The global grains environment has changed somewhat from the optimistic picture of a few weeks ago. The increased dryness in parts of Europe and the US is weighing on global crop production, specifically maize and wheat, and this has raised the prospects for downward revision of yields estimates. The United States Department of Agriculture (USDA) was the first of major institutions at the start of this month to lower its estimates for US maize and wheat production. This was followed by the EU’s production estimates, primarily on the back of concerns about yield prospects.
To zoom into the details, the downward revision of US maize production resulted in a 2% decline in the 2020/21 global maize production from June estimates to 1.16 billion tonnes. Nevertheless, this is still 4% higher than the previous season, supported by expected large production in South America, Europe and parts of Asia.
The crop is currently at its growing stages in the northern hemisphere which means the weather is an important factor to monitor in the coming weeks and months since it will continue to influence crop conditions. In the southern hemisphere, however, the 2020/21 maize season’s planting will only begin around October.
The long-term weather forecasts, specifically for South Africa, generally look favourable which supports the view for a possible, good crop even in southern hemisphere countries that are yet to plant the 2020/21 crop. Here at home, the focus is currently on the 2019/20 maize crop which is still at harvest stages. For example, in the week of 17 July 2020, about 52% of the expected commercial harvest of 15.5 million tonnes had already been delivered to commercial silos across South Africa.
In terms of wheat, the USDA forecasts the 2020/21 global wheat harvest at 769 million tonnes, which is marginally lower than the previous month’s estimate because of the aforementioned weather challenges in parts of EU and the US. This, however, is still 1% higher than the previous season.
SA stands to benefit
Wheat-importing countries like South Africa stand to benefit from large global supplies. South Africa imports roughly 50% of its annual wheat consumption. In the 2019/20 marketing year, which ends on 30 September, imports are estimated at 1.8 million tonnes. About 85% of this has already landed in the South African shores. The import volume requirements for the 2020/21 marketing year which starts on the first of October 2020, will be clearer once we have a reliable estimate of the size of the harvest of the crop which is currently underway. It is this marketing year that consumers will benefit from both cost and availability perspective from the expected decent global wheat harvest.
Other major grains that are worth monitoring, but were not affected by the recent downward revisions on the back of weather concerns, are rice and soybeans. In the case of rice, the USDA has maintained its production forecast at a record 502 million tonnes, up 1% y/y on the back of an expected large crop in Asia. Under this production estimate, global rice stocks could also lift by 2% y/y to 185 million tonnes. This would add bearish pressure on prices and, in turn, be beneficial to import countries like South Africa, which is set to import 1.1 million tonnes in 2020 (up 10% y/y).
The 2020/21 global soybean production was also left roughly unchanged from last month at 363 million tonnes, which is up 8% y/y. This is on the back of an expected recovery in production in the US, Argentina, Brazil and Paraguay, amongst others.
Influence on prices
Positively for consumers, the influence of these large global grains supplies is starting to reflect on prices which have somewhat softened over the past couple of weeks compared to last year. This is evident on the FAO global grains index which averaged 86.6 points in June, down by 2% y/y.
In a nutshell, the dryness in parts of Europe and the US is increasingly becoming a concern and has led to a downward revision of crop prospects. But this was fortunately compensated by expected large harvests in other regions, hence on balance, the expected harvest is still higher than the 2019/20 production season with prices somewhat softening as a result of this expected harvest. With that said, the weather conditions for the coming months in Europe, the US and other major grains producing regions are crucial as that will influence the size of the crop the world end up with in 2020/21 production season.
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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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