The current short market and high prices are short lived

The South African white maize price increased from the last week of November 2013 by R900/ton from R2400/ton until mid-January to R3300/ton. This constitutes an increase of 37%.

Since end November 2013 the international maize price traded sideways. Therefore, it had little impact on the increase in the domestic maize prices.

What then caused the white maize price to increase by 37%?

There are two factors which have a major impact, namely:

1. The weak exchange rate and the underlying economic fundamentals of the South African economy.

   The South African rand is following a group of emerging economies including Turkey. These countries have similar underlying fundamentals in their economy, which include significant trade deficits. Consequently, these countries are very vulnerable to risk aversion strategies by the global investment fraternity. For example, the current decline in the value of the rand at the end of January 2014 was due to the fact that the rand followed the weakening Turkish Lira. The election may have an unknown future impact on the rand and some believe that the rand will stay weak until after the election period. This will support higher import prices of both grains and inputs.

2. The unexpected exports of maize to Zimbabwe.

The FAO communicated during the second semester of 2013 to Grain SA that Zimbabwe suffered poor growing conditions and that the country may suffer a shortage of 460 000 tons that need to be imported to meet the demand of 1,43 million tons.

Consequently Zimbabwe failed to secure maize from Zambia as Zambia did not have maize available for export to Zimbabwe. Zimbabwe turned to South Africa to meet their demand. Zimbabwe imported about 154 000 tons of maize this season. This is the equivalent of maize that will be imported by South Africa from the Ukraine. Zimbabwe traditionally do not import maize from South Africa, but this unexpected event lead thereto that South Africa needs to import maize during the first quarter of 2014 just before the elections.

These two factors have a significant impact on South African maize prices.

The unexpected imports of South African maize by Zimbabwe lead to the increase in domestic maize prices. The strategic imports of maize by Zimbabwe left South Africa with a tight carry-out. Therefore, the imports of 150 000 tons of maize from the Ukraine is timely to relief pressure and thus the underlying support of maize prices for old season stock.

It is very important to note that the current high maize prices are of a short-term nature and will soon ease as imports landed and also as soon as the early delivery of maize starts in March (Table 1).

Table 1: Monthly total maize exports compared to the increase in imports (October 2013 to April 2014) until the end of the current marketing year

n.a.: not available *Estimate

The current high levels will therefore subdue in a matter of weeks. It can already be seen when the future Safex price levels for maize delivery are compared. The maize price for March trades 6% lower than February, due to earlier deliveries and expected imported volumes that will increase the supply of available maize. As harvest progresses the prices for April are 13% lower than that of February, 20% lower in May and 30% lower in July (Table 2).

Table 2: Future expected prices for maize as on 29 January 2014

*Estimate

The prices for maize delivery in July are between 9% and 12% higher compared to July prices at the same time a year ago. The exchange rate, due to South Africa's economic situation, is currently about 22% weaker than a year ago and the impact of the latter on fuel, fertilizer and other imported inputs increase the cost of production compared to the foregoing season. The current forecasts promise sufficient wide spread rainfall over the production area. The impact on new season prices can already be witnessed as new season prices start to decline.

Other factors to take into consideration

1. The domestic wheat price did not follow the old season trend in maize prices. Therefore, the price of bread should not increase. Current wheat prices are only 3 to 5% higher than last year. The wheat price only constitutes ±20% of the total cost of a loaf of bread.
2. It is expected that South Africa will import 975 000 tons of rice in 2013/14. South Africa increasingly imports more and more rice. The exchange rate and world price increases will have an impact on local rice prices.

Summary

The current maize price spike is short lived with early deliveries and imports on its way. Maize prices for the new season compare moderately (single digit changes) with the prices of last year. A continuation of the current dry conditions in the western production areas could add to more pressure on prices. Weather prospects for the coming week look promising.

South Africa has gone through similar situations in 2007/08. No interventions were made and the market corrected itself. We do not believe that any intervention is currently needed.

Grain SA

pretoria@grainsa.co.za

29 January 2014