Positive prospects for the 2020/21 global grains harvest

Positive prospects for the 2020/21 global grains harvest

This week, the United States Department of Agriculture (USDA) released the World Agricultural Supply and Demand Estimates data – arguably among the most anticipated data releases in global agricultural markets. The agency reinforced the message painted by the International Grains Council (IGC) last month, that there are large supplies in the global market.

This message also allays the fears of countries that had placed export bans fearing for a global shortage of grain commodities.

To start with maize, the USDA forecasts the 2020/21 global production to nearly 1.2 billion tonnes, up 6% y/y (see Exhibit 1). Similar to the point made by IGC, this will mainly be underpinned by an expected expansion in area plantings and higher yields in the US, Mexico, Canada, Brazil and the EU. The planting of this crop has begun in the northern hemisphere and progressed with minimal interruptions, albeit with the additional coronavirus-related precautions on farms. Moreover, input supply chains appear to be functioning well across the globe. In the southern hemisphere, planting will only begin around October for the 2020/21 season.

Exhibit 1: Global maize supply and consumption (million tonnes)
Source: USDA


In terms of wheat, the USDA forecasts a 1% y/y increase in 2020/21 production to a new high of 768 million tonnes (see Exhibit 2). The improvement is expected in Australia, India and Russia boosted by an increase in area planted and expected higher yields. This will compensate for a potential production reduction in the EU, Ukraine, the US and North Africa. This will mean that the 2020/21 global wheat stocks could increase by 5% y/y to 310 million tonnes.

The wheat importing countries such as South Africa stand to benefit with such an outlook, assuming there are no further restrictions on exports imposed as the data shows that there should be no global supply worries.

Exhibit 2: Global rice supply and consumption (million tonnes)
Source: USDA

South Africa’s 2020/21 wheat production season recently commenced and the outlook is not encouraging. Plantings are set to fall by 8% y/y to 495 000 hectares, mainly in the Free State. This means that South Africa will continue to have a large dependence on imports, about 50% of annual consumption. Fortunately, the lockdown regulations have had minimal interruptions on wheat plantings, and now the “level 4” regulations mean that the sector is largely operational, albeit observing all health protocols.

In the case of rice, the USDA forecasts a 2% y/y increase to a record 502 million tonnes (see Exhibit 3). This is boosted by a potential increase in area planted in Asia, Africa and the Americas. Under this production estimate, the USDA forecasts a 2% y/y increase in global rice stocks in the 2020/21 season to 184 million tonnes, which would add bearish pressure to prices and, in turn, be beneficial to net importing countries such as South Africa.

Exhibit 3: Global rice supply and consumption (million tonnes)
Source: USDA

While the road ahead is remarkably uncertain because of the COVID-19 pandemic, export restrictions on agricultural products should not be a policy option that countries pursue. Fortunately, Russia and Kazakhstan have recently indicated that they intend to abolish their recently imposed export quotas on wheat. This comes as it is increasingly becoming clear that there are prospects for large supplies in the market. There are currently large carryover supplies in the market from the 2019/20 season, and the 2020/21 production season promises to be even more bountiful. Over the coming month, we will closely monitor the production developments and weather conditions in key grain-producing countries.

Follow me on Twitter (@WandileSihlobo). E-mail: wandile@agbiz.co.za

Breaking new ground in global agriculture post-Covid

Breaking new ground in global agriculture post-Covid

This essay first appeared on the Financial Mail, May 7, 2020

As the coronavirus continues to spread around the world, governments have intensified efforts to contain the pandemic by limiting the movement of people and temporarily shutting down parts of the economy. Though the full extent of the economic fallout remains unknown, the effects of the pandemic will probably be felt for years.

Within this malaise, the agricultural sector and food manufacturing value chain seem likely to be among those least affected, due to supportive consumer demand. But this doesn’t mean there won’t be long-lasting structural changes in the sector.

