MORNING NOTE: Zimbabwe could import more of South Africa’s maize towards the end of this year and into 2021

by Wandile Sihlobo | Oct 11, 2020 | Daily Notes

In the 2019/20 marketing year, Zimbabwe’s maize imports, specifically from South Africa didn’t gain much momentum until the start of 2020. This is when Zimbabwe’s maize stocks were already depleted following a season where the country produced roughly 777 000 tonnes, which is way less than its annual consumption of about 1.8 million tonnes.

The same is likely to unfold in the 2020/21 marketing year. Although Zimbabwe’s maize production improved to an estimated 850 000 tonnes, the country will still need to import at least a million tonnes of maize to meet its annual consumption needs. So far, South Africa, which is usually a major supply of maize to Zimbabwe has exported only 187 037 tonnes of maize to the country.

South Africa’s maize exports could remain thin in the coming weeks as Zimbabwe still relies on its local produce, for now. But there will likely be some momentum at the end of the year and into 2021. This is when Zimbabwe’s maize stocks will be at low levels. This is also the time when we will likely hear more about cases of rising hunger, which the World Food Programme has been consistently warning about in the past few months (see here).

The implication of this expected increase in Zimbabwean maize demand is that South Africa’s maize prices — which have remained at elevated levels over the past couple of months, in part because of growing demand from the Far East countries, the weaker domestic currency and generally higher global grains prices — could receive further support from the regional demand. On 08 October 2020, South Africa’s white and yellow maize spot prices were each up by 21% y/y, trading at R3 394 per tonne and R3 498 per tonne, respectively.

Exhibit 1: Zimbabwe will have big problems in the coming months. There will be a large maize shortage
Source: USDA and Agbiz Research

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MORNING NOTE: SA’s government plan to release land for farmers is a step in the right direction

by Wandile Sihlobo | Oct 8, 2020 | Daily Notes

Written for and first appeared on Fin24, October 5, 2020

The growth of South Africa’s agricultural fortunes and job creation will, in part, depend on the expansion of agricultural activities in the underutilised former homelands regions and farms that government acquired through the land reform process. Hence, this past week’s announcement by the Minister of Agriculture, Land Reform and Rural Development, Ms Thoko Didiza, that government would be availing 700 000 hectares of agricultural land is broadly positive.

The government promises efficiency in availing the land to potential beneficiaries. The selection process, which will be through three broad structures – district, provincial and national — could take approximately two months. So far, it is unclear what criteria will the selection committees follow as no final version of the Beneficiary Selection and Land Allocation Policy has been published since the draft was Gazetted early this year. One hopes that the foundations of that policy have been retained as robust and transparent criteria is critical to bring confidence that there aren’t any corrupt activities in the process. This is an important area which was also emphasized in the Advisory Panel on Land Reform and Agriculture.

Moreover, the Advisory Panel report had recommended that the government should have more bias towards the youth and women in the beneficiary selection criteria for land redistribution process was mirrored in the Department’s recent statement. This will likely be part of the important aspects to be considered when selecting beneficiaries for the available 700 000 hectares of land. In the 135 117 hectares of land that the government has released since February 2020, women and youth were prioritized in beneficiary selection. What the current committees will, however, have to ensure is that this process is fair and transparent going forward.

Now, availing government land is one step of contributing to the growth of agricultural fortunes and job creation. Other important aspects will be the (1) readiness of the beneficiaries to farm, which is their know-how of farming, as well as (2) resources such as finance and infrastructure of the farms.

Firstly, the government states that beneficiaries will be subjected to a compulsory training programme before gaining full access to the farm. This is an important step as there might be young people aspiring to join the sector but have minimal experience. The training programmes should encompass financial and business management practices, and yet also cater to specialized training for commodities that a beneficiary wishes to focus on.

