The second largest maize harvest on record in the 2019/2020 production season did not lead to a notable decline in prices as some might have expected.
The weaker exchange rate, combined with increasing demand for SA’s maize in the Far East and Southern Africa, and generally higher global prices provided support to the domestic maize prices throughout 2020 and into the beginning of 2021.
The aforementioned price driving factors changed somewhat as we entered the second quarter of this year with the rand having firmed notably in recent months and demand for the southern African region likely expected to drop due to large harvest.
According to the US department of agriculture, Zambia’s 2020/2021 maize production could reach 3.4-million tonnes (up 69% year on year), Malawi’s maize harvest is estimated at 3.8-million tonnes (up 25% year on year), Mozambique’s maize crop is estimated at 2.1-million tonnes (up 8% year on year) , Kenya’s maize harvest is forecast at four-million tonnes (up 5% year on year) and Tanzania’s maize harvest is estimated at 6.3-million tonnes (up 8% year on year).
There are also prospects of a large maize harvest in Zimbabwe. In fact, analysts in these countries suggest that the harvest could be much larger than these US department of agriculture estimates. As these harvests start to come in, prices in the region are trading well below international levels.
One would think that the firmer domestic currency and potential decline in demand for SA maize compared with 2020 would have a notable effect on local maize prices. After all, the crop estimates committee forecasts that SA’s maize harvest could reach 16.1-million tonnes, which would be a 5% year on year increase and a new second-largest harvest on record.
However, the SA maize prices have remained elevated in the past few days. On May 13, spot prices for yellow and white maize in SA were up by 38% year on year and 31% year on year, trading at R3,586 per tonnes and R3,422 per tonne, respectively. Over the same period, the US maize prices were up 116% year on year at $326 per tonne — levels last seen in 2013.
A number of factors underpin the global price run. In China, import demand has increased sharply. This follows a below average crop due to flooding, rising demand from a rapid expansion in poultry production and an accelerated rebuilding of its pig herd after African Swine Fever related reductions in 2018 and 2019. In the first quarter of 2021, Chinese pork production had increased 32% year on year and its pig herd was 30% larger than the same time in 2020.
The rebuilding has been accompanied by a modernisation of production practices and increased feeding of rations high in maize and protein meal. All these factors contributed to high domestic maize prices in China and strong demand for imported maize, at a time when global stocks are dwindling after a smaller than anticipated crop in the US last year. Also, concerns are mounting with regards to Brazil’s maize crops due to persistent drought conditions. This is worsened by arid soils in Canada where planting is about to start, as well as dryness in parts of the US.
SA is typically a net exporter of maize, and is therefore well integrated into global markets. Our rough calculations, using high-frequency data, shows that the correlation between domestic and international maize prices remains positive, about 60% for white maize and 85% for yellow maize. This implies that, when global maize markets show an increase, the domestic maize prices tend to rise in tandem.
The work by fellow agricultural economist Ferdi Meyer and his colleagues at the Bureau for Food & Agricultural Policy indicates that this transmission is stronger during periods when SA trades into the global market. The only exception would be in years where SA moves from an import parity-based situation, due to below average harvests locally, to an export parity-based situation once volumes recover, resulting in lower domestic prices.
Given that SA already produced a surplus in 2019/2020, prices remain at export parity and even in the face of the expected large maize harvest, we continue to observe a notable increase in domestic maize prices due to the international market dynamics.
Notably, the maize prices have implications on the animal feed industry and consumer food price inflation. Yellow maize is the primary source of energy in livestock and poultry feed and typically accounts for about 60% of rations. Consequently, the higher prices could continue adding cost pressures to this subsector.
The chicken-to-maize price ratio, which is considered a basic indicator of profitability for the sector, has deteriorated to levels last seen in early 2017, even if they remain slightly higher than the peak of the 2016 drought. Higher feed prices will also affect other feed intensive livestock sectors, such as pork production, as well as cattle feedlots.
Similarly, if maize prices remain elevated, we may soon have to review our views on SA’s consumer food price inflation, as related grain products form a large share of 21% in the food inflation basket. Research by fellow agricultural economist Marlene Louw indicates that maize prices are transmitted to maize meal prices with a long run elasticity of 0.63, suggesting that 63% of the increase in maize prices will ultimately reach the consumers in the price of maize meal.
We had previously held a constructive view that SA’s food inflation would potentially average about 5% in 2021, assuming benign grain prices. In the face of the persistent rise in grain prices, we might be inclined to revisit this view in the coming month.
Given that SA maize prices are at export parity levels, international markets will need to slow for domestic prices to decline. As things stand, weather conditions in the US, Canada and the greater part of Europe and the Black Sea are key events to watch as they continue to influence planting decisions, crop conditions and ultimately, prices.
International vegetable oil and oilseed prices also remain high, suggesting that oilseeds will compete strongly with grains for area expansion. So, when South Africans are confronted with higher grains products prices in the coming months at the retail level, they should realise that such increases result from global occurrence and not domestic developments and price manipulations.
• Sihlobo is chief economist at the Agricultural Business Chamber of SA, while Davids leads the commodity markets division of the Bureau for Food and Agricultural Policy.
