We are now roughly a month and a half from the start of South Africa’s 2020/21 summer crop planting season. To get a sense of farmers’ potential planting decisions for the season ahead, the two most important indicators to take note of are commodity prices and the weather outlook.
The latter has been discussed in our notes over the past few weeks, highlighting that the prospects of a La Niña weather event this summer signals higher rainfall, which is conducive for crops. The former is the one that we find most interesting and supportive of a potential increase in plantings in the 2020/21 season.
Domestic grain and oilseed prices remain firm
It is surprising that domestic grain and oilseed prices have remained firm for so long, given the underlying supply and demand conditions. In the week of 13 August 2020, yellow and white maize spot prices were up by 5,3 and 0,2% year-on-year (y/y), trading at R2 895/ton and R2 880/ton, respectively. At the same time, sunflower seed and soya bean prices were up by 22 and 27% y/y, trading at R6 698/ton and R7 317/ton, respectively.
Such price levels would be expected in years of scarcity when there were droughts or lower plantings. But this is not South Africa’s current outlook. The 2019/20 harvest was an abundant one, with the maize harvest up by 38% y/y and the second largest on record at 15,5 million tons. The sunflower seed harvest is up 13% y/y at 765 960 tons, and the soya bean harvest is up by 8% y/y with 1,3 million tons expected.
The significant drivers of maize prices
The question is then what the underlying drivers of prices are and whether prices could be sustained at these levels for some time. There are currently three major drivers of maize prices. First, the strong demand from Southern Africa and deep-sea markets has been one of the underlying drivers of prices.
In the week of 7 August 2020, approximately 1,1 million tons of maize, which equates to 41% of the expected 2,7 million tons, had already been exported to the markets mentioned above. This is slightly faster than in a typical season where exports, specifically to Southern Africa, would gain momentum towards the end of the year.
This is indicative of strong external maize needs and we expect exports to continue, specifically to bigger markets in the region such as Zimbabwe, and outside the continent to the likes of Japan, Taiwan and South Korea.
Second, the delay in maize deliveries due to the late start of the season has also been supportive of maize prices.
Third, the weaker domestic currency is also a contributor to the uptick in prices as Agbiz has recently demonstrated. The correlation between maize prices and the exchange rate over the past year is 79%.
Simply put, this means maize prices tend to increase as the currency weakens. The global commodity prices, specifically Chicago maize prices, might have had minimal influence on domestic maize prices at this point, as they have softened by 7% y/y on 13 August 2020. Hence, we are inclined to believe that the factors mentioned have thus far had a major influence on prices.
Soya bean and sunflower seed prices
In terms of soya bean and sunflower seed prices, the interaction with the global market is different as South Africa is a nett importer of these commodities. This means the domestic market tends to be sensitive to global developments.
To this end, the Chicago soya bean and European Union sunflower seed prices were up by 8 and 10% y/y on 13 August 2020, which are supportive of the higher price trends witnessed in the domestic market.
The weaker domestic currency is an additional factor that adds support to the domestic oilseed market. We think these factors have overshadowed the news of a large harvest, which would typically be associated with lower commodity prices.
More incentive to increase plantings next season
This environment provides a greater incentive for farmers to maintain or increase plantings in the 2020/21 production season, which begins in October 2020. This is particularly the case as it is expected that the demand for maize in East Africa will remain robust, as the La Niña event typically leads to drought in that region (the opposite of Southern Africa).
The only key challenge there is regulations, as imports of genetically modified maize are still prohibited. It is unclear how much of a recovery Zimbabwe will realise. After all, the 2019/20 season had a dry start throughout Southern Africa, but Zambia and South Africa emerged with a bumper harvest, while the opposite is true for Zimbabwe.
In the event of an improvement in Zimbabwe’s plantings, their maize shortfall in the 2021/22 marketing year might be less than the million tons we are currently projecting in 2020/21. This essentially means that South African farmers might be in a better position if they extend yellow maize plantings in the 2020/21 season as that would find a market in the deep-sea regions, while white maize largely depends on African demand.
In the case of oilseeds, an increase in plantings would still contribute to the local market. The important date to look forward to is 28 October 2020, when the national Crop Estimates Committee will be releasing farmers’ intentions to plant data. – Wandile Sihlobo, Agbiz
Wandile Sihlobo, chief economist at Agbiz, shares highlights in his update on agricultural commodity markets. Click here for the full report on the agricultural markets for the major commodities.
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