Also, there will need to be active extension officers or mentors to assist the new farmers. Another important avenue would be for the potential beneficiaries to work closely with various agribusinesses and commodity organizations, specifically the ones with development programmes that focus on grooming framers. These recommendations are broadly in line with the Policy on Comprehensive Producer Development Support currently before Nedlac.

Secondly, the state of the infrastructure on these farms is unclear at this point. Each farm might be in a different condition from the next as some might have been bought by the State a couple of years ago and the infrastructure might not all be in a suitable condition. A clear assessment of this, and an upgrade where necessary, will be key before the new beneficiaries take over the farms. In some cases, beneficiaries with large capital resources might be better placed to refurbish the farm infrastructure. To gain capital, it will be vital that the blended finance products being developed jointly between the government and the private sector is operationalized as soon as possible.

Importantly, these farms will be issued a non-tradable, 30-year lease, which means the potential beneficiaries might not be able to use the land as collateral to access production finance unless a stepping-in right is registered over the lease. This could be a potential major challenge in ensuring that these farms are productive and contribute towards growing the South African agricultural fortunes and job creation. Once the process of contracting with beneficiaries commence, it will be interesting to take note of all restrictions placed on the lease so as to fully assess the degree to which the beneficiary, government and many private sector financiers can share the risk of the beneficiaries apply for private or blended finance.

If the lease is non-tradable as appears to be the case, I think the option to buy should be granted at an early stage of the lease, perhaps after five-years as this would provide the state with an ideal opportunity to assess the beneficiary’s potential to become a fully-fledged landowner. The payments in the initial renting stage should also be calculated as a down payment on the purchase value. This process would ensure that the new entrant farmer has the flexibility to use the land as collateral and access capital to further develop the farm. This process also entails a non-monetary incentive of ensuring that the beneficiary takes good care of the land as it will be their property. This process would also perhaps assist the State to make a judgement after five years of whether the beneficiary was an appropriate person for the farm. This will, of course, have its downsides for farmers who aspire to focus on long term crops such as fruit, as five years would be a shorter period to make a judgement of whether they are succeeding or not. That said, such farming venture is capital intensive and would thus benefit from the method we are proposing.

In a nutshell, the government’s action is a right step towards improving the growth of the agricultural sector. But the financing of the new farms could prove to be a challenge as we have seen in the past land redistribution programmes where beneficiaries have no tradable leases on the land and the efficacy of the blended finance proposals are yet to be tested.

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MORNING NOTE: A potentially devastating fungal disease in Zambia’s wheat fields

by Wandile Sihlobo | Oct 6, 2020 | Daily Notes

Zambia’s grain production has increased notably in the recent past, specifically maize, soybeans, and wheat. This has been boosted by both the expansion in area planted and improvement in yields. Zambia went from being a net importer of maize to an exporter in just two decades, from 2000 to 2020, while at the same time growing the soybean exports.

For wheat, however, the increase in production over the past two decades has not yet enabled the country to be self-sufficient. This is something that is not unique to Zambia, regional wheat producers such as South Africa still imports about 51% of its annual wheat consumption, a volume of around 1.6 million tonnes. Zambia’s wheat imports are much smaller in volume, in part, because of differences in population size compared to South Africa. Zambia imports about 60 000 tonnes of wheat a year, according to data from the United States Department of Agriculture.

This promising run of wheat expansion could soon be distracted. There is a fungal disease which has been recently confirmed in Zambia. It could cause devastation in the wheat fields. The International Maize and Wheat Improvement Centre (CIMMYT) released this news last week (see here). The fungal disease is called wheat blast – a formal definition and what it could do to the crop is available from CIMMYT website here. This has been reported for the first time on the African continent as illustrated in Exhibit 1 below.

CIMMYT notes that “wheat blast poses a serious threat to rain-fed wheat production in Zambia and raises the alarm for surrounding regions and countries on the African continent with similar environmental conditions.” It spreads through infected seeds, as well as by spores that can travel long distances in the air, amongst other forms.

