The outbreak of the coronavirus (Covid-19) in China is spreading across Asia and other regions of the world. The health implications of this virus on people also present risks for global value chains.
Given that South Africa’s agriculture is export-orientated, with exports of roughly US$10 billion in 2019, the potential disruptions the coronavirus could cause on global value chains is a key concern. This is specifically the case for Asia, as the epicentre of the outbreak, and also an area that accounts for a quarter of South Africa’s agriculture exports. The commodities most exposed to the Asian market are wool, fruit, grains, beverages, vegetables and red meat.
There are two channels to consider when thinking about the potential implication of the virus for the South African agriculture sector. First, the supply side of the aforementioned products that South Africa typically exports to Asia is in good shape, and promising to be higher than that of 2019 because of improved domestic weather conditions. This means any decline in exports in the near-term would be a function of a softening demand rather than supply from a South African side.
With China having temporarily closed some of the manufacturing hubs and placed restrictions on human movements as a method to contain the spread of the virus, this could negatively affect demand from firms. What’s more, the longer firms remain closed, the more likely that some might stop paying workers, which could also have implication on consumer demand. This presents a risk on US$2.5 billion worth of South Africa’s agriculture exports to Asia.
Second, we observed a significant decline in global commodity prices over the past week, in line with what happened in global stock markets. The underpinning reason for this being the fact that Asia is an important agriculture market, not only to South Africa, but the world. To be specific, China, with 8% of global agricultural imports, is the second biggest importer in the world. Moreover, Japan, with 4% of global agriculture imports, is the sixth biggest importer in the world. South Korea and Hong Kong collectively account for 4% of global agriculture imports. The top 15 importers account for nearly 60% of world agricultural imports, of which, a quarter goes to Asia (China, Japan, South Korea and Hong Kong). Ultimately, this proportion of Asia within global agriculture trade is a reason we observed declining agricultural commodity prices.
Essentially, the potential decline in Asia’s agriculture demand and falling prices could see the value of South Africa’s agriculture exports to Asia also declining. While the picture of what could unfold looks gloomy, we note that thus far, we have not yet observed disruption on the movements of products to Asia. However, the risk could materialise the longer there is no solution to the coronavirus and the spread of the virus worsens.
WEEKLY HIGHLIGHTS
SA’s 2019/20 summer crop looks promising
This promises to be a good year for South Africa’s agricultural sector, at least from a production front. The data released last week by the Crop Estimates Committee (CEC) show that South Africa’s 2019/20 summer crops production could increase by 26% y/y to 16.8 million tonnes. While this is still the first estimate for this season, with eight more to follow, if it materialises, this could be the second-largest summer crops harvest on record after the 2016/17 crop. The major gains are on maize, soybeans and sunflower seed (Exhibit 3 in the attached file).
The 2019/20 maize, soybeans and sunflower seed harvest are forecast at 14.6 million tonnes, 1.2 million tonnes, and 699 130 tonnes. This is respectively up by 29%, 6% and 3% from the previous season. The increase is supported by an expansion in area planted in the case of maize and expected improvements in yields due to favourable weather conditions.
The maize production estimate is well above ours of 13.7 million tonnes, while the soybean and sunflower seed estimate are below ours of 1.5 million tonnes and 761 070 tonnes. The variation can largely be explained by adjustments in area plantings, which for maize was revised up and soybean and sunflower plantings slashed from the preliminary estimates released on the 29th of January 2020.
The weather conditions have generally been favourable over the past few weeks with a fair amount of rainfall which improved soil moisture across many regions of the country. As a result, the crop is in good condition, and thus, we are convinced that the CEC estimates are plausible. In the case of maize, the data essentially mean that South Africa would remain a net exporter in the 2020/21 marketing year which starts in May 2020 (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.
What’s more, a maize harvest of 14.6 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. 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 caused by the growing domestic demand for these particular oilseed products.
Overall, this potential improvement in the summer crop harvest bodes well with South Africa’s food price inflation for the year, which we foresee at about 4% y/y (compared to 3.1% y/y in 2019). The marginal 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.
SA winter crop production forecasts remained unchanged
In its seventh monthly assessment for the season, the CEC left its production estimate for South Africa’s 2019/20 winter crops production unchanged in February 2020, from the previous month. This was in line with our expectations, as the sixth assessment was done when the harvest process had already been completed. Essentially, the CEC 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 4 in the attached file). As set out in our previous note, this is partly caused by expectations of poor yields in some regions of the country following drier weather conditions towards the end of 2019.
In the case of wheat, the decline in production will result in an increase in imports within the 2019/20 marketing year in order to supplement the domestic consumption needs. We forecast South Africa’s 2019/20 wheat imports at 1.80 million tonnes, up 33% y/y. 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.
DATA RELEASES THIS WEEK
On Tuesday, Statistics South Africa releases the country’s Gross Domestic Product (GDP) for the fourth quarter of 2019. To recap, South Africa’s agriculture is in recession, having contracted in the first three quarters of 2019. While we expect a marginal uptick in the fourth quarter numbers, the annual figure will show contraction. This weak performance of South Africa’s farm economy is largely underpinned by a poor summer crops harvest in 2019 because of the drought. The animal diseases in the livestock sector were also amongst other factors that constrained the farm economy. This year, however, we think South Africa’s agriculture GDP could recover to levels around 5% y/y. This uptick will be supported by a recovery in summer crops production, along with wine grapes, and also citrus.
On Wednesday, the South African Grain Information Service (SAGIS) will release the weekly grain producer deliveries data for the week of 28 February 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 21 February 2020, about 5 202 tonnes of wheat were delivered to commercial silos. This placed total wheat deliveries at about 1.40 tonnes, which equates to 93% 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 28 February 2020. In brief, maize exports for the 2019/20 marketing year have thus far amounted to 1.05 million tonnes, which equates to 80% 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.
In terms of wheat, South Africa’s 2019/20 wheat imports could increase by 28% y/y to 1.80 million tonnes, as noted in the aforementioned section. In the week of 21 February 2020, South Africa’s 2019/20 season amounted to 640 219 tonnes, which equates to 36% of the seasonal import forecast (1.8 million tonnes).
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.
