POULTRY AND GRAIN
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
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?
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.