Maize crops under the weather

The effect of El Niño on the agribusiness sector means some shares should be approached with caution at present, writes

The rise of industrialised commercial farming — most notably mechanisation and improved seed genetics, coupled with fertiliser and pesticides — has markedly altered global food production and security.

This has boosted yields in commercial field crops such as maize, soya and wheat.

Naturally, what cannot be controlled is Mother Nature and her unpredictable weather patterns — conceivably now more erratic, with climate change becoming obvious.

For now, there is no global food shortage. What causes occasional blockages are logistic and supply chain issues in the movement of key agricultural inputs and produce to various parts of the world. As we have seen in recent years, wars, conflicts and pandemics can also disrupt the movement of food.

The world is awash with grains. Bumper crops in the US and Latin America have pushed global prices for maize and wheat down to multiyear lows.

On a regional basis, weather patterns play a key role crop production.

Like many other countries, South Africa is vulnerable to both the El Niño and La Niña phenomena — climatic patterns in the Pacific Ocean that sometimes play havoc with weather when the sea temperatures change.

Typically in an El Niño year, farmers will experience hotter, drier weather. In a La Niña year, a slightly cooler, wetter climate prevails.

In local terms, the agricultural sector had a near unprecedented four-year La Niña, which led to higher than normal commercial crop yields — on average 15.9Mt.

The last major El Niño, which led to a slump in commercial maize field crop production, was from 2014 to 2016. At its lowest, 7.8Mt of maize was produced, compared with a historical average of 13.6Mt.

The recent local La Niña cycle was a boon for farmers, resulting in firm soft commodity prices, which were tied into the supply chain hangover of the pandemic and later the disruptions caused by Russia’s invasion of Ukraine. The Black Sea region is a major producer of grain and an important export hub.

From 2019, domestic farm revenues and income were boosted by above-average crop yields and soft commodity prices that also caused a surge in agricultural equipment spending. Balance sheets were padded and profits were good.

The second-biggest maize harvest on record, 16.43Mt, was produced in 2023.

But warnings were sounded from August 2023 that an El Niño event was a near certainty in the 2024 season, and there was some agricultural belt tightening. Farmers adjusted their crop planning and spend for a hotter, drier period ahead, which will curtail crop yield, tonnage and revenues.

The initial prognosis was for a mild El Niño, and early estimates for the maize crop in 2024 were trimmed by about 9% year on year to

15Mt. This is still well above average production and 3Mt above domestic needs.

Planting season started early, in late September and October 2023, as farmers took advantage of good soil moisture levels.

However, El Niño hit harder than envisioned in late January and especially in February 2024, just as the crop was developing. A hot and very dry period hit parts of the maize belt in the Free State and the North West.

In late February, in its first estimate of maize crop production, the Crop

Estimates Committee (CEC) issued a forecast of 14.3Mt, about 13% lower than the

2023 crop.

The South African Futures Exchange (Safex) soft commodities market had already foreseen a tightening of the 2024 crop, and prices of yellow and white maize started to kick up.

Much of the CEC first production forecast consisted of a 17% cut in white maize tonnage vs only a trim of 7% in yellow maize.

At the time of writing, white maize is trading on Safex at R5,200 a ton, a gain of 30% in the year to date, and yellow at R4,220/ton, a rise of 11%. This is in stark contrast to global prices of maize at $4.28 a bushel, down 9% in the year to date.

This soft commodity movement is a double-edged sword domestically. For farmers who are seeing lower yield and tonnage, a higher price helps bolster declining

What cannot be controlled is Mother Nature and her unpredictable weather patterns

revenue as El Niño cuts the harvest.

However, in the key food producers sector, costs start to climb, especially for the poorest consumers, in the form of more expensive mielie meal.

The animal rearing, egg and poultry sectors — which benefited from late 2023 into early 2024, when Safex yellow maize traded in the R3,600/ton-R3,800/ton region — experienced material relief from the higher prices that had slashed profitability and margins in late 2022 and into 2023.

With yellow maize now trading R500/ton-R600/ton higher since the start of the year, the only saving grace is that many of the large input users, such as major poultry players Astral Foods and Rainbow Chicken, will have taken out forward procurement hedges. IM understands many large users are well covered for the next six months in the R3,800/ton range. This provides a certain degree of insulation from current high maize costs.

The market will eagerly await the CEC second and third production forecast updates at the end of March and April. The hot, dry weather in February has extended into March and further crop yield damage is being foreseen, especially in parts of the white maize growing belt, which has raised expectations of further cuts to the current 14.3Mt commercial maize harvest figure for 2024.

This is critical because South Africa requires 12Mt for its domestic needs. A surplus is usually exported.

However, El Niño has also hit neighbouring countries, where weak harvests are expected too. That will be a natural pull for any South African surplus. The export demand is keeping Safex prices higher than normal.

A tighter crop with strong demand will keep prices firm, despite global grain prices being benign. El Niño is having a significant impact on the region’s consumers and food producers, and the harvest is not yet in the silos. So it may get worse.

Of ongoing concern is that if South Africa has an average historic harvest in 2024 and a similar El Niño rolls into 2025, soft commodity prices will remain elevated but the benefit will not truly feed into the production sector, as tonnages will be muted.

Looking at the investment landscape from an institutional perspective, IM’s recommendation is to avoid the agricultural businesses (especially those in the north), as a reduced maize harvest will have a ripple effect of smaller grain volumes stored in silos. What’s more, lower farmer revenue to spend on capital equipment and general retail will mean weakening earnings.

Senwes, trading at R19.25 on the company’s own platform, has been a favourite agribusiness pick, and earnings have been spectacular. However, financial 2023 will, in the medium term, be its earnings zenith. Even at a lowly earnings multiple of 3.5, IM would steer clear at the moment.

TWK, listed on the Cape Town Stock Exchange at R38, has been slammed for a slump in 2023 earnings as it was caught out in its fertiliser trading unit. However, TWK has a sizeable timber and wood chip export business which the weaker rand will aid in its 2024 earnings recovery. But it might be more prudent to first gauge the interim results to endFebruary to survey the trading landscape.

On the food producers side, avian influenza, loadshedding costs and a tight consumer environment have hit profit margins. Recovery is under way, aided by some containment of the avian influenza outbreak and hedge procurement in maize. RCL Foods will unbundle and separately list Rainbow Chicken in the months ahead. IM would be in no rush to follow that rainbow.

Astral, the country’s largest poultry producer, had a thumping R1.3bn loss in its poultry unit in financial 2023

but that should reverse into financial 2024.

Astral’s recent interim trading update was encouraging, but the market remains wary given the recently announced Competition Commission investigation into the poultry sector. Having given back early 2024 gains, Astral might be worth a punt at these levels on earnings recovery.

IM’s plum choice in the sector is KAL Group, formerly Kaap Agri. Agriculture comprises only 27% of its trading profit and the company is exposed to segments that will not be influenced too much by El Niño.

The wheat harvest in the Cape is forecast to be more than 2Mt again, and after good winter rains the horticulture and fruit segment that KAL services should also perform well. KAL is predominantly a retailer but is trading on an agri rating of 6.1.

With interim results ahead and management confident of good year-on-year earnings growth, KAL might be the one agribusiness to nurture.

Lower farmer revenue to spend on capital equipment and general retail will mean weakening earnings