The outlook for 2017 is promising for the South African grains and oilseeds sector. Assuming that the country receives a normal rainfall pattern throughout the remainder of the season, we believe that South Africa’s maize production could reach at least 11.9 million tons (compared to 7.5 million tons the previous season). Moreover, we foresee a notable increase in both soybean and sunflower seed production. Overall, we believe that these production improvements will lead to a decline in commodity prices.

White maize prices
Using an average historic yield of 4.3 tons/hectare, together with the National Crop Estimate Committee’s (CEC) preliminary area estimate, we see white maize production at 6.7 million tons, which is double the previous season’s volume (Chart 1). Against this expected production recovery, we believe that by the end of April 2017, white maize spot prices could possibly decline to levels below R2 500/ton (Chart 2). With that said, the volatility of white maize spot prices will continue, underpinned by the Rand/USD exchange rate. From mid-2015 to present, the influence of the exchange rate became increasingly significant as the domestic market shifted from export to import parity. In fact, every 1% depreciation in the Rand against the USD caused a 0.85% increase in white maize spot prices over the considered period.

As the domestic maize market transitions back to export parity, we expect this relationship to change, and the correlation between the exchange rate and the maize price should weaken progressively over the coming months. Moreover, the same can be observed with the Chicago price influence as domestic factors become more dominant. We are confident that the price will lie in the region R2229/ton to R4741/ton (with 0.95 probability). The chance that prices will come down is relatively higher, with a 52% chance that the price will lie between the R2843/ton and R3067/ton range. The projection shows that the white maize spot price could break the lower threshold, reaching R2821/ton. The white maize price will expectedly continue to move to within 12% to 16% above July 17 contract price, by the end of the season.

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Yellow maize prices
We are of the view that an average yield of 5.2 tons/hectare, with the CEC’s preliminary area estimate 992 00 hectares could result to 5.2 million tons, which is 20% higher than the previous season (Chart 3). Although yellow maize area planted did not increase much (+6% from last season), we see higher yields being the major driver of production.

Meanwhile, yellow maize production will be marginal if compared to the increase in white maize. The Agbiz Price Forecasting Model suggests that prices could maintain a downward trend (Chart 4). With that said, a rebound in domestic feed demand could easily break this trend. Therefore, the levels of prices will partly depend on the recovery of the livestock sector, particularly poultry.

The influence of the international prices and the Rand/USD exchange rate has been significant, particularly from mid-2015 to present. Over this period, a 1% increase in the Chicago maize price caused a 0.2% increase in the domestic yellow maize spot price. Meanwhile, a 1% depreciation in the Rand led to an increase of 0.9% in the domestic yellow maize spot price.

We are confident that the yellow maize spot price will lie between R2 829/ton and R3 128/ton by the end of the season, with prices likely to average R2 978/ton (with 0.95 probability). There is a 0.47 probability that the yellow maize spot price could end up above R3241 by the end of the season. However, there is a 0.53 probability that the price will lie between R3241/ton and R2232/ton. Our projection suggests that yellow maize spot prices could come down to R2405 by the end of the season, within the region of 1% above the July 17 contract month price.
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Wheat

The CEC lifted South Africa’s wheat production estimate by 1% from the fifth estimate to 1.89 million tons (Chart 5). This is 31% higher than the previous season’s crop. This uptick was mainly on the back of a 5% year-on-year increase in area plantings, as well as higher yields. The 2016/17 total wheat imports are estimated at 1.5 million tons (down from 2 million tons in the previous season). As such, South Africa’s domestic wheat market will continue to trade along the import parity levels, and as a result will significantly be influenced by international prices and the movement of the Rand/USD exchange rate, amongst other factors.

Between January 2012 and January 2017, a 1% movement in international wheat prices has led to a 0.13% shift in domestic wheat prices. Meanwhile, for every 1% depreciation in the Rand, wheat prices have increased by an average of 0.3%.

The interaction of both factors has led to significant volatility in domestic markets. Of particularly interest has been the dramatic fall in international wheat prices, and a concomitant escalation in the wheat tariff. As a result, the low international wheat prices have been mirrored by exceptionally high domestic wheat prices.

After reaching a record high of R5171/ton on the 26th May 2016, wheat spot prices have come down substantially, reaching R3598/ton by the end of the first week of January 2017 (Chart 6). Wheat prices could reach to R3706/ton by the end of April 2017, compared to current levels of R3955/ton. There is a 0.54 probability that the wheat spot price will be below R4148/ton but above R3561/ton. It is less likely that the prices will trend above the R4148/ton threshold (probability=20%).
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Soybeans
Taking a historic average yield of 1.6 tons/hectare, combined with the CEC’s preliminary area estimate (542 200 hectares), South Africa could potentially produce 867 520 tons of soybeans this season. This is 17% higher than the previous 2015/16 production season (Chart 7). Overall, we are bearish in our soybean price outlook, we see the relatively stronger ZAR/USD exchange and lower Chicago soybean prices adding downward pressure to the market. We see the prices potentially converging around R6671/ton by end of the season (Chart 8).

Sunflower seed
With an average yield of 1.2 tons/hectare, together with the CEC’s preliminary area estimate for sunflower seed (665 800 hectares), South Africa could possibly harvest 798 960 tons of sunflower seed. This is 6% higher than the previous season (despite the drop in area, which has been compensated by higher yields) (Chart 9). Against this background, we are bearish in our sunflower seed price outlook. We are fairly confident that prices will continue on a downward trend, potentially converging around R5 432 /ton. We see prices lying anywhere between R4234/t and R6840/t (Chart 10). With that said, we feel that there is a higher probability that prices will fall below R5 432/ton, with bearish pressure coming from a higher output.

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Concluding remarks
Overall, we are optimistic about the 2016/17 production season. We believe that there will be a general recovery across agricultural production. This will subsequently bring the lead to a decline in prices, which towards the end of the year could be translated to lower food prices. With that said, we view the armyworms outbreak in most parts of southern Africa (and certain provinces of South Africa) as a key risk that could potentially change our view, if it is not controlled effectively. The CEC will release the official production estimates on the 28 February 2017. Any significant changes in that could also alter our view.

INQUIRIES:
Wandile Sihlobo (wandile@agbiz.co.za)
Tinashe Kapuya (Tinashe@agbiz.co.za)
@WandileSihlobo @TinasheKapuya @AgriChamber

Disclaimer:
Price forecasts used in this report are generated using a Monte Carlo Simulation. This stochastic method captures some the volatility and uncertainty in commodity markets, which we believe is contingent on a complex and interrelated combination of political, economic, financial and other factors. As such, the forecasts cannot in any way be considered as a guarantee of future price trends but should be taken as an indicator or guide. While great care is taken to ensure the accuracy of the information used to draft this document, neither Agbiz nor the authors accept any liability arising from the use of the material or information contained herein.