The Australian Bureau of Meteorology recently reaffirmed its prediction of a La Niña occurrence from this year until at least February 2021. While this weather phenomenon presents prospects of higher rains and a potentially good agricultural season in South Africa, other regions of the world could experience the opposite.
Drought predicted for East Africa and South America
Within the African continent, one such region is East Africa, where the La Niña weather event typically correlates with below-average rainfall from December to February. This is a period just before the start of the summer grains planting, which is typically in February of each year.
Therefore, the current La Niña event has raised the risk of yet another poor agricultural harvest for countries such as Kenya, Somalia and Ethiopia. This means that these countries will likely still depend on maize imports in the 2021/22 marketing year.
Another region which is at risk, and more important for global maize and soya bean supplies, is South America. The La Niña weather event typically correlates with dryness in parts of Argentina and Brazil. The early effects of these conditions were clear in the 2020/21 planting season, which is still underway. Owing to dryness, planting progress in these countries are lagging behind the previous years’ pace.
There is also concern that even when planting is completed, crop yields will likely be much lower because of dryness. Southern Brazil has already rung alarm bells in this regard. Brazil and Argentina collectively account for 14 and 50% of global maize and soya bean production, respectively. Hence the concerns about crop conditions in this region affecting both global supplies and prices.
Current optimistic production forecasts could plummet
Interestingly, the United States Department of Agriculture (USDA), which released its update of the World Agricultural Supply and Demand Estimates report on 11 November 2020, is still optimistic about Brazil and Argentina’s soya bean and maize production in 2020/21. The USDA currently forecasts Brazil’s 2020/21 soya bean harvest at a record 133 million tons, up by 6% year-on-year (y/y), with Argentina’s 2020/21 soya bean harvest also set to be up by 4% y/y, estimated at 51 million tons.
For Argentina, the current harvest estimate is down marginally from the October 2020 estimate, which mirrors the nervousness concerning yields. Meanwhile, the USDA maintained a similar view for Brazil as the previous month. The USDA forecasts Brazil’s 2020/21 maize production at 110 million tons (up 8% y/y), which is unchanged from the October 2020 estimate. The 2020/21 maize production estimate for Argentina is down by 2% y/y, estimated at 50 million tons.
The USDA reviews its estimates each month. Therefore, there is still a chance that the current optimistic estimates about Brazil and Argentina’s 2020/21 soya beans and maize production could change as more information about crop conditions becomes available after planting has been completed.
Historical data illustrate that crop yields in these countries are generally poor during La Niña periods. Hence, we are convinced that it is only a matter of time before the USDA begins downward revisions of crops in these countries from the aforementioned optimistic estimates.
La Niña effect on soya and maize prices
In such a scenario, the 2020/21 global soya bean and maize production estimates would have to be revised downwards. Currently, the USDA forecasts 2020/21 global soya beans and maize production at 362 million tons and 1,14 billion tons, which is up by 8 and 3% y/y, respectively. The possible downward revision of these production estimates will mean that crop prices will remain at their current elevated levels.
Soya bean and maize prices have largely been supported by growing demand during the past few months, specifically in China, and the weather issues are an added factor. These relative price increases are illustrated in the FAO Cereal Price Index, which averaged 111,6 points in October, up 17% from the corresponding period in 2019 (Exhibit 1).
In summary, the La Niña weather event in 2020/21 presents varying effects to global agriculture across regions. East Africa and parts of South America could see crops being negatively affected this season.
Influence of rising commodity prices in SA
For South Africa, La Niña tends to bring higher-than-average rainfall, as we have stated previously. Therefore, there is little concern at this stage in terms of maize supplies as the country is expected to harvest more than 16 million tons of maize in 2020/21 and remain a nett exporter. This is both our estimate and that of the USDA.
However, South Africa remains a nett importer of roughly 500 000 tons of soya bean meal, the majority of which originates from Argentina. Consequently, the risks for the domestic livestock and poultry producers remain.
Importantly, global price movements will still influence commodity prices in South Africa. This is something that the livestock, dairy and poultry sectors should keep an eye on in the coming months. – 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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