The sentiment about the 2020/21 global grain and oilseeds production prospects is changing from an optimistic one to a potential downward revision of the harvest. There are doubts about the potential size of the harvest of South America and the Black Sea region due to drought that threatens crops.

In Brazil and Argentina there are reports of persistent drought, which has caused delays in plantings. These two countries collectively account for 14 and 50% of global maize and soya bean production, respectively. Meanwhile, Russia’s Black Sea region and the United States (US), which collectively account for 17% of global wheat production, have also reported potential damages to crops due to drought.

A possible downward revision of the global harvest

The scale of the potential impact on the 2020/21 global maize, soya beans and wheat harvest is unclear thus far. Nonetheless, there could be downward revision from the optimistic estimates that both the International Grains Council (IGC) and the United States Department of Agriculture (USDA) reported last month and earlier this month.

In such a scenario, grain and oilseeds prices, which have already lifted somewhat following the reports of unfavourable weather conditions, could remain at higher levels. On 22 October 2020, US maize, wheat (hard red winter wheat) and soya bean prices were up by 31% year-on-year (y/y), 32% y/y, and 24% y/y, respectively, trading at US$228 per ton, US$283 per ton, and US$466 per ton.

Factors influencing commodity prices

The weather conditions are, of course, not the only driver of prices. During the process of rebuilding its pig herd, China’s growing demand for wheat has also boosted commodity prices. Furthermore, Egypt’s demand for wheat, as well as that of countries such as Taiwan, also had a positive impact on commodity prices. The current challenge is that the reprieve on price increases might not materialise in the near term if there is a sizeable downward revision in the 2020/21 global grain and oilseeds production forecast.

At the beginning of this month, the USDA estimated 2020/21 global wheat production at 773 million tons, which is up by 1% from the previous season. Russia, Australia, Kazakhstan and India were among the countries that were anticipated to boost the harvest. Hence, the reports of persistent drought in Russia and the US present a risk of a potential downward revision of this estimate. It will be two weeks until the USDA releases its update of the monthly World Agricultural Supply and Demand Estimates report, which will provide more insights on the potential size of the harvest on 10 November 2020.

This will be an important date for wheat-importing countries such as South Africa, which will be affected by price implications the production estimates will present. As we have highlighted previously, South Africa imports roughly 50% of its annual wheat consumption of 3,2 million tons.

Global maize production

Moreover, the USDA had the 2020/21 global maize production at 1,16 billion tons, which is up 4% y/y. Although the northern hemisphere countries are at the harvesting stage and there is some level of confidence with regard to the potential size of the crop there, the southern hemisphere is still at the planting stage, which commenced this month.

Therefore, the reports of drought in parts of Brazil and Argentina could have implications on the crop in these countries. This area will need to be watched closely in the coming months, starting from the USDA’s report, which is due for release in two weeks.

Importantly, these countries account for 14% of the global maize harvest as previously stated. South Africa’s exposure to the global maize market is largely through price transmissions, not the commodity deliveries per se, as is the case for wheat.

Already, South Africa’s maize prices have increased notably in recent weeks, in part because of spillover from higher global maize prices, combined with domestic factors such as the weaker currency and growing demand from the Far East.

Soya bean and oilseeds production estimate

The 2020/21 soya bean season started with optimism, which was clear in the estimates released by the USDA earlier this month that estimated the harvest at 368 million tons. This is up by 9% y/y. Given that Brazil and Argentina account for half of this estimate, any potential downward revision on their harvest prospects will have implications on this current global production estimate, and subsequently prices.

While the northern hemisphere countries are harvesting soya beans, the focus for crop-growing conditions will be on the southern hemisphere for the next couple of weeks. These weather challenges also come at a time during which China, in the interest of rebuilding its pig industry, has a growing demand for soya beans. This was illustrated in China’s recent purchases of soya beans.

A final word

The optimistic sentiment about the 2020/21 grain and oilseeds harvest that prevailed a few months ago is now coming into question because of persistent pockets of drought in key producing countries. It is unclear as to whether this will result in a sizeable downward revision in the harvest estimates. The date to look out for is 10 November 2020 when the USDA will release the updates of the estimates. – 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.

Find previous reports here.