South Africans along the entire food value chain have borne the brunt of the El Niño induced drought. However, grain producers must not forget to think beyond this ephemeral crisis and its associated high grain prices.

Weather models are already indicating a gradual decay of the El Niño weather pattern, and it could be over in the next four months.

Last month, the Australian Board of Meteorology noted that there is a 50% chance that the ongoing El Niño weather phenomenon could transition into La Niña by the end of the year. A La Niña weather phenomenon would bring much needed rainfall to the country.

The good news for grain farmers is that the demand for starchy staples (maize and wheat) is by nature inelastic (demand does not change much with prices), hence demand can be expected to remain good in the long-term.

However, the same cannot be said for grain prices. Grain farmers that managed to harvest are enjoying the current higher prices in South Africa, but the allure of higher prices might lead to over production in the next season and subsequent lower grain prices. A situation that grain producers will need to manage carefully by diversifying their marketing options.

The cyclicality of grain prices is not unique to South Africa. In the 2012/13 production season, the United States (US) experienced a severe drought which led to a 13% year-on-year decrease in their maize production to 273 million tons, according to the International Grains Council statistics.

In response to the reduced production, the US maize prices traded above US$300 a ton; a level which was US$110 a ton higher than current US prices.

In response to those higher prices, the US farmers increased maize production in the succeeding season, 2013/14, with total maize production reaching 354 million tons, a 30% year-on-year increase. Subsequently, maize prices fell to levels around US$200 a ton which negatively affected ill-prepared farmers. Fortunately, the impact of such price fluctuations is cushioned by government subsidies in the US, and they can still afford to produce high maize volumes.

This is a luxury that South African maize farmers do not enjoy.

In South Africa, 2015/16 maize production is forecasted at 7.05 million tons, down by 28% from the previous season, which was already down by 30% from the 2013/14 production season. Maize prices reacted to these production dynamics, reaching levels of over R5 000 for a ton of white maize at the beginning of the year. This was 157% higher year-on-year, and prices have generally maintained this higher level which is expected to entice farmers that survived the drought to produce more.

However, it is important to remind farmers that the current maize prices are abnormally high and at some point they will return to normal levels of around R2 500 a ton. This is a situation that farmers will need to plan for and manage well as it might affect their profitability. As we approach the 2016/17 production season, farmers will need to carefully plan their marketing strategies in order to reduce their exposure to price risk.

The current weather related risks have already been priced-in on the market, meaning that there shouldn’t be any significant spikes in maize prices, except the day-to-day currency related changes. Going forward, farmers will need to improve how they monitor weather models and carefully plan the next season’s buying, production and marketing strategies to minimise risks and maximise profitability. Several marketing options that enable farmers to lock-in the price of their produce are available, and farmers need to familiarise themselves with them and exploit them to their advantage.

Overproduction in the next season is a real possibility, but all actors along the value chain need to be well prepared for the possible implications of those supply change dynamics.  Careful monitoring and planning for weather related developments might set one on a successful path for the 2016/17 production season.

This op-ed column first appeared in the Business Day

Link: http://www.bdlive.co.za/opinion/2016/05/16/farmers-must-manage-pricing-maze