The potential changes will not emerge from SA but from Europe and the US. However, over time they will filter into the local agricultural sector.

In particular, the pandemic has exposed the dependence of countries including Germany, Italy, France and the Netherlands on foreign agricultural labour. As borders have been closed to contain the spread of the virus, these countries have been faced with a shortage of farmworkers.

It’s a challenge that extends to the US, where parts of the agricultural sector are reliant on seasonal labourers, mostly from Mexico. In fact, US farmers had already raised concerns about labour shortages prior to the Covid-19 shock. At that point, the US was running the risk of losing about 10% of its crop due to challenges in processing the so-called H-2A visa for temporary farmworkers from neighbouring countries. The pandemic will only aggravate the problem.

Farmers across the US and Europe worry that their crops may rot in their fields, a situation that would weigh on their finances and on food security.

The impact is not limited to primary agriculture. The US, Brazil and Canada — which accounted for nearly a third of global meat and edible offal exports in 2019 — have closed some of their meat processing plants in response to the spread of Covid-19. The closures have led to speculation about potential global meat shortages — resulting in US President Donald Trump ordering US meat processors to reopen, despite the health risks.

Though such challenges have financial consequence for the farming sectors in Europe and the US, they raise broader questions about the need for automation in the agricultural and agro-processing sectors.

Admittedly, automation will not necessarily be an easy step across all agricultural subsectors (horticulture, for example, is likely to remain labour-intensive). But where possible, and where there is capital available, technological diffusion is likely to accelerate.

Such a transition would start in the developed world. But it is set to pose a challenge for policymakers across Sub-Saharan Africa and other emerging markets, where agriculture is a large part of the economy or a potential driver of large-scale job creation.

Consider SA, for instance. The country’s overarching developmental policy framework, the National Development Plan, outlines a broad policy objective to increase employment in the agriculture and agro-processing sectors by roughly 1-million by 2030.

This is underpinned by the prospect of increasing the level of investment in the sector (including in irrigation), boosting agricultural productivity, expanding export markets, promoting labour-intensive agriculture subsectors, and, where feasible, increasing the area of land being farmed.

Fortunately, SA hasn’t faced a scarcity of farmworkers since the Covid-19 pandemic started to intensify. On the contrary, it is in the unique (and, in another sense, difficult) position of having a labour market with a large pool of unskilled and often unemployed workers. So agriculture is well placed to provide livelihoods to those struggling to enter the workforce.

This doesn’t mean that a permanent shift towards automation in parts of Europe and the US after the pandemic won’t spill over into SA. The domestic agricultural sector is well integrated into the global market, which means any changes in the world’s leading agricultural countries will, over time, be transferred to our market.

When the time comes for the post-Covid-19 recovery phase, SA policymakers and industry — and those in other developing countries — will have to pay close attention to the gravitation toward automation. They will have to assemble policies that ensure each country’s agriculture sector remains competitive by keeping up with technological changes. At the same time, they’ll need to ensure that the sector continues contributing to rural economic growth, which is vital for some of society’s most vulnerable.

Policymakers will need to ensure farmworkers are upskilled, and better prepared to complement any structural labour market changes that may arise in the agricultural sector.

Follow me on Twitter (@WandileSihlobo). E-mail: wandile@agbiz.co.za

Pandemic adds to food insecurity in Africa, but little threat in SA

Pandemic adds to food insecurity in Africa, but little threat in SA

This essay first appeared on Business Day, April 28, 2020

Global food and agricultural supply chains are taking strain from disruptions caused by the Covid-19 pandemic. This is the case whether one looks at meat or grain supply chains.

First, the US, Brazil and Canada, which accounted for nearly a third of global meat and edible offal exports in 2019, have closed some of their meat processing plants over the past few days in response to the spread of Covid-19 among employees. In the US and Canada, the major closures are beef and pork processing plants, while in Brazil the closures are of poultry-related plants. Given these countries’ significant combined contribution to global meat exports of 28%, if the plant closures spread and they remain closed for a prolonged period there could be a global meat shortage and a potential uptick in prices.

