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Still no light in sight in South Africa wool industry trade matters

It has been nearly two months since the Chinese authorities temporarily suspended South African wool imports because of the foot-and-mouth disease outbreak earlier in the year.

The recent communication from the domestic wool industry, following a meeting with their Chinese counterparts, suggests that there could be further delays before the suspension is lifted.1 Depending on how this matter unfolds in the coming weeks, there is likely to be implications on the agricultural trade balance this year, as wool is amongst the top 10 exportable agricultural commodities in South Africa. In 2018, wool accounted for 4% of South Africa’s agricultural exports of US$10.6 billion.
• As we stated in our note on 25 February, what makes the Chinese decision to suspend South African wool imports particularly concerning is its share contribution to the domestic exports. Over the past five years, China accounted for an average of 71% of South Africa’s wool exports in value terms. The other markets for the South African wool industry were the Czech Republic, Italy, India, Bulgaria, Germany, the United States, and Malaysia, amongst others.
• While this heavy reliance on the Chinese market might have served South Africa well when there was minimal trade friction, today it is proving to be a challenge and has raised questions of possible diversification of wool export markets in the medium-to-long term as to avert a similar challenge in the future. While this would be a desirable approach, it wouldbe hard for any country to thrive in the wool market without some level of reliance on China due to its dominance. China accounted for an average of 62% of global wool imports by value over the past five years.
• With that said, the other countries that we think South Africa should explore a possibility of growing its market share, as a form of diversification, would be India, Italy, the Czech Republic, South Korea, Egypt, Thailand, Bulgaria, and Japan. These countries collectively accounted for 27% of global wool imports in 2018. Most importantly, South Africa already has a presence in these countries, albeit currently a smaller share in their import volumes. Therefore, we can assume that the domestic industry players are somewhat familiar with the technical necessities for wool exports to the aforementioned countries. The competitors that South Africa would most likely encounter within these markets are similar to the ones that are currently supplying China, which are Australia, New Zealand, Uruguay, Argentina, and United Kingdom, amongst others. Given that in the past two years, South Africa was the second leading supplier of wool to China, this suggests that the country can still be amongst the competitive wool suppliers in other markets.
• Looking back into the recent history, one of the periods where South African wool exports to China were suspended due to the foot-and-mouth disease outbreak was in 2011, but the impact then on export values was minimal, as the matter was resolved within few months. We will continue monitoring the developments on this matter. As things stand, we are concerned about its potential impact on the agricultural trade balance, and the growth of the wool industry. Perhaps, in the long run, the diversification of the export market should be one of the industry’s strategic goals.
Summer grain and oilseed production estimates
• Although the recent scattered rainfall in the summer crop growing areas of South Africa will not help much in improving crop conditions as most areas have matured somewhat, it might reduce the occurrence of frost over the coming weeks which will be beneficial to the crops, specifically the late planted areas in the central and western parts of the country.
• Aside from these recent weather developments, 2018/19 has generally not been a good season for summer crops due to dryness at the start of the season which resulted not only in the late start of the season, but also a reduction in area planted. Our sense is that there will be below-average yields in most summer crops, specifically in the central and western parts of South Africa. The provinces that could, perhaps, receive average-to-above average yields in summer crops such as maize and soybeans, are Mpumalanga and KwaZulu-Natal due to favourable weather
conditions in the eastern parts of South Africa over the past couple of months.
• On Thursday, 25 April, the Crop Estimates Committee (CEC) will release its third summer crop production estimates which will help shape our view of South Africa’s grain and oilseed supplies for the 2019/20 marketing year. The data will include maize (white and yellow), sunflower seed, soybeans, groundnuts, sorghum and dry beans, but our focus in this particular preview note is only on major grains.
