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Global Economic Slowdown Pressured Commodity Performance in 2019

Commodities	1018 VIEWS
Commodities
1018 VIEWS

Tuesday, January 14, 2020 /05:44 PM / AFEX / Header Image Credit: AFEX

Globally, commodity prices have witnessed wide fluctuation as the combined effects of trade wars, geopolitical tensions and the global economic slowdown pressured commodity performance in 2019. Specifically, the US-China trade war and the global economic slowdown induced risk of off sentiments on the commodities markets as investors and producers grappled with tariffs and reduced access to key export markets.

Importantly, agro commodities; wheat, soybean, maize, paddy rice and cocoa experienced diverse outcomes with maize, soybean and wheat settling at 0.24%, -0.08% and 3.32% respectively. On the other hand, paddy rice and cocoa experienced significant appreciation as production concerns drove gains of 7.74% and 4.90% at the end of October 2019.

Moving forward, the risks facing the commodities market have moderated as the recent signing of Phase one agreements seeking to roll back some of the tariffs placed on Chinese and American goods opened the lee-way for more imports on both sides.Also, forecast expectations as specified by central bank governors in Europe and theUnited States indicated that global slowdown might have bottomed out, increasing the likelihood of further commodity imports in countries across the world.

In the last four years, the agriculture sector in Nigeria has received significant attention, rivalling that witnessed in the 2011-2013 period. The renewed drive has been broad-based with virtually all sub-sectors (Livestock, Crop and Fishery) benefitting from the public, private and developmental investments in the sector. At the end of Q3 2019, Sesame, Cocoa and Cashew led the non-oil export charts, grossing $41.19 million, $30.03 million and $13.75 million over the period.

Structurally, the domestic commodity markets were structured as a spectrum of players got involved in a variety of activities necessary for seamless transactions in the industry. The spectrum spanned from the producers to final off-takers with trader, merchants and other marketing agents serving as the backbone of the industry and helping to provide the much-required linkage services. Despite the export potential of cocoa and other cash crops, maize and soybean remained the most liquid commodities in the country owing to the much wider use for industrial and household consumption across the country.

In addition to these commodities, paddy rice and sorghum have begun to assume more importance in the local landscape while sesame and ginger gain more traction in the international consumption markets.

Interestingly, the renewed interest in agriculture has stimulated substantial integration of domestic commodity markets in the supply chain of local and international manufacturing companies. This has been evident in the increased aggressiveness in commodity aggregation witnessed in the markets.

Commodity prices in the domestic market followed earlier established trends with prices exhibiting the seasonal fluctuation characteristic of the commodities market.

Despite the less than expected performance of Maize, prices closed the season at 3.64% above the opening price of N90,000 for the 2018/19 marketing year with a volatility of 33.60% over the marketing year. In the 2019/20 season, a combination of favourable weather conditions and reduced hectarage allocated to maize resulted in preliminary estimates of 5% in total production. On the contrary, demand has spiked in the present season, with an increased volume of aggregators and off-takers playing in the market. We anticipate that the price will increase by as much as 19% from the first trading day of the season owing to the net effects of demand and supply actors.

Soybean remained a star commodity all through the marketing year, closing at a season to date of 20.44% from season open price of N120, 000. The key driver of the commodity was the increasing demand for the commodity from industrial off-takers in the animal feed and baby food business. The commodity reflected the typical high risk/ high return profile with seasonal volatility of 50.69% in the 2018/19 marketing year. As experienced in the maize production areas, soybean production was favourable as conducive weather condition stimulated an expectation of higher production in the country. On the demand side, however, activities have been heightened as more players participate in the domestic sourcing of the commodity. Prices in the 2019/20 season are expected to spike with conservative estimates as high as 25-30% as the season progresses.

Performance of paddy rice in the 2018/19 marketing year was lacklustre as the commodity had a season-to-date return of - 4.98%. Notwithstanding the subpar performance, paddy rice resumed the new season on a stellar note with the season open price climbing up to N133,000 at the end of November. Production in core producing areas treaded similar trajectory as other commodities with favourable weather condition prompting a boost in harvest across producing areas. Preliminary estimates indicate that national output is expected to increase by as much as 10% to reach 9.24 million tonnes. Despite the gains in supply, price levels in the rice markets are expected to trend upwards by 15% owing to the ongoing border closure implemented by the Federal Government of Nigeria.

Export crops; cocoa and ginger, posted positive returns over the period with a season to date performance of 4.90% and 75.33% for cocoa and ginger respectively. The net effect of demand and supply actors in the market triggered the return posed with ginger enjoying the greater benefits of heightened demands from India, EU and other export markets. Volatility was highest in the ginger market with daily volatility of 7.01%.

Production in the ginger market has been free from the disease infestations witnessed in previous years, and the favourable weather condition witnessed also spurred production in key areas. According to our expectation, tailwinds such as the increased demand for ginger of Nigerian origin will be important in determining price movements and fueling price rally to about N600, 000 at the peak of the season.

On the other hand, excess rainfall in cocoa-producing areas triggered widespread speculations of production declines and hence output shortfalls in the domestic markets. The intensity and aggressiveness of aggregation witnessed post-harvest of the main crop has stimulated a massive price rally. From early aggregation evaluations, the number of participants sourcing cocoa from Nigeria has spiked with a cocoa-aggregator ratio increasing from 1T - 3/4 aggregators to 1T - 6/7 aggregators. We anticipate a price increase of almost 40% as the season progresses.

In this edition of the commodity review, maize is the focus commodity with a total production of 10.42 million tonnes (FAO 2017) and consumption of 11.10 million tonnes, indicating a deficit in the country. The maize value chain spans from the farmers who majorly own less than 1 hectare and with a productivity of about 2.5 tonnes per hectare through marketers who facilitate the linkage of farmers (producers) to the final industrial and household consumers in the country. Across the country, Kaduna, Niger and Taraba remain the largest producers of maize with an estimated production of 937,820 tonnes, 745,110 tonnes and 608,730 tonnes respectively. On the consumption side, the animal feed and baby food companies consume the largest quantities driven by burgeoning demand for animal protein, increasing population and an expanding dietary awareness amongst the population.

Moving forward, the consumption of maize is expected to grow with the fundamental drivers remaining strong. We anticipate that production growth will continue to lag consumption growth by at least 1.2% per annum, raising the prospects of continued imports of maize to cushion the domestic supply deficit.

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