Essay by Wandile Sihlobo and Tracy Davids[i]
In regular seasons, a sizeable domestic maize harvest would ordinarily lead to a decline in prices. But South Africa’s 2019/20 and 2020/21 maize production seasons have not been ordinary. The second-largest maize harvest on record in the 2019/20 production season didn’t lead to a notable decline in prices as some might have expected. The weaker exchange rate, combined with increasing demand for South Africa’s maize in the Far East and Southern Africa, and generally higher global prices provided support to the domestic maize prices throughout 2020 and into the beginning of 2021.
The aforementioned price driving factors changed somewhat as we entered into the second quarter of this year. For example, the domestic currency has firmed notably in recent months. In addition, Southern Africa’s demand for South African maize will likely decline on the back of the expected large harvest for the greater part of Southern Africa. Currently, the United States Department of Agriculture (USDA) estimates already point to prospects of increased maize production in several southern and east Africa countries.
For example, Zambia’s 2020/21 maize production could reach 3,4 million tonnes (up 69% y/y), Malawi’s maize harvest is estimated at 3,8 million tonnes (up 25% y/y), Mozambique’s maize crop is estimated at 2,1 million tonnes (up 8% y/y), Kenya’s maize harvest is forecast at 4,0 million tonnes (up 5% y/y). Tanzania’s maize harvest is estimated at 6,3 million tonnes (up 8% y/y). There are also prospects of a large maize harvest in Zimbabwe. In fact, local analysts in these countries suggest that the harvest could be much larger than these USDA estimates. As these harvests start to come in, prices in the region are trading well below international levels.
One would think that the firmer domestic currency and potentially decline in demand for South African maize compared to 2020 would have a notable impact on local maize prices. After all, the Crop Estimates Committee (CEC) estimates that South Africa’s maize harvest could reach 16,1 million tonnes, which would be a 5% y/y increase and a new second-largest harvest on record. However, the South African maize prices have remained elevated in the past few days. On 13 May 2021, spot prices for yellow and white maize in South Africa were up by 38% y/y and 31% y/y, trading at R3 586 per tonnes and R3 422 per tonne, respectively. Over the same period, the US maize prices were up by 116% y/y US$326 per tonne – levels last seen in 2013.
A number of factors underpin the global price run. In China, import demand has increased sharply. This follows a below average crop due to flooding, as well as rising demand from a rapid expansion in poultry production, as well as an accelerated rebuilding of its pig herd following African Swine Fever related reductions in 2018 and 2019. In the first quarter of 2021, Chinese pork production had increased by 32% year on year and its pig herd was 30% larger than the same time last year. The rebuilding has been accompanied by a modernization of production practices and increased feeding of rations high in maize and protein meal. All these factors contributed to high domestic maize prices in China and strong demand for imported maize, at a time when global stocks are dwindling after a smaller than anticipated crop in the US last year. Also, concerns are mounting with regards to Brazil’s maize crops due to persistent drought conditions. This is exacerbated by arid soils in Canada where planting is about to start, as well as dryness in parts of the US.
South Africa is typically a net exporter of maize and is therefore well integrated into global markets. Our rough calculations, using high-frequency data, (daily with more than 300 observations), shows that the correlation between domestic and international maize prices remains positive, about 60% for white maize (which is mostly traded into the African region) and 85% for yellow maize (which is traded into the global market). This implies that, when global maize markets show an increase, the domestic maize prices tend to rise in tandem.
The work by fellow agricultural economist, Ferdi Meyer and his colleagues at the BFAP indicates that this transmission is stronger during periods when South Africa trades into the global market. The only exception would be in years where South Africa moves from an import parity-based situation, due to below average harvests locally, to an export parity-based situation once volumes recover, resulting in lower domestic prices. Given that South Africa already produced a surplus in 2019/20, prices remain at export parity and even in the face of the expected large maize harvest, we continue to observe a notable increase in domestic maize prices due to the international market dynamics.
Notably, the current maize prices have implications on the animal feed industry and consumer food price inflation. Yellow maize is the primary source of energy in livestock and poultry feed and typically accounts for around 60% of rations. Consequently, the current higher prices could continue adding cost pressures to this subsector. The chicken to maize price ratio, which is considered a basic indicator of profitability for the sector, has deteriorated to levels last seen in early 2017, even if they remain slightly higher than the peak of the 2016 drought. Higher feed prices will also affect other feed intensive livestock sectors, such as pork production, as well as cattle feedlots.
Similarly, if maize prices remain elevated, we may soon have to review our views on South Africa’s consumer food price inflation, as related grain products form a large share of 21% in the food inflation basket. Research by fellow agricultural economist, Marlene Louw, indicate that maize prices are transmitted to maize meal prices with a long-run elasticity of 0.63, suggesting that 63% of the increase in maize prices will ultimately reach the consumers at the price of maize meal. We had previously held a constructive view that South Africa’s consumer food price inflation would potentially average around 5% this year, assuming benign grain prices. In the face of the persistent rise in grain prices, along with higher fuel and electricity prices, we might be inclined to revisit this view in the coming month.
Importantly, given that South African maize prices are currently at export parity levels, international markets will need to slow for domestic prices to decline. The change in global grains prices will only be when stocks recover, likely only when the 2021/22 crop is harvested towards the end of this year. Even then, the size of the crop will matter. As things stand, the weather conditions in the US, Canada and the greater part of Europe and the Black Sea are key events to watch as they continue to influence planting decisions, crop conditions and ultimately, prices. International vegetable oil and oilseed prices also remain high, suggesting that oilseeds will compete strongly with grains for area expansion.
So, when South Africans are confronted with relatively higher grains products prices in the coming months at the retail level, they should realize that such increases result from global occurrence and not domestic developments and price manipulations.
[i] Wandile Sihlobo is the chief economist of the Agricultural Business Chamber of SA (Agbiz). Tracy Davids leads Commodity Markets Division at the Bureau for Food and Agricultural Policy (BFAP).
Written for and first appeared on Business Day, 24 May 2021
We are on Twitter @WandileSihlobo and @tracydavids11. Our organisations are @AgbizSA and @BFAP6