 Maize: We started off the season with a pessimistic view, thinking that South Africa’s maize production could drop to as low as 10.0 million owing to poor yields in the central and western parts of the country. While conditions didn’t improve much in these areas over the past few months, as previously noted, the somewhat positive feedback from interactions with farmers in most parts of the country has compelled us to adjust our views on South Africa’s 2018/19 maize production to 10.6 million tonnes, which is in line with the previous estimates by the CEC, as shown in Figure 1. In essence, we do not expect notable changes from the CEC this week, if anything it will probably be a slight downward revision on the white maize production figures.
To put things into perspective, if South Africa harvests a maize crop of at least 10.0 million tonnes in 2018/19 production season (this corresponds with 2019/20 marketing year) which will be added to an opening stock of 3.0 million tonnes when the 2019/20 marketing year starts on 01 May 2019, then there could be sufficient supplies in the market, and that will cover the country’s annual consumption of about 10.8 million tonnes.
Moreover, South Africa is likely to remain a net exporter of maize in the 2019/20 marketing year. The exports, however, could decline by half from the 2018/19 marketing year to about 1.1 million tonnes. Importantly, this is under the assumption that maize production could amount to 10.6 million tonnes – a current CEC estimate.
Soybeans: We don’t expect any notable adjustments in South Africa’s 2018/19 soybean production as weather conditions have largely been favourable in most soybean-growing areas since the last assessment, which placed the potential harvest at 1.3 million tonnes. This is down by 13% from the previous season, and means that South Africa could be a net importer of soybeans in the 2019/20 marketing year (corresponds
3 with the 2018/19 production season). All else being equal, we think South Africa’s 2019/20 soybean imports could amount to 7 000 tonnes, which is slightly higher than the 2018/19 marketing year.
Sunflower seed: Similar to soybeans, we think that the CEC could leave its sunflower seed production estimate unchanged from last month, at 563 590 tonnes. The recent rains in some sunflower seed growing areas could help reduce the occurrence of frost, but might not have boosted the yields as the crop had already matured. The current expected harvest is down by 35% from the previous season. If we work with
these numbers, South Africa could be a net importer of sunflower seed in 2019/20 marketing year. We estimate that imports could amount to 100 000 tonnes, up from 1 324 tonnes in the 2018/19 marketing year.
Winter grain and oilseed farmers’ intentions-to-plant
• Aside from the summer crops data, the CEC will also release the farmers’ intentions to plant winter grain and oilseed data (wheat, barley, and canola). In this process, the weather will take a centre stage at least until December 2019 when the crop has matured.
• To recap, a few weeks back we signalled a possibility of favourable weather conditions over the south-western parts of South Africa, which would ultimately benefit winter crops. That view has not changed. On 28 March 2019, the South African Weather Service reaffirmed its view that between April and July 2019, the south-western parts of South Africa could receive above-normal rainfall. This bodes well with the 2019/20 winter crop production season as farmers will soon start preparing soils for planting in the Western Cape. Meanwhile, other winter crop growing provinces such as the Northern Cape, Limpopo and Free State, amongst others, will commence with plantings around mid-year.
• In terms of farmers’ planting decisions, we maintain our generally positive view that there will be a good activity in all major winter crops areas,  as weather conditions have been favourable over the past few weeks. 
Parts of the Western Cape received fairly good rainfall last month, which means that soil moisture is not as depleted as at the start of the 2018/19 production season when the country was shaking off the 2017 drought.
• Our view is that wheat plantings could, at least, be about 530 000 hectares, which would be 5% higher than the 2018/19 plantings. In the 2018/19 production season, barley plantings of 119 000 hectares were the highest in 19 years. In the 2019/20 production season, the area is likely to remain fairly stable, or decline marginally if wheat plantings increase more than what we are currently anticipating.
• Canola is also another crop that we believe could show about 4% year-on-year improvement in plantings to roughly 80 000 hectares if weather conditions remain favourable as the forecasts suggest.
• Aside from the weather, prices will also be an important factor for farmers to consider as some crops tend to compete for land use. Wheat prices have been relatively favourable from a producer perspective since the start of the year, mainly supported by the relatively weaker domestic currency against the US dollar, as well as higher Chicago wheat prices, which are underpinned by tight global supplies. The 2018/19 global wheat production could reach 735 million tonnes, down by 4% year-on-year, according to data form the International Grains Council. This will subsequently lead to a 3% annual decline in the 2018/19 global wheat stocks to 264 million tonnes. Thus, providing support to global wheat prices.


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