The high-frequency data on both domestic and global markets has reinforced the view that grain prices could be under pressure this year which could, in turn, lead to subdued food price inflation. Last week the International Grains Council (IGC) lifted its estimate for 2020/21 global maize production to 1,2 billion tons, which is up 5% from the previous season and the largest harvest on record.

Global maize prices plummet

The downward swing in global maize prices saw a 21% year-on-year (y/y) decline by 25 June, with prices trading around $162/ton. Low global maize prices are likely going to remain the theme for the rest of the year.

The season is underway in the Northern Hemisphere, with the crop in most countries reportedly in good condition. Meanwhile, in the Southern Hemisphere, the 2020/21 production season will start around October. The focus is still on the 2019/20 season, with the harvest process in full swing in major Southern Hemisphere maize-producing countries such as South Africa, Brazil and Argentina.

What’s more, all these countries are forecast to obtain large harvests, which will improve supplies. In the case of South Africa, the maize harvest is estimated at 15,5 million tons, which is the second-largest harvest on record and well above the annual domestic consumption of approximately 11 million tons. This not only means that domestic maize prices could be under pressure in the coming months, but also that exports could increase, which is positive for boosting the agricultural trade balance.

Wheat stocks could increase significantly

In terms of wheat, the IGC lifted its 2020/21 production estimate from 766 million tons to a new record of 768 million tons. This is underpinned by the anticipated largest harvests in Russia, Canada, Australia, Argentina, China and India, among others. While some European countries reported dryness last month, the weather conditions have improved considerably, which is conducive for the crop. As a consequence of the improvement in production, the 2020/21 global wheat stocks could increase by 6% y/y to 290 million tons.

This means that global wheat production could be under pressure in the coming months. On 25 June, the global wheat price was down 8% y/y, at $212/ton. Wheat importing countries such as South Africa stand to benefit from such an optimistic outlook, especially as South Africa’s 2020/21 season might lead to yet another small crop due to a potential reduction in area planted. Plantings are set to fall by 8% y/y to 495 000ha, mainly due to a decline in area in the Free State. This means that South Africa will continue to have a large dependence – about 50% of annual consumption – on imports.

An increase in rice production

In the case of rice, the 2020/21 global production was revised down marginally from 507 million tons to 505 million tons, which is still a record harvest. This is boosted by an expected large crop in India, Vietnam, Thailand, Indonesia and Bangladesh, among others. The anticipated large production could subsequently lead to a 2% y/y increase in global rice stocks, to 180 million tons.

Similar to the aforementioned commodities, rice prices could also ease in the coming month. Global rice prices already come off higher levels observed in April, when there were prospects of trade restrictions and a higher degree of uncertainty about the 2020/21 harvest. South Africa, as a rice-importing country, stands to benefit from this positive outlook. The IGC currently forecasts South Africa’s 2020 rice imports at 1,1 million tons, up by 10% y/y.

Soya bean prices could come under pressure

As a key input in animal feed, soya bean is another important crop for global food security. The IGC forecasts 2020/21 global soya bean production at a new peak of 364 million tons, which is up 8% y/y. This is supported by expected large harvests in the US, Argentina and Brazil, among others. This expected uptick in production could lead to a 3% y/y increase in stocks, to 45 million tons.

This means global soya bean prices could also be under pressure in the coming months, but this could be eased by a rapid push to rebuild the Chinese pig industry, which has been devastated by African swine fever. However, there are doubts that this would be the case. From a South African perspective, the country stands to benefit as it imports around half a million tons of soya bean oilcake (meal). On average, 97% of soya bean meal originated from Argentina over the past ten years.

Positive global grain prospects

These positive global grain and oilseeds prospects support the view that food price inflation could be subdued this year, hovering around 4% y/y (from an average of 3,1% y/y in 2019). The key upside risk within the food price inflation basket will mainly be meat, in part because of base effects and a possible uptick in poultry prices following the recent increase in import tariffs.

Overall, however, grains – and fruit – prices could offset the potential increases in inflation and keep the headline number at lower levels. – 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.

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