Fortunately for SA, from a beef perspective, it is a net exporter. Hence the closures of certain plants in top exporting countries present minimal risks from a food security perspective. However, when it comes to pork SA remains a net importer of mainly ribs from Europe. These imports accounted for roughly 6% of domestic consumption in 2019. Similarly, about 20% of domestic poultry consumption is imported, mainly from Brazil, the US and EU, according to Trade Map data. This essentially means that if the disruptions to meat processors in the US and Brazil persist and spill over to the global market, SA will be affected, particularly when it comes to poultry imports.

Second, wheat continues to be plagued by the spectre of export limitations. In March Russia placed an export quota of 7-million tonnes of wheat in the three months to June to protect its domestic supply during the pandemic before the July harvest of its new crop. This quota has now been reached, and it is unclear if the country will issue a new quota for the remaining months leading to July.

Russia is the world’s leading wheat exporter, accounting for 19% of global wheat exports in the 2019/2020 season. On average, exports account for 45% of Russia’s wheat production of 77-million tonnes. With the International Grains Council forecasting a 9% year-on-year increase in Russia’s wheat production in 2020/2021, I doubt further wheat export restrictions will be announced post-July 2020. Nonetheless, the policy direction Russia takes will have implications for SA, which imports half of its annual wheat consumption, with Russia among the leading suppliers.

Third, looking further afield to the rest of Africa, there are rising concerns over food insecurity in 2020. These stem from unfavourable weather conditions, which has negatively affected agriculture in various countries and spreading locust swarms.

Zimbabwe suffered from drought and floods in 2019, and the production of staple crops fell more than half. Agriculture in Zimbabwe also started the 2020 production season on the back foot due to unfavourable weather. The International Grains Council forecasts the country’s 2019/2020 maize production at 800,000 tonnes, which is less than half of what it needs to satisfy annual consumption of 2-million tonnes. In East Africa, as locusts continue to spread Kenya, Somalia and Uganda could experience crop losses.

It is important that the disruptions to meat supply chains in the US, Brazil and Canada are monitored, but I don’t foresee an immediate threat to SA’s supplies. This is because of the country’s relatively lower dependence on imports of meat. In the case of wheat, Russia is a big enough wheat market to warrant policy attention. On the rest of the continent, the lingering challenge of food insecurity has only been accentuated by the Covid-19 pandemic.

To mitigate societal risk, food insecurity should be on the front burner when the continent mobilises resources from the public purse and multinational and developmental institutions.

Follow me on Twitter (@WandileSihlobo). E-mail: wandile@agbiz.co.za

Africa’s food security under fire amid the pandemic

The COVID-19 pandemic will exacerbate an already dire situation of food shortage in some African countries. Professor Mzukisi Qobo (Head of Wits School of Governance, University of Witwatersrand), Isaah Mhlanga (Chief Economist at Alexander Forbes) and I have an essay out this morning which discusses this matter. You can access it here.

Follow me on Twitter (@WandileSihlobo). E-mail: wandile@agbiz.co.za

Some positive developments in the global wheat market

Some positive developments in the global wheat market

We have previously warned of the restrictions placed by countries on agricultural commodity exports, specifically rice and wheat. The concern was that restrictions in the world’s larger supplier markets would inevitably result in drastic price increases of the aforementioned commodities, of which South Africa is a net importer of.

South Africa imports all of its rice and half of its wheat requirements.  The restrictions on exports were announced in the Black Sea and Asia regions, although the world has large supplies of rice and wheat. The United States Department of Agriculture forecasts 2019/20 global wheat production at 764 million tonnes, up 4% y/y. And the 2019/20 rice production is estimated at 496 million tonnes, down by 1% y/y.

