How long can the status quo in the global food system hold?

How long can the status quo in the global food system hold?

Essay by Wandile Sihlobo and Tinashe Kapuya[i]

As countries continue to implement “risk-adjusted” responses to COVID-19 and global leaders and analysts alike continue to assess the evolving implications of the pandemic on global markets. What makes COVID-19 unique is that it is a health shock that has fundamentally affected both the supply and demand side of the global economy.

In the food industry, government policy responses have mainly hinged on three major interventions since the pandemic started. These include (1) an initial intent to implement protectionist trade policies in major agricultural producing countries, followed by a pullback of direct trade restrictions (2) supply-side support for the agricultural industries in the form of historic budgetary support for small and large companies, and (3) demand-side support through a boost in household incomes through wage support.

First, in the early days of the pandemic, countries such as Russia, Kazakhstan, Cambodia and Vietnam, amongst others, introduced export quotas and bans on rice and wheat exports. These were attempts to ensure stable domestic staple food supplies amid the uncertainty about how long will the pandemic last. But these policies were soon abandoned after a month, as aforementioned countries signalled a return to the open market trading terms within the next two months.

One of the reasons that contributed to this change includes the exemption of agriculture and food supply chains from COVID-19 restrictions that had affected trading in other sectors of the economy. The International Grains Council has lifted its 2020/21 global grains harvest by 2% year-on-year to 2.2 billion tonnes. This is a welcome development for grain importing countries who feared food insecurity risk when the protectionist policies were announced. This includes South Africa and the African continent at large, which relies on rice and wheat imports from the global market.

Second, as initial worries about production abated, it became clear that the biggest challenge was not a lack of food in the market, but logistical disruptions. However, closures of meat processing plants in the US, Ireland, Canada and Brazil, amongst others due to the outbreaks of the virus in production facilities is now bringing renewed fears that the longer the pandemic continues, the more likely that parts of the food system will cease to function. The risks of meat shortages in the global market, as well as the negative ripple effects in other parts of the food system linked to the meat sector, implying that the food system remains extremely vulnerable. The emerging concerns of potential meat shortages – and spillovers into potentially other parts of the food system – are putting intense pressure on political leaders to respond more aggressively, as seen in the US, where President Trump ordered meat plants to re-open to avert an inevitable spin-off crisis.

This specific aggressive intervention is just part of a much broader set of unprecedented policy responses from global leaders, which have been underpinned by large unprecedented fiscal spending which surpasses those of the 2008 financial crises and the Great Depression. Richer countries have implemented financial relief programmes to support small and large businesses, including farmers – to cope with the deep negative impacts of the pandemic. In South Africa, the Department of Agriculture, Land Reform and Rural Development ring-fenced R1.2 billion for financially distressed small-scale farmers. This prioritizes the poultry sector, livestock and vegetables, amongst other agricultural commodities which will be selected on a case-by-case basis. The farmers within the Proactive Land Acquisition Strategy programme are also included in this package.

Third, governments tried to preserve incomes and livelihoods, and in turn, supported the demand side of the food sector. Rapid increases in already high levels of unemployment in most parts of the world translate to weak demand for food, particularly high-value products in the near-to-medium term. Income protection and support in countries such as the UK and the US is expected to mitigate the weakening demand, and somewhat keep demand at levels that ensure that the economy can bounce back quickly once the economies are fully opened up post-COVID-19.

Meanwhile, in the emerging markets, South Africa has been amongst countries that provided support through an increase in social grants, food parcels and food vouchers. While these are short term assistance measures, they somewhat help improve household demand for food products. These measures are short term and are being implemented with the hope that the pandemic will keep the economy closed for a maximum of three months.

