The disruptions in the global agricultural supply chains and uncertainty regarding how long the COVID-19 pandemic will last have resulted in three major developments that currently dominate the market. These are closures of major meat processing plants, wheat export restrictions, and looming hunger in Africa.
Closure of meat processing plants
Firstly, the United States (US), Brazil and Canada, which accounted for nearly a third of global meat and edible offal exports in 2019, have closed some of the meat processing plants due to the spread of coronavirus among their employees over the past few days.
In the US and Canada, mainly beef and pork processing plants are affected, while in Brazil, the closures are influencing poultry-related processing plants. Given these countries’ significant share of the global meat trade (28%), if more processing plants are closed and remain closed for a prolonged period, there could be fears of a global meat shortage and potentially an uptick in prices. Both the US and Canada are among the world’s top ten exporters of beef and pork products. In the case of poultry, Brazil is a leading exporter, followed by the US, Poland, the Netherlands and Germany.
Fortunately, from a beef perspective, South Africa is a net exporter as shown in Exhibit 1. Therefore, the closures of certain plants in key exporting countries present minimal risks from a food security perspective. In terms of pork meat, however, South Africa remains a net importer of ribs from Europe. Imported pork accounted for roughly 6% of domestic consumption in 2019.
Similarly, with poultry, about 20% of domestic consumption is imported, mainly from Brazil, the US and the European Union, among other suppliers. This essentially means that if the disruptions in various meat plants in the US and Brazil persist for some time and spill over to the global market, South Africa wouldn’t be spared from the price impact, particularly on poultry products. With that said, we do not see any reason to panic at this point, but rather a need to monitor and strengthen domestic production where possible.
Export restrictions on wheat
The wheat market continues to be dominated by prospects of export limitations. At the end of March this year, Russia placed an export quota of 7 million tons on wheat in the three months to June, to protect its domestic supply before the harvest period for the new crop due in July. While the quota has now been reached following large exports over the past few weeks, news reports suggest that the Russian government sees no need to limit exports for the remaining months leading to July.
To provide context on Russia’s significance in the global wheat market, Russia is the world’s leading wheat exporter, accounting for 19% of global wheat exports in the 2019/20 season. On average, the exports account for 45% of Russia’s wheat production of 77 million tons. With the International Grains Council (IGC) currently forecasting a 9% y/y increase in Russia’s wheat production in 2020/21, as shown in Exhibit 2, we concur that export restrictions on wheat would be reintroduced after July this year.
Wheat import requirements
As outlined in our previous notes, South Africa is a net importer of wheat. We estimate that 2019/20 wheat imports could increase by 33% y/y to 1,8 million tons. This is 13% higher than the five-year average import volume, exacerbated by the decline in domestic wheat production on the back of unfavourable weather conditions in parts of the Western Cape in late 2019. As of 17 April this year, South Africa had imported 804 335 tons of wheat, which equates to 45% of the volume the country intends to import during the 2019/20 season.
The leading suppliers thus far are Germany, Lithuania, Poland, Latvia, Ukraine and Russia. These import requirements essentially account for half of South Africa’s annual requirements; hence it is important to monitor developments in the global market. While the export restrictions are unsettling and typically lead to upticks in prices, we are at ease with the expectation that Russia is expecting a bigger harvest and export restrictions might not be necessary. In addition, Romania, which is the world’s seventh largest wheat exporter, retracted its statement to ban exports of wheat.
There are rising concerns regarding a potential increase in food insecurity in Africa this year. The challenge is not only the restrictions in people’s movements due to the COVID-19 pandemic, but also unfavourable weather conditions which negatively affected agriculture in various countries. Compounding this effect is the continuous spread of locusts in the East Africa region.
Within Southern Africa, Zimbabwe suffered from drought and floods in 2019, leading to falling production in staple crops by more than half. The country started the 2020 production season on the back foot under similar conditions. The International Grains Council forecasts Zimbabwe’s 2019/20 maize production at 800 000 tons, which is less than half of what the country needs for annual consumption (two million tons). This will be a second consecutive year of food shortages, further deepening poverty levels in that country.
In East Africa, Kenya, Somalia and Uganda lost part of their 2020 produce to locusts at the start of this year, which is continuing in some regions of these countries, threatening the new season’s maize crop. For several African countries, the importation of agricultural products could become a challenge this year due to numerous reasons, which include the relative weakness of currencies across the region amid COVID-19. This, in turn, could lead to rising food prices. Moreover, there are disruptions in logistics and supply chains as various countries implement strict border closures as a measure to reduce the spread of the COVID-19 pandemic.
No immediate threat to South Africa’s meat supply
Overall, the disruptions in the meat supply chains in the US, Brazil and Canada are key to monitor. However, we do not foresee an immediate threat to South Africa’s supplies in the near term because of the country’s relatively low dependency on meat imports, specifically beef.
In the case of wheat exports, Russia is a big enough market to warrant anybody’s attention when it makes policy changes. We gain comfort in knowing that the 2020/21 wheat harvest is large enough to ease concerns of supply tightness in the domestic market.
Within the African continent, the challenge of food insecurity will require African leaders to place food security on their agenda when mobilising resources from multinational and developmental institutions during the COVID-19 pandemic. – 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 agricultural markets for the major commodities.