This past week, however, Romania, which is the world’s seventh-largest wheat exporter, retracted its statement on the ban of wheat exports.  Over the past five years, Romania’s wheat exports averaged 5.6 million tonnes. While not directly a big supplier of wheat to South Africa, the easing of exports is a positive move towards boosting the global wheat supplies for export markets. The International Grains Council estimates that the world has 176 million tonnes of wheat for exports within the 2019/20 season, which is a 5% increase from the previous season.

Under circumstances of increased wheat production and supplies for exports, one would ordinarily assume that wheat prices would be somewhat lower than levels seen this time last year. But this is not the case.

Global wheat prices traded around US$238 per tonne (US HRW) on 22 April 2020, which is up 13% y/y. The increase can, in part, be attributed to the restrictions on exports announced by various countries over the past couple of weeks amid fears about the timeframe of the COVID-19 pandemic. If we could see similar statements as Romania or assurance that there won’t be an export restriction on wheat from major wheat-producing countries, there could be some ease in the global wheat market about supplies throughout the season.

This is a message that was widely shared in the G20 Extraordinary Agriculture Ministers Meeting, earlier this week, noting a need to “guard against any unjustified restrictive measures that could lead to excessive food price volatility in international markets and threaten the food security and nutrition of large proportions of the world population.”

In the case of South Africa, 2019/20 wheat imports could increase by 33% y/y to 1.8 million tonnes. This is 13% higher than the five-year average import volume, exacerbated by the decline in domestic wheat production on the back of unfavourable weather conditions in parts of the Western Cape in late 2019. As of 17 April 2020, South Africa had imported 804 335 tonnes of wheat, which equates to 45% of the volume the country intends to bring into its shores within the 2019/20 season. The leading suppliers so far are Germany, Lithuania, Poland, Latvia, Ukraine and Russia.

There is no doubt that over the coming weeks and months, there could be supply chain disruptions because of the pandemic. However, the hope is that trade policy in key producing counties doesn’t add to an already challenging environment for importing countries. We are counting on various countries upholding the G20 message.

Follow me on Twitter (@WandileSihlobo). E-mail: wandile@agbiz.co.za

New data out of Stats SA on Business impact survey of the COVID-19 pandemic in South Africa

The actual impact of the COVID-19 pandemic on South African businesses remains unknown until critical variables to measure it can be identified, including the duration of the pandemic and its intensity in terms of infection rates. So far, the pandemic has highlighted the need to obtain accurate information as close as possible to real time.

Hence, the good folks at Statistics South Africa have set out to determine the impact on businesses and the economy at large by conducting an experimental study. They have just released their first report and you can download it here.

Follow me on Twitter (@WandileSihlobo). E-mail: wandile@agbiz.co.za

Which SA farmers will benefit from emergency aid, and who will need it?

Food products and nonalcoholic beverages have been classified as essential goods, and their production, distribution and retailing will continue during the 21-day coronavirus lockdown period. As such, one could expect the impact on the agricultural sector to be minimal, but is that true?

Intuition would lead one to expect that agricultural exports will be reduced as the Covid-19 pandemic creates mayhem in the global economy. But people have to eat, and logistics and movement of goods are continuing, so food demand should hold. It is therefore difficult to assess the impact of the lockdown regulations, how they are applied and the demand effects of the pandemic on agriculture without unpacking each sector by its subsectors, to enable us to determine who the government should assist in these trying times.

Stats SA has just released the results of its 2017 census of commercial agriculture, which could aid a better understanding of these issues. Speaking at the launch of the census results, agriculture, land reform & rural development minister Thoko Didiza announced that her department has ring-fenced R1.2bn for assistance to mainly small-scale farmers. The question is how they will be defined and how they qualify for support.

Read more in an essay by Professor Johann Kirsten of Stellenbosch University and myself in today’s Business Day.  A link to an online version is here.

Follow me on Twitter (@WandileSihlobo). E-mail: wandile@agbiz.co.za

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