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

Does the African Continental Free Trade Agreement  offer opportunities for SA Agriculture?

Does the African Continental Free Trade Agreement offer opportunities for SA Agriculture?

The South African agricultural sector, and specifically the expansion in the sector over the recent past, is heavily reliant on exports. In fact, South Africa exports roughly 49% of its agricultural products in value terms. Hence, the newly launched African Continental Free Trade Agreement (AfCFTA) would potentially open additional avenues for South African products to destinations where the country hasn’t largely participated in over the recent past. This would practically mean, an increase in the share of South Africa’s agricultural exports to the continent, rather than mainly focusing on growing other well-established markets.

Moreover, the AfCFTA is expected to make 90% of trade within the continent duty-free by July 2020, and this is set to increase to 97% over the next decade as more duties on an additional number of products are phased down. While some African countries will be deprived of revenue currently derived from trade tariffs, the expectation is that the benefits will exceed the costs, as countries will eventually benefit from trade creation, production diversification, job creation, industrialisation with increased corporate income tax revenue as a corollary, and higher personal income tax revenue.

However, the African continent is beset by other systemic problems such as poor quality or lack of infrastructure, unconducive business environments that make trade across borders particularly costly and nearly prohibitive, corruption and weak institutions which render legal recourse and dispute settlements redundant, among others.

With the AfCFTA providing a potential opportunity to unlock further growth in trade, this will not be possible unless and until the abovementioned issues are sufficiently addressed. The precedent of African countries collaborating politically and economically set by the AfCFTA should translate to deep and fundamental reforms that unlock the existing barriers to intra-regional trade.

The make-or-break of the AfCFTA will come when trade under the agreement officially kicks off in July of 2020. Although the African Export-Import Bank has reserved $100 billion to help member countries alleviate trade adjustment costs and facilitate the creation of a common payment system, concerns still remain. Previous experiences from the Regional Economic Communities such as SADC show that tariff phase-down have been matched with, and exceeded by non-tariffs barriers (NTB), such as the excessive documentation needed for cross-border trade transactions, administrative bottlenecks and stipulated trade quotas aimed at curbing the quantity of traded goods.

The extent of these NTBs effectively reversed the potential gains of the SADC Free Trade Area. In the AfCFTA scenario, policymakers have indicated that NTBs will also be given equipollent attention as its contemporaneous existence could threaten the growth of intra-African trade and impede the effective operationalisation of the AfCFTA.

Overall, this relationship would not be one way. South Africa remains an importer of poultry meat (edible offal of fowls), rice, wheat, sugar, palm oil, soybeans, beer, fish, sunflower oil, soybean oilcake, and tobacco, amongst other agricultural commodities. Ideally, the African countries can also have room to participate in the South African market by supplying these products.

But most African countries do not have the capacity to export significant volumes of the aforementioned agricultural products, at least not to the extent of satisfying South Africa’s import requirement. The onus, however, lies on the Member States and their respective industries to realise that there is demand in South Africa, and start investing in production and providing an enabling environment for such industries to thrive.

With thanks to Tinashe Kapuya, PhD.

Written for and first published by the Agricultural Business Chamber of South Africa (Agbiz)

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

Delays in South Africa’s Wheat Tariff Publication Not Helpful

Delays in South Africa’s Wheat Tariff Publication Not Helpful

The delays in the publication of adjustments to the South African wheat import tariff are once again causing an interesting pattern. Remember on 10 July 2018, the wheat import tariff triggered to R640.54 per tonne due to a decline in global wheat prices. Well, this has not been published in the government gazette to make it official, which means the wheat import tariff is effectively still R281.74 per tonne (see chart below).

Over the past few weeks, global wheat prices have since recovered from levels seen at the end of June and early July 2018. This is due to unfavourable weather conditions in the European and Black Sea regions, which led to a 4 percent year-on-year decline in the 2018/19 global wheat production estimate to 730 million tonnes. This is according to data from the United States Department of Agriculture. 

So, on 16 August 2018, South Africa’s wheat import tariff triggered to R298.45 per tonne owing to an uptick in global wheat prices (No2 HRW). This is 53 percent lower than the previous trigger of R640.54 per tonne (which has not yet been published). This newly calculated rate will also be effective only after publication in a government gazette, of which the timeframe is unclear.

Due to the delays in tariff gazetting, there is now an overlap between the increase to R640.54 per tonne and the decline to R298.45 per tonne, which defeats the whole point of having the tariffs in the first place. Global market conditions are very dynamic, as such, we need an agile tariff management system that gazettes tariff adjustments in real time. It is only fair for the wheat industry that has to contend with a myriad of other challenges, to at least have a functional tariff management system in their corner.

By the way — the adjustments in the wheat import tariff are satisfied when the global wheat price (US No.2 HRW) deviates from the base price by more than US$10 per tonne for three consecutive weeks.

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


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