The high-frequency data on both domestic and global markets reinforced our view that grain prices could be under pressure this year and that, in turn, could lead to subdued food price inflation.
This past week, the International Grains Council (IGC) lifted its estimate for 2020/21 global maize production from last monthly estimate to 1.2 billion tonnes, which is the largest harvest on record, and up 5% from the previous season. The downward swing in global maize prices saw a 21% y/y decline by 25 June 2020, with prices trading around US$162 per ton. Low global maize prices are likely going to remain the theme for the rest of the year.
The season is underway in the northern hemisphere, with the crop in most countries reportedly in good condition. Meanwhile, in the southern hemisphere, the 2020/21 production season will start around October 2020. The focus is still on the 2019/20 season, with the harvest process in the full wing in all major southern hemisphere maize-producing countries such as South Africa, Brazil and Argentina. What’s more, all these countries are forecast to obtain large harvest which will improve supplies, ahead of another expected good 2020/21 season starting in October, as previously noted. In the case of South Africa, the maize harvest is estimated at 15.5 million tonnes, which is the second-largest harvest on record and well above the annual domestic consumption of about 11 million tonnes. This not only means domestic maize prices could be under pressure in the coming months, but also that exports could increase which is positive for boosting the agricultural trade balance.
In terms of wheat, the IGC lifted its 2020/21 production estimate further from 766 million tonnes last month to a new record of 768 million tonnes. This is underpinned by the anticipated largest harvest in Russia, Canada, Australia, Argentina, China and India, amongst others. While some European countries reported dryness last month, the weather conditions have now improved considerably, which is conducive for the crop. As a consequence of the expected improvement in production, the 2020/21 global wheat stocks could increase by 6% y/y to 290 million tonnes. This means that global wheat production could be under pressure in the coming months. On 25 June 2020, the global wheat price (US HRW) was down 8% y/y, at US$212 per tonne. Wheat importing countries such as South Africa stand to benefit from such an optimistic outlook, more so, because South Africa’s 2020/21 season might lead to yet another small crop because of a potential reduction in area planted. Plantings are set to fall by 8% y/y to 495 000 hectares, mainly due to a decline in area in the Free State. This means that South Africa will continue to have a large dependence on imports, about 50% of annual consumption.
In the case of rice, the 2020/21 global production was revised down marginally from 507 million tonnes last month to 505 million tonnes, which is still a record harvest. This is boosted by an expected large crop in India, Vietnam, Thailand, Indonesia and Bangladesh, amongst others. The anticipated large production could subsequently lead to a 2% y/y increase in global rice stocks to 180 million tonnes. Similar to the aforementioned commodities, rice prices could also ease in the coming month. Global rice prices already come off higher levels observed in April where there were prospects of trade restrictions and a higher degree of uncertainty about the 2020/21 season harvest. South Africa as a rice-importing country stands to benefit from this positive outlook. The IGC currently forecasts South Africa’s 2020 rice imports at 1.1 million tonnes, up by 10% y/y.
Soybeans is another important crop for global food security, as a key input in animal feed. The IGC forecasts 2020/21 global soybeans production at a new peak of 364 million tonnes, which is up 8% y/y. This is supported by expected large harvests in the US, Argentina and Brazil, amongst others. This expected uptick in production could lead to a 3% y/y increase in stocks to 45 million tonnes. This means, the global soybeans prices could also be under pressure in the coming months, but this could be eased by a rapid push to rebuild the Chinese pig industry, which has been devastated by the African Swine Fever. We doubt that might be the case though. From a South African perspective, the country stands to benefit as it imports around half a million tonnes of soybean oilcake (meal). On average, 97% of soybean meal originated from Argentina over the past 10-years.
These positive global grain and oilseed prospects support our view that food price inflation could be subdued this year, hovering around 4% y/y (from an average of 3.1% y/y in 2019). The key upside risk within the food price inflation basket will mainly be meat, in part, because of base effects and a possible uptick in poultry prices following the recent increase in import tariffs. Overall, however, grains, and also fruit prices could offset the potential increases in inflation and keep the headline number at lower levels.
WEEKLY HIGHLIGHTS
SA set to have its second-largest summer grains harvest on record
South Africa’s 2019/20 fifth summer crop production estimates data released last week by the Crop Estimates Committee (CEC) reinforced the view that the country will have large grains supplies. The CEC left most production estimates roughly unchanged from the previous month with a notable downward revision of 17% from the previous month in the groundnuts production estimate, which is now at 52 140 tonnes. Nevertheless, this is still more than double the 2018/19 season’s groundnuts harvest. The 2019/20 maize and soybean harvest were revised down, marginally, by 0.5% and 2% from the previous month to 15.5 million tonnes and 1.3 million tonnes, respectively. Meanwhile, sunflower seed was left unchanged at 765 960 tonnes.
In the case of maize, about 9.1 million tonnes is white maize, with 6.4 million tonnes being yellow maize, which makes up a total of 15.5 million tonnes. The current maize harvest is up 38% from the 2018/19 harvest and is the second-largest harvest on record. The soybeans and sunflower seed 2019/20 harvests are up 8% y/y and 13% y/y, respectively. The increase in this season’s summer crop harvest is mainly supported by an expansion in area planted in the case of maize and favourable weather conditions which led to improvements in yields.
