Guest Contributor | May 17, 2019 | 0
You may be surprised to find out that there is a very tangible, definite link between mealies and steak and it is not biological
Another interesting chart, posted by Capricorn Asset Management this week, shows the cyclical nature of yellow maize prices in the United States. Since the US is the dominant yellow maize producer in the world, their local prices, quoted on the Chicago Board of Trade, basically determine all maize prices worldwide.
Called corn by the Americans, what we know as yellow maize is the major ingredient in many animal feeds. The local prices, which are essentially South African prices, are determined by a combination of US prices and so-called parity, in other words the Rand US Dollar exchange rate.
What I have done on the graph is to highlight the seasonality by drawing blue lines across the phases where the US yellow maize price is in recession. It is very obvious that the market cycle is repetitive, regular, and to some extent predictable. It is exactly this characteristic that makes it an attractive commodity for futures traders on international commodity markets.
Every commodities trader knows that corn will be high at a specific point during the year. The reliability of this assumption is borne out by the graph. Furthermore, they know that somewhere in the second semester when the US harvest comes in, corn prices will come down because there is so much of the commodity. Accordingly, they align their futures contracts to these cycles, buying grain in advance from producers, and then selling the coupon at a very specific date to downstream users like millers, feedlots and exporters.
The predictive nature of corn production is further supported by the fact that it is determined by seasonal climate changes. So whatever adverse conditions there may be, it is a given that production will peak in the second semester, whether there is a surplus or not. And with such huge volumes produced, there is a certain natural “liquidity” built into the commodity.
And because America is the overwhelmingly dominant producer, traders do not have to pay too much attention to what production volumes are in South Africa, Argentina, Brazil and the Ukraine. To give some perspective, the US produces around 400 million tonnes of corn in a good year, of which less than one fifth is exported. South Africa produces on average about 12 million tonnes according to the South African Department of Agriculture. So, from the comparative figures it is obvious who is the elephant and who are the mice.
The long and the short is that the price of yellow maize is determined in America and the rest of the world must accept that price whether they like it or not.
In a regional context (SADC) South Africa is the dominant producer even if total production pales in comparison to the US. But the one drawback that South African producers must always contend with, is climate. The South African season is far less reliable or predictable than the American season.
In a good year, South Africa usually produces a surplus and then farmers are very happy because they can export at American parity prices, and if the Rand tends to be weaker, they score. The opposite side of the coin, unfortunately, is that in a poor year yellow maize must be imported, again at parity, and that may be detrimental to the animal feeds industry that depends on yellow maize.
Therefore, at this point it is important to consider what South African production will be since that will determine whether yellow maize must be imported or not.
The South African season started late, as is now generally known but eventually was saved by good delayed rains in the major producing areas. This meant however, that the growth season was short and this has an impact on production volumes. Official estimates now put the expected South African harvest at between 20% and 25% less than last year. This implies a production shortage of roughly 4 million tonnes.
At the onset of the season there were just over 3 million tonnes stockpiled as a surplus from last year, so in all probability around one million tonnes will have to be imported. Right now it is difficult to say with certainty what the exact import need will be but all indicators point to the fact that yellow maize will have to be imported and when that is the case, the exchange rate becomes a crucial determinant.
It is also not possible now to say with any degree of certainty what the exchange rate will be at the end of the year but it is unlikely that it will be below R14 to one US Dollar. Nevertheless, it means that imports will be more expensive in 2019 than what it was in 2016, the last time that any significant volumes of yellow maize were imported.
You may ask, what has all this got to do with food production in Namibia? This is where the picture becomes very interesting.
Namibian red meat producers market the bulk of their cattle to South Africa, either as weaners or as slaughter oxen. And the demand for Namibian weaners by South African feedlots is determined by the price of yellow maize.
When there is an overproduction like last year, the price of yellow maize is suppressed and the margins on red meat production increase. Last year, that pushed up the demand for weaners, and we saw the results. Local weaner prices skyrocketted until something unforeseen happened. That was the detection of Foot and Mouth disease in some cattle from South Africa’s northern provinces, but it effectively lead to all exports being stopped and the demand for weaners dropped.
This is reflected in the weaner price of around N$29 per kilo live as of this week. This sharp reduction from 2018 average prices reflects the lesser demand from South African feedlots as a result of the closed export gates. At some point the situation will normalise and exports will resume but that will probably only be in the second semester, coinciding more or less with the last of the yellow maize harvest.
This harvest will be considerably below average meaning there will probably be a shortage of yellow maize later in the year. This will put pressure on margins and two things will happen. The wholesale price of red meat will go up and the local price for Namibian weaners will go down.
In practice it translates to an incentive for red meat producers to hang on to their weaners and raise them themselves. There is only one huge problem – the current drought. It implies that the cost of fodder will rise (because it is imported) and the local producer price will come down (because of lower demand).
Essentially, what I am arguing is that local producers are facing a conundrum and that financial support to farmers, whether in the form of subsidies or direct financing, will have to increase during the remainder of the year.
Either way, it seems to me that cattle farmers are in for a rough patch this year, and that they have no control over the conditions that create the enormous adversity in their industry.