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Delayed rains, but the 2019/20 summer crop looks promising-South Africa

South Africa’s Crop Estimates Committee (CEC) releases its first estimate of the country’s 2019/20 summer crop harvest on the 26th of February 2020.

Market expectations are largely positive because of two factors. First, the area planted for major summer crops such as maize, soybeans and sunflower seeds is up 10% y/y, 4% y/y and 7% y/y, respectively. Second, although summer rains were delayed which subsequently led to a share of plantings occurring outside the optimal window in some regions of the country, weather conditions have improved notably since the beginning of January 2020. And as a result, the crop is in good shape in most regions of the country with anticipation of higher yields.

 

On the 27th of January 2020, we tentatively placed our forecast for South Africa’s 2019/20 maize harvest at 12.50 million tonnes. We have now lifted this to 13.72 million tonnes, which is 22% higher than the 2018/19 season’s harvest. This is underpinned by an upward revision of yield estimate to 5.40 tonnes per hectare, from our earlier assumption of 5.00 tonnes per hectare, in an area of 2.54 million hectares.

 

 If such a harvest materialises, South Africa would remain a net exporter of maize in the 2020/21 marketing year which starts in May 2020 (this 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 importation of genetically modified maize, which eases access for South African maize exporters.

 

Other typical maize export markets for South Africa outside the African continent, include Japan, Taiwan, Vietnam and South Korea. While these particular countries have not featured prominently in the 2019/20 marketing year exports, which were largely dominated by African countries, we anticipate that they could return in the 2020/21 marketing year. We think the potential increased supplies could lead to possibly attractive or competitive prices in the coming months, which should be a catalyst for increased exports to countries outside the continent.

 

 Moreover, we estimate that South Africa’s soybeans and sunflower seed 2019/20 season harvest could lift by 26% and 12% from the previous season, to 1.48 million tonnes and 761 070 tonnes, respectively. This too is underpinned by an expansion in area plantings and anticipation of higher yields. Our soybean yield estimate is 1.95 tonnes per hectare, with sunflower seed yield estimate at 1.38 tonnes per hectare. All these are within the historic range of seasons of good rainfall. Unlike maize, however, South Africa could remain a net importer of soybean products, specifically oil cake, and a net importer of sunflower oil, irrespective of the potential improvement in the harvest. This is largely caused by the growing domestic demand for these particular oilseed products.

 

 Overall, as we will explain in the next section of this note, an improvement in the summer crop harvest bodes well with South Africa’s food price inflation for the year. As a result of our optimism on 2019/20 summer crop yields, food price inflation could remain benign in 2020, hovering around 4% y/y in our view.

 

SA winter crop production forecasts to remain unchanged

 

Also, out on the 26th of February 2020 is the seventh estimate of South Africa’s 2019/20 winter crops production. With the crop having been harvested already by the end of January, which was when the CEC released its previous estimate, we don’t foresee adjustments in this month’s update. The CEC currently forecasts 2019/20 wheat, barley and canola production at 1.5 million tonnes, 345 080 tonnes and 96 200 tonnes, which is respectively down by 20%, 10% and 8% from last season (see Exhibit 2 in the attached file). This is partly caused by expectations of poor yields in some regions of the country following drier weather conditions towards the end of 2019, specifically in most regions of the Western Cape.

 To zoom in on a major winter crop – wheat – the downward revision is mainly on the back of poor harvest in parts of the Free State, Limpopo, Northern Cape and Western Cape. All is because of lower yields on the back of unfavourable dry weather conditions over the past few months, not the decline in area plantings. The area planted to wheat in 2019/20 production season is 7% higher than the previous season, at 540 000 hectares.

 

 This will result in an increase in wheat imports within the 2019/20 marketing year in order to supplement the domestic consumption needs. We think South Africa’s 2019/20 wheat imports could increase by 33% y/y to 1.80 million tonnes. Fortunately, there are large supplies in the global market. The United States Department of Agriculture (USDA) forecasts the 2019/20 global wheat harvest at 764 million tonnes, up by 4% y/y. This has also kept global prices at softer levels, which should be beneficial to importing nations such as South Africa.

 

WEEKLY HIGHLIGHTS

 

South Africa’s food price inflation to remain subdued in 2020

 

 As highlighted in our note on the 19th of February 2020, South Africa’s food price inflation slowed to 3.7% y/y in January 2020 from 3.8% y/y in the previous month. 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.

 

 What we think will matter the most for the direction of food price inflation this year are developments in the grains and meat markets. These two food categories account for nearly two-thirds of South Africa’s food price inflation basket.

 

 Firstly, the outlook for South Africa’s grain production is positive. Maize production could increase by, at least, 22% y/y to 13.72 million tonnes. What’s more, global wheat production, which South Africa is a net importer of, is set to be up 4% y/y to 764.0 million tonnes, according to data from the USDA. This means grain-related product prices could be under pressure in the coming months.

 

 Secondly, meat price inflation was subdued in 2019 because of the ban on red meat exports on the back of a foot-and-mouth disease outbreak at the start of that year. We are seeing a repeat of a similar situation this year following another foot-and-mouth disease outbreak at the end of 2019. This means South Africa’s meat prices could again remain at relatively lower levels for the greater part of this year. But the lower base effect of 2019 will mean that meat will not suppress the overall food price inflation in 2020 as much as in the previous year.

 

 Against this backdrop, we believe South Africa’s food price inflation should hover around 4.0% in 2020 (food price inflation averaged 3.1% y/y in 2019). Under this scenario, the upside pressure will largely come from meat; and importantly, it will mainly be base effects in the case of red meat, and a possible slight uptick in poultry products prices. Grain prices should remain subdued on prospects of a good domestic maize crop and bearish Chicago prices.

 

DATA RELEASES THIS WEEK

 

While the attention on Wednesday will be fixed on the 2020 National Budget Review, there are some data releases to keep an eye on in the agricultural front.

 

First, the South African Grain Information Service (SAGIS) will release the weekly grain producer deliveries data for the week of 21 February 2020. This covers both summer and winter crops. With summer crops still at growing stages, the focus is on winter wheat data, whose harvest was completed in the previous month. In the week of 14 February 2020, about 3 278 tonnes were delivered to commercial silos. This placed total wheat deliveries at about 1.39 tonnes, which equates to 93% of the expected harvest in the 2019/20 season.

 

 Second, the Crop Estimates Committee releases its seventh production estimate for South Africa’s 2019/20 winter crops (wheat, barley and canola) and also the first production forecast for 2019/20 summer crops (see the introductory section for our expectations).

 

On Thursday, SAGIS will release the weekly grain trade data (wheat and maize), also for the week of 21 February 2020. In brief, maize exports for the 2019/20 marketing year have thus far amounted to 1.01 million tonnes, which equates to 77% of the export forecast for this season (newly revised 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.

 

·       In terms of wheat, South Africa’s 2019/20 wheat imports could increase by 28% y/y to 1.80 million tonnes because of expected lower domestic harvest on the back of unfavourable weather conditions in the Western Cape. In the week of 14 February 2020, South Africa’s 2019/20 season amounted to 568 556 tonnes, which equates to 32% of the aforementioned seasonal import forecast (now revised to 1.8 million tonnes).

 

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 (see A Q&A around the US-China ‘phase one’ trade agreement, 20 January 2020).


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