Hence, I am a bit concerned about the possibility of this disease spreading to neighbouring Zimbabwe, and what that would mean for the country’s wheat industry. I don’t have answers to this at this point as I don’t even fully understand the disease itself. But I felt that it would be important to flag it in this blog post so that those doing serious scientific research in this area or farming with wheat could be on the lookout. There is research on how to combat the disease underway elsewhere (see here).

Exhibit 1: Here are some countries that have had the “wheat blast”
Source: CIMMYT

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MORNING NOTE: SA wheat imports to fall by 14% y/y in 2020/21, thanks to improved local harvest

by Wandile Sihlobo | Oct 5, 2020 | Daily Notes

South Africa’s 2019/20 winter crops marketing year ended this past week. The key data point most analysts observe are wheat imports, as the country imports about 51% of its annual wheat consumption.

We initially estimated the 2019/20 wheat imports to 1.80 million tonnes, which was up by 32% y/y on the back of a poor domestic harvest that year. But the data released by the South African Grain Information Services on 25 September 2020 showed that imports were mildly higher than our estimate, at 1.86 million tonnes. Russia, Poland, Lithuania and Germany were the leading suppliers of wheat to South Africa in 2019/20 marketing year.

In the 2020/21 marketing year, wheat imports will likely show a decline of 14% y/y to 1.64 million tonnes. This is a view that is also shared by both the South African Grain and Oilseeds Supply and Demand Estimates Committee and the United States Department of Agriculture (Pretoria Office). This is premised on the back of a potential increase in domestic wheat production following the favourable weather conditions in the Western Cape, which accounts for two-thirds of South Africa’s wheat plantings, and other wheat-producing regions of the country.

Just this past week, the Crop Estimates Committee (CEC) reaffirmed its view that South Africa’s 2020/21 wheat crop could be the largest in a decade, while the canola and barley harvest could be the largest on record. The CEC lifted all the production forecasts of all the aforementioned crops by 3% each from the previous month’s levels, as favourable rainfall suggests that there could be good yields in several regions. The current estimates suggest that South Africa’s 2020/21 wheat, barley and canola production could increase by 32% y/y, 51% y/y and 33%, respectively, to 2.02 million tonnes, 520 106 tonnes and 126 520 tonnes.

Since I have mentioned other winter crops, I should as well note that for barley, South Africa will remain a net exporter, and the country is actively looking for export markets as the expected volume might not all be utilized in the domestic market this season (see here). Meanwhile, for canola, the harvest will probably be utilized in the domestic market.

In a nutshell, 2020/21 marketing year promises to bring notable improvement from an output perspective, which in turn, will lead to a decline in imports of wheat. For other winter crops, South Africa will remain a net exporter. This is primarily thanks to favourable weather conditions, and of course, farmers’ efforts.

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MORNING NOTE: Thoughts on South Africa’s Food Price Inflation

by Wandile Sihlobo | Oct 4, 2020 | Daily Notes

The rising grain prices, which over the weekend I highlighted their impact on the livestock sector, present upside risks also to South Africa’s food price inflation. This is a case although the pass-through of the recent price increases remains fairly muted, with “bread and cereals” category of the food price inflation basket rising by only 2.8% y/y in August 2020, marginally up from the previous month (I have previously discussed the food price transmission mechanism story here).

Earlier in the year, we estimated that South Africa’s food price inflation in 2020 could average at 4% y/y (compared with 3.1% y/y in 2019). At that time, we anticipated a notable decline in domestic grains prices on the back of a large harvest, which as we all have come to see didn’t materialize. Maize prices are currently up by over 20% y/y, on the back of rising global demand, primarily from China; the weaker domestic currency; and generally higher global maize prices, amongst other factors. Meanwhile, other food products categories in the food price inflation basket are roughly in line with our expectations.

