At this time of the year, the focus in the South African agricultural market would ordinarily be shifting towards the next summer crop season, which begins with the planting of grains and oilseeds around October of each year. But it is proving hard to solely follow this path this year, as the commodity prices for the 2019/20 harvest are astonishingly high for a year where the is a bumper crop.
On 24 August 2020, while grains and oilseed prices had softened marginally from higher levels seen at the close of the previous week, the day ended with still fairly higher levels. Consider white and yellow maize spot prices, for example, which yesterday traded at R3 021 per tonne and R2 961 per tonne, up by 11% y/y and 9% y/y, respectively.
The primary drivers of prices remain roughly unchanged from what I mentioned last week, which is; (1) Strong demand from the Southern Africa region and deep-sea markets, (2) the delay in maize deliveries due to the late start of the season, and (3) the weaker domestic currency (here are a short paper I recently wrote on ZAR/USD and SA maize price correlations).
These prices levels provide an incentive for farmers to maintain a sizable maize area plantings in 2020/21 season, which will also have favourable weather conditions as we expect a La Niña weather event during summer.
For consumers, the grain products price inflation has been subdued for the greater part of the year and our expectations were prices would remain at lower levels for a prolonged period this year because of the expected large maize harvest (15.5 million tonnes, second largest in history). But the aforementioned passages already show that conditions haven’t thus far gone the way we had predicted. If prices remain at these levels for a month or so, we could start seeing an upturn in grain products price inflation towards the end of the year (keeping in mind the lag between commodity prices and food price inflation). With that said, I think this will be marginal as retailers do not have the ability to easily pass on these price increase to a consumer that is focusing on resilience in the face of job and income losses.
On the global front, the agricultural news landscape was fairly quiet at the start of the week, except for the announcement of wheat tenders issued by Egypt, which is a normal event and therefore has minimal bearing on prices.
They were also reporting of drier weather conditions in the eastern and southern Ukraine, southern Russia, southeastern Romania and eastern Bulgaria. The weather forecast for the next 10-days paint prospects of continuous dryness in these regions, which is negative for the crops. But I don’t think there is much concern in the market; certainly, form local analysts, as some revised up their estimates for Russia’s 2020/21 wheat harvest yesterday; perhaps a sign that the talk of dryness is not a major threat as some of us in the global south might think.
The only important data overnight was the United States Department of Agriculture (USDA) Crop Progress Report, which I flagged in yesterday’s Morning Note as something to monitor to get a sense of crop damage in Iowa following the recent windstorms. In line with expectations, the US maize and soybeans crop conditions were rated slightly poorer than last week, but still in better conditions than last year. This reinforces the view I expressed yesterday that the global market will still have large grains and oilseeds supplies in 2020/21.
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