Written for and first published in The Herald.
Before the war started on February 24, our primary focus in the global grains and oilseeds market was on production conditions in South America and Indonesia, where maize, soybeans and palm oil were negatively affected by dryness. The possible lower yields in these countries alone had elevated global grain and oilseed prices over the past few months.
The Russia-Ukraine war is now an additional risk, specifically to exporting activity. Ukraine suspended its exporting activity since the war started. Russia faces some restrictions to its exporting activity because of the sanctions and higher shipment insurance premiums for moving grains to various export destinations. This is a significant challenge because both countries constitute significant global grain and oilseed export volumes.
As we previously stated, in 2021, these countries together accounted for nearly 30% of global wheat exports, about 14% of global maize exports, roughly 32% of global barley exports, and almost 60% of global sunflower oil exports.
However, the production of these grains and oilseeds is one thing, the most critical aspect to now consider is the feasibility of shipment of some of these products to various global markets where they are needed.
To this end, the recent monthly World’s Supply and Demand Estimates of grains and oilseeds by the United States Department of Agriculture (USDA) provides essential data for assessing world supplies amid this trade uncertainty. The USDA forecasts 2021/22 global wheat production at 779 million tonnes, marginally up from the previous season. About 14% of this harvest is from Russia and Ukraine and is therefore not be readily accessible to global buyers for reasons we stated above. Despite this impasse, both countries are forecast to have about 52 million tonnes of wheat for the export market in 2021/22. This accounts for a 26% share of global wheat exports of 203 million tonnes this season.
Because of the increase in global consumption from increases in both food and feed demand, the 2021/22 global wheat stocks are forecast to decline by 3% y/y to 281 million tonnes. This decline in global stocks, combined with challenges facing shipments in the Black Sea region, means that global wheat prices could remain elevated over the medium-term, as has been the case since the days leading up to the conflict.
Maize is another major grain that has been of central focus. Its production is forecast up by 7% y/y in the 2021/22 season, with an expected harvest of 1,2 billion tonnes. The expansion in area planted in Brazil and Argentina is anticipated to compensate for any losses in yield. Thus, both countries are set to have larger harvests than in the 2020/21 season, despite the drier weather conditions in various regions when the season started.
Russia and Ukraine’s production prospects are largely positive compared with the 2020/21 production season. Thus, the available maize for export in both countries accounts for 16% of the global maize export forecast of 200 million tonnes in the 2021/22 production season.
As with wheat, the disruption of exports of such a large volume of maize will continue to lend support to prices in the medium-term, as buyers continue to place higher bids for maize from other origins such as South America, the US and South Africa, amongst other key exporters. Prices could remain slightly elevated despite the maize stocks having improved by 3% from the 2020/21 season to 300 million tonnes this year.
Rice is another key crop to watch, as countries could substitute it for maize and wheat. The global production conditions for this crop are favourable, with the 2021/22 harvest estimate at 514 million tonnes, up by 1% from the previous season. This is supported by expected large production in various parts of Asia.
Consequently, the 2021/22 global rice stocks are forecast at 191 million tonnes, up by 2% from the previous season. These positive production prospects have kept rice prices relatively under pressure since mid-2021, following a surge at the start of 2021 when prices breached the US$500 per tonne mark. Prices have since toned down to levels below US$400 per tonne. But we think a potential surge in demand remains a bullish factor, which could negatively affect importing countries such as South Africa, which imports about a million tonnes of rice a year.
In terms of oilseeds, Brazil and Argentina typically account for 50% of global soybean production. As such, the reports of dryness in these countries since the season started and the frequent downward revision of the crop by the local analysts has raised production concerns and kept vegetable oil prices elevated since the start of the season. The recent updates from February estimates showed a further downward revision to the 2021/22 soybean harvest in these countries. This subsequently weighed negatively on global production prospects, estimated at 354 million tonnes, down by 3% y/y. As such, a 12% y/y decline in ending stocks to 90 million tonnes is projected due to firmer consumption and the decline in production.
This diminished soybean production outlook, combined with expectations of a poor palm oil harvest in Indonesia, and the fact that Russia and Ukraine account for nearly 60% of global sunflower oil exports, should keep the global oilseed product prices elevated over the near to medium-term. Even if a ceasefire were to be brokered soon, the damage to Ukraine’s infrastructure and disruption to society and businesses would still be lingering hindrances to the resumption of sunflower oil production and exportation into the foreseeable future.
In sum, while we started the 2021/22 global grains and oilseeds season with South American and Asian weather challenges being the major risks to production and prices, the Russia-Ukraine war has exacerbated the risks to soft commodity exports. It will likely keep global prices, and by extension, South African grain and oilseed prices elevated over the foreseeable future.
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