POUL­TRY AND GRAIN

The Poultry Bulletin - - FRONT PAGE -

Be­tween 2015 and 2016, South Africa ex­pe­ri­enced one of the most se­vere droughts that changed the land­scape of the agri­cul­tural in­dus­try. The ef­fects of the drought, as we have seen, have had long term ef­fects, not just on the agri­cul­tural mar­ket but also on the South African econ­omy. Fol­low­ing two con­sec­u­tive years of lower crop pro­duc­tion, a pos­i­tive out­look for the 2017/18 mar­ket­ing sea­son would pro­vide re­lief from the drought. As ex­pected, the up­com­ing sea­son is likely to pro­vide dif­fer­ent trends from the drought, which is what the ar­ti­cle seeks to out­line.

Ef­fects of the drought: 2015 -2016 game changer

A30% de­cline in maize pro­duc­tion in the 2015/16 mar­ket­ing year, fol­lowed by a fur­ther 22% de­cline in 2016/17

mar­ket­ing year, re­sulted in short­age of maize sup­ply in the coun­try. A de­cline in lo­cal maize pro­duc­tion meant that com­mod­ity prices would in­crease. To­wards De­cem­ber 2016, maize prices be­gan trend­ing higher on the back of a de­crease in sup­ply. By March 2016, white maize prices were trad­ing well above the im­port par­ity band, av­er­ag­ing R4 800 per ton. In the same pe­riod, yel­low maize prices were less emo­tion­ally re­ac­tive, but also traded higher, av­er­ag­ing R3 300 per ton - a lit­tle above the im­port par­ity band.

An in­crease in lo­cal maize prices re­sulted in higher food prices that weighed on heav­ily on lo­cal con­sumers. The live­stock in­dus­try’s in­put costs also rose at the back of higher feed prices which were caused by higher com­mod­ity prices.

Apart from hav­ing had an ef­fect on the pro­duc­tion out­put for ma­jor crops, the im­pact of the drought also had an ad­verse ef­fect on fi­nan­cial po­si­tion of the farm­ers. Over the past 10 years be­tween 2005 and 2015, it is quite ev­i­dent that farm debt es­ca­lated faster be­tween 2014 and 2015. This in­di­cates that the fi­nan­cial strain on farm­ers af­fected their re­pay­ment ca­pa­bil­i­ties.

Since the first quar­ter of 2015, the agri­cul­tural GDP posted eight con­sec­u­tive quar­ters of eco­nomic de­clines. A de­cline in an­nual agri­cul­ture con­tri­bu­tion to GDP also had an ef­fect on over­all GDP; de­clin­ing from 1.3% in 2015, to 0.3% in 2016. Since GDP pro­vides an in­di­ca­tion on the coun­try’s eco­nomic per­for­mance, it was clear that the coun­try was al­ready un­der pres­sure. Lower growth rates meant that the high un­em­ploy­ment would per­sist.

Ef­fects of the bumper crop: out­look on 2017/18 mar­ket­ing sea­son

On a global per­spec­tive, look­ing ahead into the up­com­ing 2017/18 mar­ket­ing sea­son, the world can ex­pect large global pro­duc­tion of maize. Global maize pro­duc­tion is sit­ting at over 1 bil­lion tons. Sub­se­quently, world end­ing stocks are also at gen­er­ally high lev­els. To put it into per­spec­tive, the cur­rent world end­ing stocks ac­count ap­prox­i­mately 50% of US pro­duc­tion. It’s clear that re­cent low in­ter­na­tional prices came as a re­sult of am­ple global maize sup­plies.

In the re­cent pro­duc­tion fore­cast re­leased by the Crop Es­ti­mates Com­mit­tee (CEC), do­mes­tic maize pro­duc­tion is es­ti­mated to reach 15.6 mil­lion tons, a 102.5% in­crease from the pre­vi­ous sea­son. Since lo­cal de­mand is about 10.5 mil­lion tons, this means that South Africa would have sur­plus maize which would boost in­ter­na­tional trade, thus re­gain­ing its sta­tus as a next ex­porter of maize. Con­se­quently, it is ex­pected that an in­crease in sup­ply would re­sult in lower com­mod­ity prices. In De­cem­ber 2016, maize prices started trend­ing to­wards the ex­port par­ity band. By Fe­bru­ary 2017, white maize prices was trad­ing at ex­port par­ity, while yel­low maize prices were slightly above ex­port par­ity but

gen­er­ally lower.

