Outlook for the 2008/09 summer grain season

Summer grain producers must base their planting decisions on careful analysis of market factors and of their own situation, and not on general recommendations to plant less or more.
Issue date : 01 August 2008

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In the next couple of months, Grain SA will once again publish their production area estimates for the different summer grain crops. They’ll recommend that farmers plant more or less of a variety of crops, all depending on how they view the market and based on the premise that we are better off if we produce just enough for the local market. While this provides worthwhile information for the grain industry, individual farmers must base their planting decisions on their own situation.

In a free-market system, if the majority decides to plant less so as to achieve a higher price, the real winner is the individual who planted more and sold his product at the higher price. Summer grain price expectations World grain and oilseed prices have increased sharply. From April 2007 to April 2008, the FAO grain price index increased by 92%. Higher prices normally result in higher production and in downward pressure on prices.

The Food and Agricultural Policy Research Institute in the US expects a decrease in wheat prices from the 2008 high to between US0/ton (R1 905) and 300/ton (R2 284), a yellow maize increase from 200/ton (R1 524) in 2008 to 240/ton (R1 836) in 2014, sunflower seed prices moderating to US0/ton (R4 876) to 680/ton (R5 182) by 2014 and soya bean seed to sell at about 500/ton (R3 808). All these prices are far above the 2004 to 2007 price levels. A weakening rand will result in still higher import parity prices. T he 2008/09 season’s maize prices will depend on international prices, local production and local demand. maize futures give an indication of expected prices in the coming months. July 2008 maize futures trade at US2/ton (R2 302), September 2008 at 307/ton (R2 337) and July 2009 at 327/ton (R2 493).

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Import parity ranges between R3 525 and R3 888 while export parity ranges between R2 112 and R2 528. If SA produces a bumper crop again in 2009, prices will move nearer to the R2 100 level. But chances of a large maize crop in 2009 are low. much higher soya bean, sunflower and wheat prices will induce farmers to plant less maize. Although not impossible, chances of two good crops in a row are also slim. he price of the inputs needed to produce grain has increased at a faster rate than the price of agricultural products and it seems as if there’s still no end to spiralling input prices. Higher input costs will also result in a smaller area planted to crops in 2008/09, in many cases because farmers find it difficult to get the necessary production credit. Farmers’ planting decisions for 2008 S ummer grain producers will have to evaluate the relative profitability of the different summer grain crops.

At the current higher prices, oilseed, soya beans and sunflower seem viable alternatives to maize. The first step is to compare the possible income and cost of the different crops. This seems simple – any newly graduated agricultural economist with a laptop can do it. Unfortunately, as all experienced farmers know, the uncertainty makes it a very difficult exercise. That’s why farmers plant a mixture of different crops. F armers who decide to cut down on planted area, must make sure that the lower production income can still cover all fixed costs.

When you decide whether you should plant maize or other crops this year, only variable costs are relevant. Fixed cost plays no part in this determination. In other words, although the prospective price may not cover all costs, if it covers the variable cost with a slight margin, farmers will make more money if they do plant than if they don’t plant. The livestock farmer’s situation July 2009 maize traded at R2 455 on Safex and chances are good that this may increase to R3 000 and more during the season. There are maize producers who are prepared to sell directly and maize users can save a lot if they go this route.

Users will also save money as their price will not be based on Safex less a transport differential. It doesn’t make sense if both the seller and buyer pay transport and handling charges. Users should also investigate forward contracts to hedge favourable prices. the next summer grain season is going to be difficult. Farmers will have to plan well if they want to utilise the opportunities provided by the marketplace. Dr Koos Coetzee is an agricultural economist at the MPO. All opinions expressed are his own and do not reflect MPO policy. |fw