Focus for the week: H2’24 Agriculture Outlook – Weathering the perfect storm

The global agricultural sector faces a complex landscape shaped by geopolitical tensions and environmental concerns. The ongoing Russia-Ukraine conflict continues to disrupt global agricultural trade, maintaining food and grain prices above pre-conflict levels. This situation is further exacerbated by Houthi rebel attacks in the Red Sea, leading to a decrease in trade volumes through the Suez Canal. These disruptions have significantly increased food prices, particularly affecting import-dependent regions in Africa and Asia.

In the vegetable oil market, palm oil has emerged as a critical player amidst supply shortages of alternative oils like sunflower and soybean oil. However, the industry faces challenges including declining yields, adverse weather conditions, and increasing pressure for sustainable practices. The EU’s proposed deforestation law adds another layer of complexity, potentially restricting palm oil exports and reshaping global trade flows.

For Nigeria, the agricultural sector, while crucial to the nation’s economy, experienced mixed fortunes in H1’24. The sector grew modestly at 0.18% in Q1’24, significantly lower than the previous year. Key challenges include insecurity in crop production zones, poor infrastructure, and rising input costs. These factors contributed to a surge in food inflation in Q1’24. Consequently, the Nigerian government has responded with emergency measures, as they are mulling over plans to suspend import duties on staple foods and agricultural inputs. However, the success of these initiatives, including plans to establish new palm oil plantations, remains uncertain due to implementation challenges and the long-term nature of such investments.

Looking ahead to H2’24, the outlook for the global and Nigerian palm oil industry remains mixed. While potential supply tightening due to weather conditions could boost prices, the industry must navigate increasing sustainability pressures and potential regulatory changes. For Nigeria, while government initiatives aim to increase domestic production, the short-term impact on pricing is expected to be subdued.

What shaped the past week? 

Equities: The local market closed in the green, upturning last week’s bearish performance. The ASI gained 106bps to close at 97,456.62 points, as investors’ sentiments were positive amid bargain hunting during the week.  As at Friday’s close, all sectors closed higher w/w. The banking sector (+5.12% w/w) was the week’s top performer as FBNH jumped 31.52%w/w. The Oil & Gas sector followed (+2.00% w/w), continuing its bullish run, as OANDO (9.40% w/w) and CONOIL (9.09% w/w) posted weekly gains. Additionally, gains in CUSTODIAN (+15.04% w/w) and CONHALL (+12.59% w/w) lifted the Insurance index by 1.59% w/w. Furthermore, gains in the Consumer Goods space (+1.47% w/w) were driven by FLOURMILL (+22.47% w/w), HONYFLOUR (+13.42% w/w) and NESTLE (+9.88% w/w). Finally, the Industrial Goods sector managed a 17bps gain w/w as BERGER (27.73% w/w) sustained its bullish run through the week.

Fixed Income:

During the week, The DMO offered ₦162 billion across maturities on the curve, compared to ₦233 billion offered in the previous auction. With the reduced offering, the subscription levels also declined to ₦563 billion from ₦1,129 billion in the previous auction. At the end of the auction, the DMO allotted ₦162 billion across all maturities. Following this, stop rates across all tenors declined, with the 91-day, 180-day and 364- day bills contracting by 37bps, 50bps and 35bps to close at 16.63%, 17.00% and 18.59%, respectively. Despite the continued decline in rates, OPR closed the week above the 30% mark at 31.20% (-5bps w/w), as liquidity remained tight. At the end of the week, yield movements were seen on the 91-Day bill (+78bps), 182-Day bill (-218bps), 364-Day bill (-116bps), 2-year note (-8bps), 3-year note (-2bps), 5-year note (-1bp), 7-year note (-1bp), and 10-year note (+24bps).

Currency: At the end of the week, the Naira appreciated by ₦46.91 w/w to close at ₦1,546.41 per dollar.

Domestic Economy: Nigeria successfully raised $900 million in its debut issue of domestic dollar-denominated bonds, representing a 180% oversubscription, compared to the initial proposal of $500 million. The 5-year bond was issued at a coupon rate of 9.75%, slightly higher than a comparable Eurobond yield of 9.67%. While this debt raise could boost the external reserve stock, the government could explore more bond issues, given its target of $2 billion. While this and future domestic dollar bond issuances could raise Nigeria’s medium-term external debt profile, they could alternatively serve as cheaper refinancing mechanisms when Eurobonds mature.

Global: U.S. consumer sentiment rose to a four-month high in September, amid expectations that inflation will continue moderating over the next year and household incomes improve, but views on the labor market weakened against the backdrop of slower job gains. Ebbing price pressures give the Federal Reserve ample room to focus on the labor market, which has slowed considerably from last year’s robust job growth. The U.S. central bank is expected to kick off its long-awaited policy easing cycle next Wednesday. Meanwhile, Wall Street’s main indices rose on Friday as investors reevaluated the possibility of a bigger interest rate cut by the Federal Reserve next week. Traders’ bets of a 50-basis point rate cut jumped overnight, now standing at 43% (prev: 14%). All the three major U.S. benchmark indices were trading near a two-week high, on track to log solid weekly gains. The Dow Jones Industrial Average rose 0.84% to 41,440.48, the S&P 500 rose 0.56% to 5,627.15, and the Nasdaq Composite gained 0.64% to 17,682.47. Meanwhile, in the UK, The FTSE 100 edged up 0.4% to 8273.09 on Friday, while the pan-European STOXX 600 index was up 0.7% at 515.75 points on the day, even as the ECB cut rates again on Thursday. However, in Asia, stocks recorded losses as the Nikkei closed 0.68% lower on Friday to close at 36,581.76 points, while the Shanghai composite index lost 0.48% to close at 2704.09 points.

What will shape markets in the coming week?

Equity market: Looking ahead, bargain hunting is expected to persist as investors position themselves to take advantage of undervalued stocks, particularly in sectors showing resilience. Broader market sentiment remains positive, the prospect of improved corporate earnings of select firms should uplift investor confidence, pointing to a favorable environment for equity gains in the coming session.

Fixed Income: Amid moderating rates, we anticipate that system liquidity will be a major factor in shaping trading activities in the coming week’s trading sessions.