But if the global economy does not bounce back sooner, under the pressure of a new wave of infection which leads to a much slower opening of the economy, then household income and purchasing patterns might be altered over the short to medium-term. In this case, the implications for the agricultural and food sector could be dire. We suspect that the demand for higher-value products will inevitably decline somewhat post-COVID-19, but the longevity of this decline could lead to a shift in the supply chains. Depending on the extent and duration of the impact, the shift could be permanent, due to irreparable damage to the supply chains – if critical businesses shut down permanently.

This is crucial for countries like South Africa whose agricultural sector is export-orientated, with rough 49% of the produce in value terms exported. South Africa’s high-value export products are mainly fruit, wine and beef. These are mainly destined to the EU and Asia market which accounted for nearly US$10 billion in 2019, according to data from Trade Map.

In a nutshell, the resilience of global agriculture will continue to be tested as the pandemic impacts both the supply-side and demand-side of the global economy. There is no telling how long the global food system – as currently configured – will continue to sustain the pressure from COVID-19. What is becoming increasingly clear is that, the longer the pandemic continues to impact on the supply and demand sides of the global food system, the more likely we are going to see structural shifts that will fundamentally reconfigure it as it adapts to the changing effects of the pandemic.

What is particularly worrying is the lack of support measures for businesses and households in developing countries. In resource-poor nations – especially those in the African continent, who are already under the weight of worsening debt levels – governments do not have the means to support private businesses and farming communities to the same degree as the US, the United Kingdom, China, and others. This means that the developing world is a part of the global food system and economy that remains extremely vulnerable to the pandemic.

There have been relatively lower numbers of COVID-19 cases in sub-Saharan Africa so far, perhaps due to a lack of testing capacity. But if what is happening in the global north is a harbinger of what is to occur in sub-Saharan Africa over the next couple months, then the largely informal food systems in the continent will likely come under extreme pressure, a scenario which will evoke a food insecurity catastrophe.

[i] Wandile Sihlobo is chief economist at the Agricultural Business Chamber of South Africa (Agbiz). Tinashe Kapuya (PhD) heads supply chain research at the Bureau for Food and Agricultural Policy (BFAP).

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How long can the status quo in the global food system hold?

SA food supplies are expected to hold despite Covid-19

This essay first appeared on Business Day, March 18, 2020

The outbreak of Covid-19 will change the way we live our lives, without exception. The virus has raised serious concerns in society, ranging from health safety and economic conditions to essential food supplies.

In the UK, US and parts of SA we are starting to see empty shelves as consumers stockpile in fear of disruptions to global food chains. This has given rise to questions whether SA could experience food shortages in the near to medium term.

I doubt that this will be the case, at least on a national level for most food products. SA is an agriculturally endowed country, and is generally a net exporter of agricultural and food products. The prospects of an abundant harvest of staple grains and fruit in 2020 are good.

SA nevertheless depends on essential imported food products such as rice, wheat and palm oil. Key palm oil suppliers are Indonesia and Malaysia. The typical rice suppliers are Asia and the Far East, namely Thailand, India, Pakistan, China and Vietnam, some of which are hard hit by the pandemic. In the case of wheat, the suppliers are usually Germany, Russia, Lithuania, the US and the Czech Republic, and some have also been hit hard.

As some of the countries that have reported Covid-19 cases have not taken drastic measures to limit business activity and reduce the spread of the virus, SA’s importation of some of these agricultural products could continue unabated.

Logistical bottlenecks

SA also imports poultry products and sunflower oil, but these can be replaced by local suppliers should global supply chains be disrupted.

In the unlikely event of shortages occurring they are likely to be due to logistical bottlenecks in shipping rather than a decline in global essential grain supplies. The 2019/2020 global wheat production is expected to amount to 764-million tonnes, up 5% from the previous year, according to data from the US agriculture department. The estimated 2019/2020 global rice production is 499-million tonnes, about the same as in the previous season.

The readiness of domestic food supply chains is most likely to be tested in the coming weeks and months if panic-buying caused by fear of the spread of Covid-19 surges to the levels in the UK and US.