As a result of this, South Africa’s headline food price inflation has averaged about 4.4% in the first eight months of 2020. With maize prices likely to remain at these elevated levels for the rest of the year, we now think the headline food price inflation could average at levels around 4.5% y/y in 2020, which is slightly higher than our initial expectations. To be clear though, this is by no means an extraordinary level. We’ve seen volatile and elevated headline food price inflation over the past couple of years as illustrated in Exhibit 1.

Going forward, South Africa’s food price inflation will likely remain contained into 2021 as we expect a good agricultural season on the back of a La Niña weather event. This should help contain grain prices from early 2021, and at the same time support all forms of agriculture output. What will make 2021 different is that a La Niña weather event could present good rains across the Southern Africa region, which would reduce the grain shortage in various countries, and in turn, demand for white maize from South Africa. Under this scenario, the base effects of grain prices, combined with potentially sideways prices of other agricultural commodities should help contain South Africa’s food price inflation in 2021.

Exhibit 1: South Africa’s food price inflation
Source: Stats SA and Agbiz Research

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WEEKEND NOTE: Higher grains and oilseed prices raise risks for SA livestock farmers

by Wandile Sihlobo | Oct 3, 2020 | Daily Notes

Ordinarily, at this time of the year, I would be writing about the upcoming summer crop season, which starts this month. But this year it is a hard act to follow due to several lingering, significant developments from the 2019/2020 summer crop season.

Most notable of these is the persistent upsurge of summer grains and oilseed prices. SA had its second-largest maize harvest on record at about 15.5-million tonnes (yellow maize 6.5-million tonnes and white maize 9-million tonnes) and the third-largest soya bean harvest on record (about 1.26-million tonnes) — yet commodity prices do not reflect the increased production.

On September 25, the soya bean spot price was at R8,100 a tonne, up 39% year on year. White and yellow maize spot prices ended the week at R3,494 a tonne and R3,350 a tonne respectively, each up about 23%. While it is tempting to be excited about these price levels as they mean a better financial position for grain farmers, who have endured droughts over the past two years, they raise the risks for poultry, dairy and other livestock farmers, who are the major consumers of yellow maize and soya beans as feed ingredients.

The price increases are precipitated by the weaker domestic currency, coupled with growing demand from China and other Asian markets. China is rebuilding its pig herd, the world’s largest, that was decimated by the African swine fever in 2019. This process has led to a notable increase in global soya bean imports, pushing up prices. For Brazilian and US soya bean farmers, this rising demand has been a windfall.

For us, the opposite is true, for two reasons. SA is a net importer of soya bean meal, a by-product of soya beans that is used in animal feed. We import about half-a-million tonnes of soya bean meal a year, primarily from Argentina. Therefore, the rising price of soya beans and its by-products, combined with the weaker domestic currency, also means increased costs for the livestock and poultry industries. SA’s soya bean prices tend to follow the global market, partly because of our import dependence. The uptick in global soya bean prices has thus fed into domestic prices.

In the case of maize, SA is a net exporter, which means global market developments tend to have a smaller effect than with soya beans. But the likes of South Korea, Vietnam, Japan and Taiwan have been relentless in buying domestic maize (primarily yellow maize). In the week of September 18, SA’s 2020/2021 total maize exports were 1.46-million tonnes, 54% of the seasonal export forecast of 2.7-million tonnes. Yellow maize exports accounted for 75% of the volume already exported, with white maize accounting for the rest. This growing global demand, coupled with the weaker domestic currency, which makes exports more lucrative, and generally higher global maize prices, have added to the increase in domestic maize prices.

As this dynamic is unlikely to change in the near term, soya bean and maize prices could remain fairly high for some time, at least within the 2020/2021 marketing year, which ends in February for soya beans and April for maize. This will lead to sustained higher costs to the users of the grain and oilseeds, mainly the livestock and poultry industries.

Due to higher grain prices, animal feed costs and producer price inflation, the situation will need to be monitored closely in the next months to assess whether retailers will pass the costs on to consumers or manage to absorb them despite the tough economic environment.

Written for and first appeared on Business Day, September 29, 2020

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