We are just over two weeks before the Crop Estimates Committee (CEC) releases data on South African farmers’ intentions to plant summer crops for the 2020/21 season.
The available data such as tractor sales, weather outlook, and commodity prices, which could be read as ‘leading indicators’, suggests that this could be yet another good season for South Africa’s agricultural sector. The focus on 28 October 2020, which is a day when the data will be released, will mainly be on maize, sunflower seed, soybeans, groundnuts, sorghum and dry beans, which are all major summer grains and oilseeds.
The aforementioned tractor sales, which are an important early indicator of farmers’ expectations for the upcoming season, have been robust since June 2020. The recent sales for September 2020 showed a 23% y/y increase, with about 529 units sold. Importantly, the available data for the first nine months of the year already show that South Africa’s tractor sales amounted to 3 924 units, up slightly by 0.1% y/y. This was boosted, to a certain extent, by improved farmers’ financial position following a large summer grains harvest in the 2019/20 production season and combined with higher commodity prices.
Another factor that is likely to buoy farmers is crop prices. On 08 October 2020, South Africa’s white and yellow maize spot prices were each up by 21% y/y, trading at R3 394 per tonne and R3 498 per tonne, respectively. At the same time, domestic soybean and sunflower seed spot prices were up by 36% y/y and 34% y/y respectively trading at R8 206 per tonne and R7 633 per tonne. The key drivers of prices are mainly the weaker domestic currency, rising demand for South African grain products in key markets such as the Far East, and generally higher global grains prices on the back of growing demand from China. Although these price increases present various challenges for grain users, primarily, the livestock industry, millers, and ultimately consumers, they have improved farmers’ finances. This has offered some of the support for the solid agricultural machinery sales.
In addition to boosting the agricultural machinery sales, the higher commodity prices could provide an incentive for farmers to maintain or even increase area plantings where possible. This is likely to be the case as we expect South Africa’s grain prices to remain at fairly higher levels for the rest of this year. This is on the back of an anticipated uptick in Southern Africa’s maize demand in the coming months. This is specifically the case for Zimbabwe, whose maize stocks will likely be depleted towards the end of the year into 2021.
The favourable weather outlook for 2020/21 production season is one of the aspects we have discussed these past few weeks. The South African Weather Service forecasts a La Niña event, which should bring above-normal rainfall between November 2020 and February 2021. The start of the season this month could experience below-normal rainfall in some areas, but the tide should change in the coming month. This too adds to optimism about the 2020/21 summer crop production season.
While the CEC will release the farmers’ intentions to plant data this month, the production estimates for the 2020/21 grain season will only be released in February 2021. Still, with the area plantings estimates and weather outlook, one should be able to make rough yield estimates, leaning on the previous years' data, which should ultimately provide a view of the size of the crop for the season. Other institutions such as the United States Department of Agriculture (USDA) have already released their estimates on South Africa’s 2020/21 maize crop. This past week, the USDA placed its estimate at 14.0 million tonnes, which is down by 14% from the 2019/20 season. Importantly, the USDA’s estimate encompasses both the commercial and non-commercial production estimates, while the CEC releases these numbers separately and market players’ attention tends to be focused on the commercial estimate.
With the aforementioned favourable weather outlook and price levels, we think the USDA’s estimate might be slightly conservative and South Africa could harvest a slightly larger harvest than the forecast 14.0 million tonnes. This USDA’s production forecast is slightly lower than South Africa’s average total maize production for the past four seasons, which is 14.6 million tonnes. Also, worth noting is that a good season for maize will most likely be the same for other summer crops such as sunflower seed, soybeans, groundnuts, sorghum and dry beans.
Going forward, the one factor that will need constant monitoring, albeit currently positive, is the weather. For the forecast of a large maize crop to materialize, the expected rainfall from now going into February 2021 will need to materialize. It is only when there is confidence about the 2020/21 season harvest that South Africans could see a reprieve on the current higher grain prices. As things stand, the grain prices are an upside risk to food price inflation, particularly into next year. With that said, we do not expect the food price inflation for the year to exceed 5.0% y/y.
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WEEKLY HIGHLIGHTS
Global grains prices elevated although there are large supplies
Over the past couple of months, the global grains prices increased notably, underpinned, in part, by growing demand from China, and dry weather conditions which adversely affected crops in many parts of Europe. On 08 October 2020, US maize, wheat and soybean prices were up by 25% y/y, 32% y/y and 21% y/y, respectively, to US$210 per tonne, US$274 per tonne and US$439 per tonne.
