase one trade deal and impact of the COVID-19 pandemic on trade.

 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 22nd of May 2020. This covers both summer and winter crops. But the focus is on summer crops since the winter crops are still at planting stages. As indicated above, in the third week of the 2020/21 maize marketing year, which was on the 15th of May 2020, about 277 178 tonnes of maize had already been delivered to commercial silos. About 58% was yellow maize, with 42% being white maize. This, however, is a small fraction of the expected harvest of 15.2 million tonnes in the 2019/20 production season (which corresponds with 2020/21 marketing year).

Unlike maize, where the harvest season is still at its very early stages, there has been progress in the soybean harvest. In the week of 15th of May 2020, about 842 428 tonnes had been delivered to commercial silos. This equates to 65% of the expected harvest of 1.3 million tonnes in the 2019/20 season. Also, on the 15th of May 2020, about 211 279 tonnes of sunflower seed, which accounts for 29% of the expected harvest in 2020/21 marketing year had already been delivered to commercial silos.

  On Thursday, SAGIS will release the weekly grain trade data. In the third week of the 2020/21 marketing year, about 59 702 tonnes of maize had already been exported, all to the neighbouring countries. This too is a small fraction of the 2.7 million tonnes of South Africa’s 2020/21 maize exports we currently forecast, which is up by 90% y/y. This notable increase is supported by the expected large harvest, which is set to be the second largest in the history of South Africa, at 15.2 million tonnes. In terms of wheat, South Africa is a net importer. In the week of the 15th of May 2020, South Africa’s 2019/20 wheat imports amounted to 1.2 million tonnes, which equates to 66% of the seasonal import forecast.

In Africa, having the largest cattle herd is not always a predictor of being the biggest beef or milk producer. Ethiopia, Sudan, Tanzania, Nigeria, Kenya are the top five countries with the largest cattle herds in Africa.

Countries such as Canada are making great strides in exploiting cannabis for economic purposes and job creation. On December 3, Kristine Owram, writing for Bloomberg, noted that “there has been a spike in postings for jobs at cannabis growers and retailers in Canada.

These past few days I shared contrasting views on the agricultural conditions between the western and eastern parts of South Africa due to variations in weather conditions. If there is one photo that clearly demonstrates the picture I was trying to paint, it’s this one – see Figure 1 below.

The South African government is currently drafting its localization strategy as part of various measures underpinning the Economic Reconstruction and Recovery Plan from the destruction caused by the pandemic. The agriculture, food and beverages sector accounted for an average 8% of South Africa’s total imports over the past five years, an annual value of about US$6.5 billion. This makes it a fairly notable sector to be explored in the process of promoting localization.

The top-ten products in the import list account for 46% of all agriculture, food and beverages imports. These are rice (7%), poultry meat (7%), wheat (6%), alcohol (vodka, whiskies, spirits, gin, rum, etc.) (5%), sugar cane (5%), palm oil (4%), beer from malt (4%), protein concentrates (3%), sunflower oil (3%), and unspecified animal foods (dog or cat food for retail) (2%). This top-ten import list might draw the attention of policymakers, or even persuade them to explore ways of reducing the imports in this category. But this is not where the attention should be. The focus should rather be on relatively small and niche value chains where South Africa might have capabilities of improving domestic production.

 As an example, the top-ten imports list comprise of some products that South Africa does not have a conducive climate to increase its production. Such products are palm oil, wheat and rice, which account for 18% of overall agriculture, food and beverages import bill of US$6.5 billion. With that said, there could be an improvement in the medium to long term in reducing the imports of poultry products, sunflower oil, sugar cane and animal foods through improvements in domestic production. In the case of poultry and sugar industries, the Master Plans and various trade instruments in place are some of the policy steps that seek to support domestic production and reduce import dependency.

 Other imported products, which are not part of the top ten, yet notable include live cattle, fruit juices, bottled water, coffee, soybean oilcake, pork products, pasta, honey, pasta, beef and sources, amongst others. Closely studying this list and identifying products and value chains that South African business can expand operations on will be essential in the drafting of the localization strategy. Another important aspect will be an increased focus in value chains that are also labour intensive so that the localization strategy can also address the core challenge in South Africa, which is the growing unemployment.

Importantly, South Africa will need to foster the localization strategy while also being cognizant of the trading partners perception of this strategy. The country should minimize the use of trade instruments such as import tariffs, and rather focus more on providing incentives to develop the value chains that will be identified as key. We mention this because of South Africa’s agriculture, food and beverages’ dependence on export markets. The annual exports over the past five years averaged US$9.6 billion. Therefore, any trade policy instrument that would signal increased protection for the local sector to South Africa’s trading partners might not be a good signal. The localization strategy should rather be packaged and communicated as a way of boosting local production in employment-intensive subsectors that will help address the growing unemployment in the country.

Moreover, the same level of energy will be required for expanding the export markets for products that South Africa currently produces. In the case of agriculture, the horticulture sector is seeing growing volumes in fruits such as citrus and more volumes will be harvested in the coming years and there will need to be a market for these products. In addition to the typical EU markets that South Africa participates in, the needs to be increased attention in gaining market access for South Africa’s agricultural products in markets such as India and China, who have a growing population and where South Africa’s agriculture, food and beverages presence is still minimal. South Africa’s share in India and China’s agriculture, food and beverages imports is a mere 0.5% and 0.3%, respectively, as illustrated in Exhibit 1 (attached file). Both these countries are part of the BRICS group, which provides a mutual political space for South Africa to promote the desire to increase market access for these products. Such ambition, however, will need to be aware of the reciprocities that these countries might need and how important such industries will be for the South African economy. Balancing these will be a task of the policymakers.

