Disciplines represented on the Board
In 2017, South Africa produced 1,3 million tons of soybeans on 574 thousand hectares. The substantial year-on-year increase in yield levels brought the national average to 2,29 tons per hectare; the highest on record. The Crop Estimates Committee reports that in 2018, the area planted to soybeans expanded to an all-time high of 787 thousand hectares, a 37% year-on-year increase. A return to longer term trend yields implies that production is expected at 1,55 million tons. This makes soybeans the fastest growing field crop industry in South Africa over the past decade; area and production respectively increased by an average of 15% and 20% per annum. In the latest outlook produced by the Bureau for Food and Agricultural Policy (BFAP), the area cultivated to soybeans is projected to continue expanding by an annual average of 2,9%, to reach 962 thousand hectares by 2027. In 2017, the average soybean price fluctuated around R4 600 per ton, a year-on-year decline of 29% on the back of lower international prices and a strengthening of the Rand over the course of the outlook. The SAFEX price is projected to trade between import and export parity, with the derived price for the cake and the oil determining a relative benchmark for the local price.
In addition to expanding area, projected production growth is underpinned by an average annual yield gain of 2% per annum over the outlook, which is faster than the yield improvements observed over the past decade. There are a number of trends to consider with regard to projecting future soybean yields. Firstly, there is a rapid increase in the number of soybean varieties available for planting. Secondly, the area under soybean production has increased rapidly and the western production regions, which have traditionally been regarded as marginal areas for soybean production, are gradually coming into production. Thirdly, producers have continued adapting production techniques, resulting in more stable and improved yields.
Therefore, combining these three trends and despite the significant variation in yields in recent years, South Africa managed to produce a soybean crop with an average yield of 2,29 tons/ha on 574 000 ha in 2017. It must however be said that the 2017 crop was grown under favourable climatic conditions, with some soybeans also planted on fallow areas carried over from 2016 due to the drought. In the current season, average yields have fallen back to an estimated 1,97 tons/ha due to less conducive climatic conditions. The view therefore is that although volatile weather conditions have not allowed average yields in recent years to reflect the full potential of improved seed varieties, improved farming practices and investment in suitable mechanisation, these investments are expected to start paying off in the next few years. This assumption rests on the premise that the investment will be maintained and the End Point Royalty system introduced successfully.
Although seed companies have over the last number of years invested in bringing an increased number of soybean varieties (with a wider range of climatic adaptability) to the market, current market information indicates that companies are not willing to introduce the latest seed technology in South Africa without an End Point Royalty system. This could have a significant impact on the competitiveness of South African soybean farmers, who are facing very stiff competition from the major international soybean producers not only from a yield perspective, but also from the ability to produce a consistent bean quality. Considering a 20-year period, the average annual yield increase for soybeans in the United States was 1,46%, while yields increased by 1,33% in Brazil and 0,64% in Argentina (Table i). Despite the influence of recent droughts on average yields in the short term, South African soybean yields increased marginally at 0,43% per annum. On average over the 20-year period, South Africa's average soybean yield was 40% lower than the average achieved in the three leading soybean-producing countries.
Table i – Annual average soybean yield increase between 1998 and 2017 Country Percentage USA 1.46% Brazil 1.33% Argentina 0.64% South Africa 0.43%
As was the case with maize, the exceptional soybean crop in the 2017 production season is also visible in other farm-level competitiveness indicators such as the cost of production. Figure 1 illustrates the cost to produce a ton of soybeans across the globe with South African farms located on the right. Previous analysis indicated that local farms are less competitive compared to international counterparts such as Brazil, Argentina and the United States of America. This is driven mainly by lower yields and higher cost for selected input items. The Eastern Free State prototype farm spent US$140 on average to produce a ton of soybeans, whereas the Northern Free State farm, newly introduced into the BFAP network of prototype farms, spent an average of US$97 per ton soybeans produced. The international sample spent an average US$116 per ton soybeans produced, with an average yield of 3,16 tons per hectare. Argentine farms located in Zona Nucleo and Western Buenos Aires spent between US$68 and US$79 to produce a ton of soybeans with average yields of 4,1 and 3,5 tons per hectare respectively.
Domestically, it will remain of vital importance to pursue higher yields in a more productive manner, in order to enhance the competitiveness of producers. More importantly, and in particular for the Western production regions, it is essential to reduce annual yield volatility in order to reduce the relative production risk of soybeans against its alternatives. Soybean gross margins are projected to outperform maize in 2018 and also in several regions in 2019. However, the resilience of maize and sunflower in less favourable growing conditions reduces their production and financial risk at farm-level relative to that of soybeans, emphasising the need to also reduce soybean yield volatility.
The area under sunflower production decreased by 12% in 2017 to 635 thousand hectares, which resulted in 874 thousand tons of sunflower seed produced at an average yield of 1,38 tons per hectare. Over the outlook, the area under sunflowers is expected to decline marginally, yet additional demand will be comfortably met by increasing yields. Sunflower yields are projected to increase by an average of 2,2% per annum over the outlook period, reaching 1,65 tons per hectare by 2027. This projected yield growth is based on the assumption of stable rainfall and continuously improved cultivars. Over the past 5 years, average yields have not reflected the potential of current varieties, due to adverse weather conditions in the form of extreme droughts and temperatures in four out of the five seasons. Furthermore, the adoption of the latest release of high-yielding cultivars with Clearfield® technology that significantly reduces weed pressure and increases yields is rapidly gaining ground, which is expected to improve average yields going forward.