The current higher prices could be sustained in the coming weeks, as the aforementioned driving factors haven’t changed. The recent monthly update of the most-watched United States Department of Agriculture (USDA)’s World Agricultural Supply and Demand Estimates report released this past week didn’t introduce any major changes that might tilt the market fundamentals from the previous month’s levels.
There were minor, yet mixed adjustments from the USDA’s September estimates. Positively, the USDA lifted its estimate for 2020/21 global wheat production by 0.3% from September to 773 million tonnes. The monthly upgrades were mainly in Russia and Japan. The current estimate is now up by 1% from the previous season’s record global wheat production. Importantly, this bodes well for wheat-importing countries, such as South Africa, at least from a volume perspective. The expected large crop means the key wheat-producing countries might not be tempted to restrict exports in the coming months, as they attempted to do at the start of the year amid fears of the pandemic. With that said, prices will likely remain at higher levels as the weather conditions in parts of the northern hemisphere continue to threaten the winter wheat sowing.
Moreover, the 2020/21 global rice production estimate was lifted by 0.4% from September to 501 million tonnes. The US, China, Pakistan, Philippines and Brazil were behind the recent monthly upward revision of the production estimate. Important, the current production estimate is up by 1% y/y. Similar to wheat, South Africa takes a keen interest in the global rice production conditions as the country is a net importer of the commodity. The International Grains Council currently forecasts South Africa’s 2020 rice imports to be 1.10-million tonnes, up 10% y/y. The global rice prices, however, are at levels higher than 2019, in part, because of strong global demand, which is experienced across the grains market.
On the monthly downside, the 2020/21 global maize production estimate was revised down by 0.3% from September 2020 to 1.16-billion tonnes. The downward revisions were mainly in the US, Ukraine and EU. Still, the expected harvest is up by 4% y/y. While the northern hemisphere countries are at harvesting stage, the southern hemisphere is still at the planting stage which commenced this month. The medium-term weather forecasts point to a potentially good season, which is also supportive of the optimistic view that the 2020/21 season’s maize crop could be higher than the previous one.
Also, the USDA revised down its 2020/21 global soybean production estimate by 0.3% from the previous month to 368 million tonnes. This was primarily on the back of expected lower yields in parts of the US. Still, the 2020/21 season crop is 9% higher than the 2019/20 season, boosted by improved yields across major soybeans producers in the Americas. The expected large harvest, however, has not been reflected on prices, which are up notably from the previous year driven by growing demand from China. The Chinese are rebuilding their pig herd, which was devasted by the African swine fever this past year.
Essentially, the higher global grains prices are largely a function of growing demand, not disruptions on the supply side. The recent USDA monthly data has shown that there are solid supplies in all major commodities. The higher global grains prices have been passed-through into the South African market and are currently reflected through the domestic grain prices, which are also elevated. This is the case although South Africa had its second-largest maize harvest, and third-largest soybean harvest in history, and is expecting the largest wheat harvest in a decade.
While this is positive for farmers as it improves their finances, the opposite is true for grain users such as livestock producers and millers, and ultimately consumers. Already, the FAO Global Food Price Index was up 5% y/y in September 2020, at 97.9 points, which shows the inflationary effects of the higher global grain prices.
DATA RELEASES THIS WEEK
From a global calendar, on Tuesday we have the US weekly crop progress data which will be released by the USDA. The previous report of 04 October 2020 showed that US maize and soybean crop conditions were rated in a better condition compared to the corresponding period in 2019. Moreover, the harvest activity was gaining momentum in some states, with yields reportedly higher than the previous season. On Friday, the USDA will release the US weekly export sales data, which also help in tracking the agricultural trade activity between the US and China.
On the domestic front, on Wednesday, the South African Grain Information Service (SAGIS) will release the weekly grain producer deliveries data for the week of 09 October 2020. This data covers both summer and winter crops. But the focus is on summer crops where the harvesting process has recently been completed.
On Thursday, SAGIS will release the weekly grain trade data also for the week of 09 October 2020. In the previous week of 02 October 2020, South Africa’s 2020/21 total maize exports were at 1.49 million tonnes, which equates to 60% of the seasonal export forecast (2.50 million tonnes). In terms of wheat, South Africa is a net importer, and in the week of 02 October 2020, the first consignment for the 2020/21 marketing year arrived. This was a volume of 52 053 tonnes, which equates to 3% of the seasonal import forecast of1.64 million tonnes (down by12% y/y because of an improved domestic harvest).