As in the previous month, the data essentially mean that South Africa would remain a net exporter of at least 2.7 million tonnes in the 2020/21 marketing year which started in May 2020 and ends in 2021, up 89% y/y. This is at a time when Southern and East African maize import needs could outpace those of the previous year because of poor harvests on the back of drought and locust invasion. South Africa could also export maize beyond the African continent to other deep-sea markets such as Japan, Taiwan, Vietnam and South Korea who were not prominent in the 2019/20 marketing year. In the case of soybeans and sunflower seed, South Africa will remain a net importer of their products, sunflower oil, and soybean oilcake (meal), despite the expected increase in domestic production.
SA food price inflation marginally accelerated in April 2020
South Africa’s food price inflation accelerated to 4.6% y/y in April 2020, from 4.4% y/y in the previous month. This uptick was mainly underpinned by relative price rises of meat; milk, eggs and cheese; and oils and fats. Meanwhile, other products decelerated and some remained roughly unchanged. In the case of meat, the base effects, following lower levels of last year when meat exports were banned on the back of foot-and-mouth disease, were the key driver of the uptick in April. In eggs, the sharp demand at the start of the lockdown period was, in part, a key driver of the uptick in prices. In terms of oil and fats, South Africa imports a notable share, therefore the weaker ZAR/USD partially supported the prices.
Looking ahead, we are still convinced that what will matter the most for the direction of food price inflation this year are developments in the grains, meat and fruit markets, as stated in the initial section of this note. These three 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, with the maize harvest estimated at 15.5 million tonnes which is the second-largest harvest on record. Moreover, global wheat and rice prices, which South Africa is a net importer of, could soften in the coming month as the 2020/21 harvest is estimated at 768 million tonnes and 505 million tonnes, respectively. The slightly firmer ZAR/USD recently and if sustained, bodes well for imported products amid subdued international oil prices. The risk on the imported products, which we continue to monitor is COVID-19-related disruptions on logistics or shipments.
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, as previously noted. This year, the base effect of 2019 will mean that meat price inflation could show a mild uptick. Thirdly, South Africa has had a generally good fruit harvest this year, with the citrus industry recently noting a 13% y/y increase in available supplies for export markets. This could keep prices at relatively lower levels this year.
Against this backdrop, we still think that South Africa’s food price inflation could average around 4% y/y in 2020 (from 3.1% y/y in 2019). 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 on the back of a recent tariff adjustment.
SA agriculture jobs up marginally in Q1, 2020
The Quarterly Labour Force Survey data for the first quarter of 2020 showed that South Africa’s primary agricultural employment increased by 3% (or 27 000 jobs) from the corresponding period last year to 865 000. The notable job gains were mainly in the Western Cape, Gauteng, Northern Cape and Mpumalanga (Exhibit 3). This was largely in the horticulture, field crops and aquaculture subsectors. These activities, however, were not evenly spread across all provinces. Other provinces, namely the Eastern Cape, KwaZulu-Natal, Free State and North West experienced a reduction in agricultural employment over the observed period. But this was overshadowed by the improvement in the aforementioned provinces, hence, on balance, South Africa’s primary agriculture sector registered employment net gains from the corresponding period in 2019.
DATA RELEASES THIS WEEK
From a global perspective, on Monday the United States Department of Agriculture (USDA) will release the weekly crop progress data. As previously highlighted, this is important data to monitor as it provides a better sense of the US 2020/21 grains and oilseeds growing conditions. There are generally good prospects for large harvests in the US as outlined in the opening section of this note.
On Thursday, the USDA will release the weekly export sales data. This data help us monitor the progress on commitments made in US-China phase one trade deal and the impact of the COVID-19 pandemic on trade.
On the domestic front, on Tuesday, Stats SA will release the first quarter of 2020 GDP data. After four consecutive quarters of contraction, we expect a positive reading in the first quarter of the year following an increase in horticulture and grains production.
On Wednesday, the South African Grain Information Service (SAGIS) will release the weekly grain producer deliveries data for the week of 26 June 2020. This covers both summer and winter crops. But the focus is on summer crops which are currently being harvested. The winter crops are still at early growing stages for the 2020/21 season.
In the eighth week of the 2020/21 maize marketing year, which was on 19 June 2020, about 3.6 million tonnes of maize had already been delivered to commercial silos. About 60% was yellow maize, with 40% being white maize. Nevertheless, this is a small fraction of the expected harvest of 15.5 million tonnes in the 2019/20 production season (which corresponds with the 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 19 June 2020, about 1.2 million tonnes had been delivered to commercial silos. This equates to 91% of the expected harvest in the 2019/20 season. Also, on 19 June 2020, about 564 599 tonnes of sunflower seed, which accounts for 74% 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 eighth week of the 2020/21 marketing year, which was on 19 June 2020, about 369 965 tonnes of maize had already been exported, all to neighbouring countries, as well as Taiwan and South Korea. This 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 89% y/y. In terms of wheat, South Africa is a net importer. In the week of the 19 June 2020, the country’s 2019/20 wheat imports amounted to 1.48 million tonnes, which equates to 82% of the seasonal import forecast.