Sunflower supply and demand is expected to remain finely balanced over the next decade and consequently prices are projected to trade between export parity and the derived price for oil and cake. When the local market moves into a temporary surplus, prices tend to decline to export parity levels, which increases crushing margins and therefore crushing levels. In 2017, the average sunflower SAFEX price decreased by 30% to R4 607 per ton, trading very close to export parity levels due to high stock levels following a bumper crop. Responding to the reduction in production levels, the sunflower price is expected to trade above export parity in 2018, at an annual average of approximately R4 700 per ton. The long run equilibrium price over the projection period remains above export parity.
After more than doubling the area under canola production from 44 thousand hectares in 2012 to 95 thousand hectares in 2014, the industry has consolidated somewhat, with the area under production in the Western Cape fluctuating between 70 and 85 thousand hectares in recent years. Although concrete gains in yields (2,6% average annual increase) have been achieved due to the introduction of improved cultivars, effective technology transfer and improved farming practices, gains have been achieved from a small base and canola still faces stiff competition from wheat and barley on a gross margin per hectare basis. The real economic value of canola only comes into play when it is incorporated in a rotational cropping system. Sensitivity analysis around gross margins revealed that canola production has vast potential, but under higher yield assumptions.
In 2018, the canola production area is expected to decrease by approximately 10%, as late rains in the Southern Cape are affecting plantings. Industry specialists also suggest that there seems to be a concern around sufficient access to the higher yielding cultivars that have proven to be effective in the past few seasons. Figure 2 illustrates that canola yields in the Southern Cape production region are lagging behind Northern Hemisphere producers. The international sample average amounts to 3 tons per hectare, whereas the average yield for the Overberg farm over the period from 2008 to 2016 equals 1,5 tons per hectare. When it is compared to other Southern Hemisphere countries such as Australia, the Southern Cape prototype farm performed relatively well. However, when the cost of production is considered, the Southern Cape farm lags well behind Australia. In the 2016 production season, the average cost to produce a ton of canola in the wheat belt and South Coast area of Australia ranged between US$128 and US$148 per ton, whereas the Southern Cape farm spent US$174 per ton canola produced. The higher cost on the Southern Cape farm was mainly driven by the cost of seed and fertilisers.
Going forward, the canola production area is projected to increase by an average of 3,2% per annum to 115 thousand hectares by 2027. The average yield is projected to increase to 1,67 tons per hectare, resulting in a projected harvest of 192 thousand tons in 2027. Under the current projections, total current crushing capacity of 175 thousand tons will be reached by 2024. The average canola price decreased by 13% in 2017 to R5 600 per ton and is projected to continue trading between import and export parity over the outlook period, reaching R7 025 per ton by 2027. This implies an average annual increase of 3%, less than general inflation and hence a modest decline in real terms.
The combined effect of local oilcake production and concurrent imports of soybean oilcake from alternative sources at competitive prices is creating a situation whereby the domestic market at times finds a surplus of oilcake available. The net result is that the price formation of soybean seed is starting to change to reflect a derived price from cake and oil, rather than soybeans simply trading on its own fundamentals. It also implies that domestic crushing plants have to compete against imported oilcake produced mostly in mega plants in Argentina, where soybeans are sourced at export parity prices. This is putting significant pressure on domestic crushers to continuously improve efficiencies and capacity utilisation, and to beat the quality of imported oilcake.
Despite its noted importance, prices are not the only driver in the evolution of the South African soybean cake market. The current (2017-2018) marketing year is a case in point, with soybean prices trading closer to export parity levels following an estimated crop of 1,4 million tons and positive crushing margins that should boost the uptake of soybeans in the crushing market. However, the demand for locally produced soybeans remains subdued, firstly due to a crushing plant on the Reef having to close down following an explosion and fire damage, which reduced the available crushing capacity by 150 thousand tons and secondly because some chicken producers in SA still prefer imported soybean cake above the locally produced cake. The result is that around 450 000 tons of soybean cake will likely be imported in the current season, despite the fact that South Africa can supply a significant share of this volume locally.
There are many debates around the local quality of the domestic soybean cake versus that of the imported cake. Results from comparison studies are becoming increasingly available and typically illustrate that South African soybean cake is on par with imported cake. It is therefore anticipated that the current question around quality will be resolved, and it is only a matter of time before uptake of locally produced oilcake relative to imported oilcake will increase. The sensitivity around the quality of the soybean cake underlines the fact that the quality and consistency of oilseed that is delivered to the crushing plant also plays a significant role in the economics of the soybean value chain.
REPORTS RESEARCH REPORTS 2017/2018 ENGLISH 2017 DISCIPLINES : AGRICULTURAL ECONOMICS
- 2017 DISCIPLINES : ANIMAL FEED AND OILSEED CRUSHING INDUSTRY
- 2017 DISCIPLINES : PROTEIN CONSUMERS
- 2017 DISCIPLINES : PLANT PRODUCTION
- 2017 DISCIPLINES : ORGANISED AGRICULTURE
- 2017 DISCIPLINES : AGRICULTURAL ECONOMICS