The same trend is ob­served with lo­cal soy­bean pro­duc­tion. Ac­cord­ing the CEC, lo­cal soy­bean pro­duc­tion is ex­pected to reach 1.3 mil­lion tons, also a record crop. Soy­bean prices also came un­der pres­sure at the back of ex­pected higher soy­bean sup­plies lo­cally. The ef­fect of the record crop would thus pos­i­tively im­pact the feed in­dus­try as a de­cline in com­mod­ity prices would re­sult in lower feed prices.

Grain, and grain-based prod­ucts, play a big role on the con­sumer bas­ket and ac­count for 75% of the food CPI through its link­ages with the dif­fer­ent food in­dus­tries such as meat, oils, dairy and eggs. There­fore, pro­duc­tiv­ity in this sec­tor would cre­ate a pos­i­tive out­look for agri­cul­ture GDP and in­fla­tion. In the re­cent eco­nomic data re­leased by Sta­tis­tics SA, the agri­cul­tural in­dus­try grew by 22.2% in the first quar­ter of 2017, mainly at the back of pro­duc­tiv­ity dur­ing the 2016/17 pro­duc­tion sea­son. In­fla­tion also dropped to 5.3% in April, from 6.1% in March, largely in­flu­enced by lower com­mod­ity prices. Thus, a de­cline in prices of maize and soy­bean would ease pres­sure on feed prices as well as lo­cal food prices, which are ex­pected to de­cline in third quar­ter of 2017. For the grain and oilseed pro­duc­ers how­ever, a bet­ter crop would ease on cash flow re­quire­ments but lower prices would still place pres­sure on prof­itabil­ity.

Link­ages of poul­try in­dus­try to lo­cal grain mar­kets

The poul­try in­dus­try is very im­por­tant to the grain and oilseed in­dus­try, ac­count­ing for 43% of grain and oilseed feed con­sump­tion through the broiler and layer in­dus­try. There­fore, a de­crease in lo­cal pro­duc­tion of poul­try would also have an ef­fect on the grain and oilseed feed de­mand. Re­cently, one can see that there are move­ments in a bet­ter mar­ket for the poul­try in­dus­try, but the ques­tion re­mains as to when the poul­try in­dus­try would fully pick up - and whether the in­dus­try will be prof­itable given the im­ports of cheaper prod­ucts?

Con­clu­sion

The de­ter­mi­nants of the fu­ture prospects of the grain in­dus­try are de­pen­dent on pro­duc­tiv­ity of grain and oilseed. Based on the “be­fore and af­ter” ef­fects of the drought out­lined above, it is ev­i­dent that pro­duc­tion of less than 10.5 mil­lion tons, which is equal to do­mes­tic de­mand, is likely to re­sult in higher com­mod­ity prices, whereas pro­duc­tion over 11.5 mil­lion tons would cre­ate ex­port op­por­tu­ni­ties and the abil­ity to com­pete at deep sea level; how­ever, prices would trend to­wards ex­port par­ity band, trad­ing at lower lev­els. Given the cur­rent high car­ry­over stocks, it is clear that prices are likely to stay at ex­port par­ity level. How­ever, the ques­tion re­mains; “How can pro­duc­ers be prof­itable at ex­port par­ity?” Prof­itabil­ity can be achieved through ef­fi­ciency; it is there­fore Grain SA’S goal to achieve this through more in­vest­ment in re­search and de­vel­op­ment, mar­ket­ing and tech­nol­ogy. Ul­ti­mately what this means is there is a need to foster col­lab­o­ra­tion through in­dus­tries, com­bine in­tel­lect around var­i­ous com­modi­ties and work on mar­ket in­sights bet­ter to col­lec­tively reach in­dus­try growth amongst dif­fer­ent sec­tors.

This ar­ti­cle is based on an orig­i­nal pre­sen­ta­tion de­liv­ered at Avi Africa 2017 by Michelle Mokone, agri­cul­tural econ­o­mist at Grain SA, and may not be re­pro­duced. Michelle Mokone can be con­tacted by email at Michelle@grainsa.co.za.

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