Grain outlook: don’t be misled!

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South Africa’s maize farmers produced a large crop of about 11 million tons in 2013, and the Crop Estimate Committee (CEC) expects another big crop in 2014. Given the current good rains in most of the maize production areas, the 2014 crop may even exceed the CEC’s estimated 12,4 million tons. The large US crop, meanwhile, resulted in a decrease in US grain prices from above US$325/t in 2012 (R3 500/t at the current exchange rate) to the current US$225/t (R2 400/t). In addition, US future prices remain lower at R2 000 (July 2014) and R2 050 (March 2015).

READ:Rand in freefall

SA grain prices followed the downward trend for a time. Nearest month YM1 (yellow maize) prices decreased from R2 690 in August 2012 to R2 165 in August 2013, marginally above export parity. Since then, Safex prices have increased to R3 000 and more. The latest SA Grain Information Service calculation shows maize import parity at R3 948 and export parity at R2 009.

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While nearest month prices remain at or above R3 000, Safex future prices are significantly lower – R2 096 (July 2014 YM1), increasing to R2 189 for December 2014 contracts. For maize users, the big question right now is: to buy or not to buy? The current July 2014 price of around R2 000 is still slightly above export parity. However, the current maize stock is selling at import and not export parity.

Export parity calculations are based on benchmark Chicago Board of Trade (CBOT) prices, but SA exports go to countries such as Angola, Botswana, Cameroon, Zimbabwe, Namibia and Mozambique. Export parity for these countries should rather be calculated according to their interior prices. Nobody from South Africa will try to export maize to Chicago.

As things stand, though, it’s likely that maize users may find that July 2014 prices increase as harvest time approaches. The prudent course of action for maize users is probably to lock in the current July 2014 price with an option. Another alternative is to source maize directly from producers.

To sell or not to sell
For maize producers, the current July 2014 price is not very attractive. But it will probably increase as we move nearer to harvest time. The problem is that farmers frequently wait too long to fix a price. As a prominent maize farmer told me in 2012: “I wanted to sell at R2 700, but decided to wait for the market to move to R3 000.” This didn’t happen and he eventually sold at R2 200.
Another option for maize producers is to sell directly to maize users. In this way, both parties can save on handling and transport costs.

Long-term effect on livestock
The current maize market, with the high import parity level, partially caused by a weak rand, is likely to continue for a few years. This weakens the position of the SA poultry industry relative to Brazil and of our dairy industry relative to Argentina, where prices are very low. In Argentina, a local export tariff contributes to the lower grain prices.

Intensive ruminant industries, such as the dairy and feedlot sectors, can limit their reliance on grains by using high-quality roughage such as maize silage. However, the opportunity cost of silage is equal to the income of the same maize if harvested and sold as grain. For these sectors, the ratio between feed prices and product prices is crucial. In the end, the consumer will have to pay for the more expensive grain.

Since market power lies largely with the retail sector, price rises will not happen overnight and intensive livestock industries will probably have to absorb some of this cost for a time.

Outlook for grain producers
Both winter- and summer-grain producers, with some unfortunate exceptions, had two or more favourable seasons. The high grain income may encourage some of these farmers to give up their livestock enterprises – despite the fact that these enterprises carried them through many difficult years.

In some areas, consultants are also telling farmers that, with current technology, a good yield is almost assured. This is not true. Crop production costs are very high and it’s unwise to risk a farm’s total asset value every year. It has often happened that two or more failed crops have resulted in farmers in a specific area going bankrupt. This could easily happen again. In short, farming has simply become too risky to put all your eggs in one basket.

Dr Koos Coetzee is an agricultural economist at the MPO. All opinions expressed are his own and do not reflect MPO policy.