The implications of Covid-19 on food price inflation remains unclear in the near term. We continue to monitor consumer buying behaviour for signals of rising demand. SA has ample food supplies for 2020, and we have therefore forecast a food price inflation rate for the year of about 4%, compared with 3.1% in 2019.

Potential slowdown

The uptick in food price inflation compared with the previous year is associated with a potential increase in meat prices rather than the Covid-19 pandemic, which has had a deflationary effect on some exported fruit commodities.

The negative effects of the virus are likely to be felt most by farmers and agribusinesses, through the potential slowdown of export demand and a likely subsequent decline in agricultural commodity prices. SA’s agricultural sector is export-orientated and relies heavily on global markets. Nearly half of the value of the country’s production is exported.

As Asia and Europe, which accounted for half of the $10bn of SA agricultural exports in 2019, are the hardest-hit by Covid-19, people’s routines and supply chains in these regions could be disrupted as governments strive to limit the spread of the virus.

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South Africa’s food price inflation to remain subdued in 2020

South Africa’s food price inflation to remain subdued in 2020

South Africa’s food prices increased at a relatively slower pace in January 2020 compared to December 2019. The data released this morning by Statistics South Africa shows that the country’s food price inflation was at 3.7% y/y in January 2020, while the previous month was 3.8% y/y. This deceleration, however, was not across the food basket. Only price inflation of bread and cereals; fish; and vegetables decelerated. But this was enough to overshadow the increases in meat; milk, eggs and cheese; oil and fats; fruit; sugar, sweets and desserts.

What we think will matter the most for the direction of food price inflation this year are developments in the grains and meat markets. These two food categories account for nearly two-thirds of South Africa’s food price inflation basket.

Firstly, the outlook for South Africa’s grain production is positive. Maize production could increase by, at least, 11% y/y to 12.5 million tonnes. The higher-end estimates point to a 14.0 million tonne harvest. What’s more, global wheat production, which South Africa is a net importer of, is set to be up 4% y/y to 764 million tonnes, according to data from the United States Department of Agriculture. This means grain-related product prices could be under pressure in the coming months.

Secondly, meat price inflation was subdued in 2019 because of the ban on red meat exports on the back of a foot-and-mouth disease outbreak at the start of that year. We are seeing a repeat of a similar situation this year following another foot-and-mouth disease outbreak at the end of 2019. This means South Africa’s meat prices could again remain at relatively lower levels for the greater part of this year. But the lower base effect of 2019 will mean that meat will not suppress the overall food price inflation in 2020 as much as in the previous year.

Against this backdrop, we believe South Africa’s food price inflation should hover around 4.0% in 2020 (food price inflation averaged 3.1% y/y in 2019). Under this scenario, the upside pressure will largely come from meat; and importantly, it will mainly be base effects in the case of red meat, and a possible slight uptick in poultry products prices. Grain prices should remain subdued on prospects of a good domestic maize crop, and bearish Chicago grains prices.

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


Written for Agbiz.

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Zimbabwe imports the largest weekly maize volume from SA in 7-years

Zimbabwe imports the largest weekly maize volume from SA in 7-years

If there is one thing that stood out for me in the South African agricultural markets yesterday, it was the reports of maize exports to Zimbabwe. In the week of 24th of January 2020, South Africa exported 16 210 tonnes of maize to Zimbabwe. This may not seem like a big volume; however, it was noticeable as it is South Africa’s largest weekly maize export sales to Zimbabwe since December 2013.

What’s more, Zimbabwe has shown a greater interest in South African maize this year thus far, as illustrated in Exhibit 1 below. Here we present South Africa’s weekly maize exports to Zimbabwe (we’ve combined both white and yellow maize, but the majority is white maize for human consumption).

