Wandile Sihlobo | Grain prices are starting to soften

Wandile Sihlobo (supplied)
Wandile Sihlobo (supplied)
  • The global grains outlook is no longer as rosy as a few weeks ago, says Wandile Sihlobo. 
  • Long-term weather forecasts, specifically for SA, do look favourable. 
  • Wheat-importing countries like South Africa stand to benefit from large global supplies.


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 10 July 2020, about 45% 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).

Influence on prices

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. 

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.

Sihlobo is chief economist of the Agricultural Business Chamber of South Africa (Agbiz) and author of FINDING COMMON GROUND: Land, Equity and Agriculture.

ZAR/USD
17.38
(-0.05)
ZAR/GBP
22.72
(-0.10)
ZAR/EUR
20.56
(-0.12)
ZAR/AUD
12.45
(-0.12)
ZAR/JPY
0.16
(-0.19)
Gold
1942.90
(+0.07)
Silver
26.42
(+0.07)
Platinum
941.16
(+0.46)
Brent Crude
44.74
(-0.36)
Palladium
2104.73
(+0.41)
All Share
57077.48
(-0.60)
Top 40
52737.48
(-0.65)
Financial 15
10156.41
(-0.69)
Industrial 25
75107.47
(-0.84)
Resource 10
58926.78
(-0.40)
All JSE data delayed by at least 15 minutes morningstar logo
Company Snapshot
Voting Booth
Do you think it was a good idea for the government to approach the IMF for a $4.3 billion loan to fight Covid-19?
Please select an option Oops! Something went wrong, please try again later.
Results
Yes. We need the money.
11% - 1005 votes
It depends on how the funds are used.
74% - 6748 votes
No. We should have gotten the loan elsewhere.
15% - 1417 votes
Vote