Strong gains for grain and oilseed prices in 2020

In the second instalment of this weekly column by Absa Agribusiness, maize, wheat and oilseed prices are analysed, with all three commodities showing a largely positive performance since June last year.

MAIZE

The prices of both white and yellow maize saw substantial increases between June and October 2020.

Since then, both commodities have traded in a band of between R3 700/t (the highest point at the end of October 2020) and R3 170/t (the lowest point in December 2020). The significant price run between June and October

( see Graph 1) was a result of rapid price increases in global markets on the back of strong demand.

The bulk of this demand originated from China, as that country is rebuilding its swine herd after the devastating effect of African swine fever in 2018. Since the beginning of this year, local maize prices have closely tracked exchange rate movements.

This is not surprising, given the sizeable maize harvest projected for the current season, pushing prices to export parity. The first Crop Estimates Committee estimate for the total South African maize harvest was 15,3 million tons.

In our view, this is quite conservative, and we foresee that the next estimate will point to a harvest of well over 16 million tons. Although the substantial amount of rainfall received could effect the quality of maize, it is expected that the reduction in quality will be more than offset by yield improvements.

Over the coming months, global prices and the exchange rate will drive local maize prices. Since December 2020, the rand has been strong, despite local challenges such as rolling blackouts and COVID-19 vaccination concerns. The rand found support from global factors such as an increased risk appetite for trade with and investment in emerging markets, and the announcement of a generous US stimulus package.

The announcement by the US Federal Reserve in March that US interest rates would be kept low suggests that expansionary policies in the US are likely to persist. This supports the strengthening of the rand, and our view is that the currency will trade between R15 and R15,25 over the next quarter.

Global maize prices, in turn, are still strong, with high numbers of US export quotations in late February and early March suggesting firm global demand. The growth apparent in the last half of 2020 might, however, have slowed and we expect global prices to trend downward, at a moderate rate, as Southern Hemisphere maize supplies enter the market.

WHEAT

Over the past year, local wheat has largely traded in a band between R5 000/t and R6 000/t ( see Graph 2), only breaching these price levels for short periods.

Supported by price increases for other grains, global wheat prices showed substantial gains between December 2020 and January 2021, with record proportions of wheat used as feed due to the margin between maize and wheat shrinking.

Global developments that caused prices to remain firm included trade restrictions from Russia and severe cold spells in the central plains of the US. Prices have eased since early March, with the effect of the cold weather seemingly limited, and an announcement that Russia will be lifting restrictions as soon as its local market stabilises. A substantial Northern Hemisphere

harvest is also expected to curb the price growth. In South Africa, prices have closely tracked movements in the exchange rate. We expect that wheat prices will move sideways over the next fews months due to expectations of a moderate depreciation of the rand to levels of between R15 and R15,25, offset by global prices trending lower.

OILSEEDS

Just like maize, oilseeds have seen strong price growth since mid-2020, also fuelled by strong feed demand from China ( see Graph 3).

The price of local soya bean, however, seems to have peaked at the beginning of February, with a strong downward trajectory since the announcement by the Crop Estimates Committee that the current harvest will amount to almost

1,25 million tons. This is a 30% increase in production, compared with the 2019/2020 season.

In contrast to this, the sunflower price reached a high of R9 900/t in March. This is supported by an estimated reduction of almost 10% compared with production levels in 2019/2020. This reduction is due to a smaller area planted combined with concerns about the Sclerotinia fungus in certain areas.

Globally, products derived from oilseeds have seen divergent trends in recent weeks, with the use of products such as soya meal decreasing and the use of soya oil increasing. This is a result of ongoing animal disease concerns in China, which are affecting demand expectations for meal. Oil, in turn, has benefited from higher prices of vegetable oils in general.

Supply disruptions in palm oil and sunflower oil markets have also supported prices.

In addition, higher crude oil prices have stimulated demand for oilseeds for biofuel, which is supporting prices. In the third week of March, exchange rate movements weighed on oilseed prices, and both sunflower and soya bean prices decreased. We expect global prices to ease somewhat as the Southern Hemisphere harvest enters the market, which will push local prices down as well.