In sum, there is room for the localization strategy in South Africa’s agriculture, food and beverages sector. Yet, the focus needs not to be primarily on the top-ten imported products, rather on niche and labour-intensive value chains that haven’t been explored to full potential. Determining such value chains will require deep research which the Department of Trade, Industry and Competition should lead, along with private sector players. The use of trade policy instruments should be careful thought-out and not lead to a situation where trading partners will deem South Africa as being a protectionist country.

WEEKLY HIGHLIGHTS

The October uptick in South Africa’s food price inflation may be a temporary blip

 South Africa’s food price inflation accelerated to 5.6% y/y in October 2020 from 4.2% in the previous month, and well above the average of 4.4% for the first nine months of the year. This was broad-based and reflective of the agriculture commodity price increases we have observed in the past few months. In this section we highlight a few products with higher weighting on the food price inflation basket, namely: (1) bread and cereals, (2) meat, (3) vegetables, (4) milk, eggs and cheese, and (5) oils and fats.

First, the increases in bread and cereals price inflation mirrors, although to a limited extent, the surge in grains prices that’s been underway over the past couple of months. The South African grains prices were pushed higher mainly by the weaker domestic currency, stronger demand in the Southern Africa region and also the Far East, as well as generally higher global grains prices, which are, in turn, supported by strong demand from China. This happened despite the country having received its second-largest maize harvest in history in 2019/20, about 15.4 million tonnes.

Second, the decline in slaughtering rate of red meat (aside from cattle), along with the recent increase in poultry import tariffs are amongst the factors that have provided an increase in meat price inflation. Moreover, there is also an element of base effects as meat price inflation was fairly subdued in 2019. Third, South Africa had a fairly good season in field crops and horticulture perspective, but that was only at the aggregate level. Some important vegetables which include potatoes saw prices rising in the past few weeks because of lower harvest in central and northern regions of South Africa. But this is all temporary. The outlook for the 2020/21 production season is positive, with prospects of La Niña rains.

Fourth, the increase in milk, eggs and cheese category of the food price inflation was a surprise as total raw milk purchases and supplies in the country have generally been higher than the previous five years, according to reports from the South African Milk Processors’ Organisation. Perhaps, this somewhat reflects the global dynamics, where milk prices have generally been at higher levels compared to 2019, according to the FAO Dairy Price Index.

Lastly, the acceleration in oils and fats price inflation is partly influenced by the weaker domestic currency in the past few months. South Africa remains a net importer of vegetable oils and therefore exposed to exchange rate risks. Moreover, the global vegetable oil prices have generally been at higher levels in recent months, boosted, in part, by the growing demand from China. These dynamics influenced price levels that we observed in the South African market. Nevertheless, this is all history, and the interest is probably on the outlook view going into 2021. We are generally optimistic that South Africa’s food price inflation might not exceed an average of 5% y/y in 2021. The expected La Niña rains could help boost the domestic harvest; and importantly, improve the harvest across Southern Africa. This could subsequently lessen pressure and demand for South African products. This, in turn, could lead to softer agricultural commodities prices and contain food price inflation at comfortable levels. In addition, the strengthening domestic currency also bodes well for products the country imports such as vegetable oils and fats.

South Africa’s winter crop production forecasts revised up

 The Crop Estimates Committee lifted its production estimates for wheat, barley and canola 1%, 5%, 8%, respectively from October 2020 to 2.15 million tonnes, 552 766 tonnes, and 148 456 tonnes. These will be the largest harvest on record for barley and canola, while for wheat it will be the largest harvest in 19 years.

 Nevertheless, the increase in production will have minimal impact on prices, specifically wheat, of which South Africa is a net importer. And thus, wheat prices largely depend on developments in the global market, along with domestic currency movements. Having said that, while South Africa will remain a net importer, the volume will fall notably compared to the previous year. The most recent estimates from the South African Grain and Oilseeds Supply and Demand Estimates Committee suggest that wheat imports could fall by 18% y/y to 1.54 million tonnes, which bodes well for the agricultural trade balance. Meanwhile, the recovery in barley production will see South Africa being a net exporter. Canola and oats will mainly be for domestic consumption.

DATA RELEASES THIS WEEK

This is a relatively quiet week on the agricultural calendar. On the global front, we start the week with the US weekly crop progress report which will be released later today by the United States Department of Agriculture (USDA). The report will mainly focus on winter wheat conditions, as the maize and soybean harvest process has been completed in the US.

 On Thursday, the USDA will release the US weekly export sales data, which also help in tracking the agricultural trade activity between the US and China. In recent weeks, China has been buying large volumes of both maize and soybeans, and the demand is expected to hold as the country rebuilds its pig herd which was devastated by African swine fever. In October 2020, the size of China’s national pig herd is up by 27% y/y, according to China’s Agriculture Ministry.

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 27 November 2020. This data covers both summer and winter crops. But the focus has shifted towards winter crops whose harvest is underway. In the week of 20 November 2020, about 312 350 tonnes of winter wheat were delivered to commercial silos. This placed the 2020/21 wheat producer deliveries at 695 898 tonnes, which equates to 32% of the expected harvest of 2.15 million tonnes.

On Thursday, SAGIS will release the weekly grain trade data also for the week of 27 November 2020. In the previous week of 20 November 2020, South Africa’s 2020/21 total maize exports were at 1.75 million tonnes, which equates to 70% of the seasonal export forecast (2.50 million tonnes). In terms of wheat, South Africa is a net importer, and in the week of 20 November 2020, the eight consignment for the 2020/21 marketing year had arrived, putting the total imports at 418 941 tonnes. This equates to 27% of the seasonal import forecast of 1.54 million tonnes.