Exhibit 1: South Africa’s weekly maize exports to Zimbabwe
Source: SAGIS

If you are a regular reader of this blog, you are probably aware of why Zimbabwe is suddenly a centre of attention regarding maize imports. For those who have not been following the story, the need for maize imports in Zimbabwe, according to data from the U.S. Department of Agriculture, was mainly caused by a poor domestic harvest which had fallen by 53% year-on-year in 2018/19 production season to 800 000 tonnes. Zimbabwe consumes around 1.8 – 2.0 million tonnes of maize a year, so this fall in production meant that the country would need to import at least a million tonnes of maize to cover the shortfall.

The import activity did not accelerate until earlier this year, at least from a South African market. There were small imports from Tanzania last year but that didn’t make a dent as evidenced from incidences of food shortages in the country.

On January 3, 2020, Zimbabwean President, Emmerson Mnangagwa, told Bloomberg that his country will import maize Mexico, Ukraine and South Africa to help ease pressure in the country. But there were no details on whether this was the maize that would be supplied by organizations such as the World Food Programme or private businesses, or the government agency, Grain Marketing Board.

Mexico had about 1.5 million tonnes of maize for export markets in the 2019/20, according to data from the U.S. Department of agriculture. Meanwhile, in the same season, South Africa had about 1.2 million tonnes, according to our estimates. The U.S. Department of Agriculture estimated that Ukraine had the largest volume of about 25 million tonnes of maize for the export market in the 2019/20 season.

It is unclear how much maize Mexico and Ukraine have exported thus far within their 2019/20 allocations. In the week of 24th of January 2020, South Africa had already exported to the global market 73% of the allocated maize for exports in the 2019/20 season which ends in April 2020. Zimbabwe was one of the smallest buyers, having imported only 79 283 tonnes of maize from South Africa between May 2019 and January 2020, as previously stated.

This means that South Africa and possibly Mexico have now relatively tighter stocks compared to mid-year 2019 when it became clear that Zimbabwe would need to import a large volume of maize. Had the sales been facilitated then, Zimbabwe would have found abundant maize supplies in the market. The coming weeks will be interesting to watch where Zimbabwe sources its maize, and at what price.

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South Africa’s food price inflation to remain subdued in 2020

Thoughts on South Africa’s food price inflation

South Africa’s food price inflation averaged 3.1% y/y in 2019, which is well below market expectations. What many analysts seem to have underestimated was the length of the period that meat prices would remain subdued for, and its influence thereafter on the overall food price inflation headline number. This is because meat contributes 35% of the food inflation basket, which is a significant share.

The subdued meat price trend was largely caused by the ban on exports on the back of a foot-and-mouth disease outbreak at the start of 2019. Seeing that foot-and-mouth disease is again a challenge this year, South Africa’s meat prices could again remain subdued for the greater part of 2020. But the lower base of 2019 will mean that meat will not keep overall food price inflation at lower levels in 2020 as in the previous year.

Therefore, the lower base of meat prices is one of the key factors that could add upward pressure on food price inflation this year. Another important factor is that there is still uncertainty about is the maize harvest. In 2018/19 season, South Africa harvested 11.2 million tonnes of maize. And the current estimates for 2019/20 season vary between 12.0 and 14.0 million tonnes. The crop in the fields is looking great, although planted way behind the normal schedule. If the next two months could bring sufficient rains, then it is plausible that South Africa could get a decent maize harvest (in a range of aforementioned estimates) which bodes well for consumers.

The key concern is the prospects of below-normal rainfall between this month and March 2020 which the South African Weather Service has flagged. The question is, how will this affect the crop, which at this point is looking relatively good in most parts of the country? Another concern is, of course, the possibility of frost later in the season as the crop is planted late and the impact thereafter on crops?

In short, there is still some level of uncertainty about the maize harvest in South Africa. But in an event that we get a good maize harvest as various market estimates reflect, then South Africa’s food price inflation should hover around 4.0% in 2020. Under this scenario, the upside pressure will largely come from meat; it will mainly be base effects in the case of red meat, and a possible slight uptick in poultry products prices.

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