Farmer's Weekly (South Africa)
Global Farming
Despite a number of commentators predicting that the prices of agricultural products would decrease sharply because of the COVID-19 lockdown, this has not happened. In some cases, prices are higher than a year ago.
Economists maintain that markets are driven by supply and demand. While this is true in a broad sense, market prices, and especially free-market prices, are actually determined by the perceptions of market participants. When market commentators opine that prices will decrease, role players beyond the farm gate use this forecast as an excuse to decrease prices offered to farmers.
When the coronavirus disease (COVID-19) appeared in January, various commentators predicted large price decreases for agricultural products. At the time of writing (the beginning of June), we can look back at the past four months and see if the pandemic and subsequent lockdown did indeed affect South African agriculture negatively.
The Food and Agriculture Organization of the United Nations (FAO) Food Price Index, which measures the price of a large basket of agricultural products, showed a 10% decrease during the first five months of 2020. Meat prices decreased 12%, dairy prices 9% and grain prices 1%. Sugar prices fell 18%. The price of maize on the CBOT decreased from US$170/t (about R2 900/t) at the beginning of January to US$142 (about R2 400/t) in May and then improved slightly to US$158/t (R2 700/t), still 7% down from the beginning of the year. US wheat and soya bean prices decreased 7% and 3% respectively from the end of 2019.
Based on the value of the Global Dairy Trade Index, dairy product prices decreased 13% on average. Producer milk prices decreased sharply in the US (29%) and India (19%), and there was a limited decrease in most other countries. However, futures exchanges show that markets expect higher future prices.
SOUTH AFRICA
The effect of international prices on the South African market depends on local supply and demand factors as well as the exchange rate. The rand devalued 29% against the US dollar from December 2019 to reach R19,29/US$ in April 2020, and recovered somewhat to R16,77 in June, which was still 15% down on the December value. The decrease in the value of the rand largely protected
South Africa’s product prices against the decrease in international prices. In mid-May, the price of Grade-A beef was 2,3% down year-on-year, weaner calf prices were 8% higher, and the beef contract price was 2,5% down.
Mutton and lamb prices were 16% and 18% higher respectively, while feeder lambs were selling at the same price as the previous year.
While red meat prices were on average higher than a year ago, pork and poultry prices were down about 9%.
Milk-producer prices increased slightly during the first quarter of 2020. Wool prices fell by about 15%, but prices recovered at the most recent sale.
South Africa’s agricultural exports in the first quarter of 2020 were buoyant and the country recorded a healthy agricultural trade surplus, up 16% year-on-year.
Farmers expect a record maize crop this year. Despite this, prices are currently only about 10% down on last year, but still well above Grain SA’s very conservative export parity. The soya bean price is 15% up on last year. As South Africa was already in a recession by year-end and had fast-growing unemployment, demand would have been lower even without the effects of COVID-19.
The lockdown resulted in less money being spent on fuel, eating out and takeaway foods up to the end of the national lockdown Level 5. This resulted in higher demand for fresh food for home use.
Red meat, eggs and dairy product sales did not decrease. Poultry demand did, however, decrease, as fast-food chains are generally major buyers of poultry meat.
THE DANGERS OF FORECASTING
Commentators should be careful with their predictions; any information pointing towards lower demand will be used by livestock buyers to push for lower prices.
The COVID-19 lockdown has affected all South Africans, and combined with the current recession, will affect future demand for food as unemployment increases and smaller businesses and the informal sector are affected.
To date, the effect on agriculture has been very limited and will probably remain so for the rest of 2020.