Commodities | |
Commodities | |
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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.
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Market - Jan 14, 2019
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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