Meeting Demand for Grain

by Teresa Acklin
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I.G.C. members assess outlook for global demand and trade patterns.

By Diane Montague, European Correspondent

   The long term patterns of food supply and demand and economic growth in Asia will be the greatest influence on world grain trading patterns in the next 10 years, according to world grain trade experts speaking at the International Grains Council's annual conference in London in June.

   A rapidly expanding population that is increasingly living in metropolitan areas and changes in diet are combining to make Asia the fastest growing food market in the world. But the speakers were optimistic that supply would be able to keep pace with demand in this and other parts of the world.

   "The focus of the grain industry has changed dramatically. Thirty years ago it was the Common Market, then in the 70s, the U.S.S.R. Now it is Asia," said Susumu Matsuoka, executive vice chairman of the Japan International Agricultural Council in a review of grain supply and demand prospects in Asia.

   Leading the change was Japan, which is currently the largest net food importer in the world. Developments there provide an indication of likely future patterns of development.

   In 1995, Japan imported U.S.$52 billion-worth of food, feed and beverages from all over the world. This included 36 million tonnes of grains and oilseeds, equivalent to 100,000 tonnes every day of the year.

   This pattern of imports was only made possible, however, by the country's infrastructure of transportation, storage, processing, livestock production, distribution and marketing. At the same time, the Japanese people have retained their traditional dietary patterns and have developed a highly advanced agriculture of their own.

   "Other Asian countries should follow a similar pattern," said Mr. Matsuoka. "Although there will be a steady rise in demand for food and feed grains, it is vital for other countries in Asia to maintain their domestic food production as long as possible and avoid overdependence on imports. This means making use of all available production technology, using sustainable methods and maintaining adequate food reserves."

   Ways to meet these problems are being investigated under a new initiative launched by the Asia Pacific Economic Cooperation following a meeting in Osaka, Japan, last November. The project will include a country-by-country and product-by-product study of constraints on stabilization of food demand and supply, Mr. Matsuoka concluded.

   As the largest single market in Asia, China plans to take an active part in the international grain trade, which it sees as an essential part of its agricultural and economic development. Despite the limitations on its arable land, China is expecting another record harvest, said Li Ming, deputy general manager of Top Glory, the agency for China National Cereals, Oils and Foodstuffs Import and Export Corporation in London. Delivering a paper on behalf of Zhou Mingchen, president of COFCO, Mr. Ming said the 1996 harvest was expected to exceed last year's record crop of 466.6 million tonnes by 2%.

   He said that the agricultural policies so far had been successful and China was more or less self sufficient in food despite having only 7% of the world's arable land and 22% of its population, which was growing by 17 million a year. However, to boost production further, China needs to upgrade crop varieties, raise yields, increase water conservancy projects and reduce grain losses during harvesting, transportation and processing.

   In addition, China intends to remain in the international grain trade because it stimulates domestic production and helps to improve distribution systems. In a further development of this policy, China is in the process of adapting its trading regulations with the aim of becoming a member of the World Trade Organization.

      Optimistic Outlook

   From the point of view of a leading supplier, Eugene Moos, undersecretary for farm and foreign agricultural services in the U.S. Department of Agriculture said, "The nations that make up the Asia Pacific region have become the most dynamic economic region of the world."

   Demand is strong for a diverse range of products including wheat and coarse grains. Influencing the changes are the large-scale moves of population from rural to urban areas, changes in food retailing systems and the growth in Asian food processing industries that require low cost, high quality ingredients.

   But the increases in demand should not pose a problem, according to Mr. Moos. In an upbeat overview of the world supply/demand situation, Mr. Moos said, "The move from an era of world surplus to one of growing demand has happened faster than expected and the resulting tensions are playing themselves out in the grain markets."

   But tight grain supplies do not mean there is a crisis situation. Higher prices will provide an incentive for farmers around the world to increase plantings. Weather permitting, grain production will expand to meet growing demand, Mr. Moos said.

   Overall prospects for the 21st century are exciting, he said. Population growth and improved standards of living are creating a strong demand for food and fiber.

   In addition, outdated policies of self-sufficiency, protectionism and government control of markets are being challenged, reformed or dismantled. From handling 50% of the world's wheat and feed grain business, the private trade could be handling 90% by the year 2000. With better access and fewer restrictions, competition for markets is expected to heat up, he said.

   The U.S. is gearing up to take advantage of the new opportunities, Mr. Moos said. Domestic policies are moving away from restrictive farm programs, and exports are expected to increase their share of gross farm receipts from 23% to 32% by the year 2000.

   "Our new farm bill will allow the government to get out of the day-to-day business of farming and focus on the long-term strength of agriculture — research, trade and conservation," he said. The policy also vastly reduces the government's role in encouraging and managing surpluses and reserve stocks.

   Trevor Flugge, chairman of the Australian Wheat Board, was similarly optimistic. He said there was every sign that production would be able to keep pace with growing demand. The current situation, though, should not be used as an excuse to return to protectionism on world markets.

   "The international grain market has changed in a most fundamental way," said Mr. Flugge. "We are now moving towards an open grain trading system where producers, consumers and traders can respond to market forces.

   "But you can no longer just trade grain," he went on. "You must develop a system where grain moves from producer to consumer in the most efficient way possible. Buyers are insisting on guaranteed quality and guaranteed supplies from year to year."

   Guy Legras, director general for agriculture in the European Commission, said that for the first time in four years world wheat production would exceed demand and the market situation should become more comfortable. The situation on coarse grains was more doubtful, but production was still expected to be above demand.

   He said that the price rises earlier in the year were due to supply shortages rather than dramatic increases in demand and that all the scenarios based on a boom in demand were unrealistic.

   "The Commission thinks we have entered an era where production and demand will be more or less in balance," said Mr. Legras. This does not mean that prices will fall to the low levels of the previous few years, he added. That development was the result of the conflict on export markets between the United States and the European Union, he said, brought about by huge crops, huge subsidies and price wars. But as supplies improve, prices will drop to more moderate levels in the medium term, he predicted.

   "I am pleased this period is over," Mr. Legras said, "because in this type of market there is no management by the Commission or the U.S.D.A."

   Mr. Legras said he believed that, as far as grains were concerned, the E.U. was not very far from world price levels. Many of the problems of the past have been solved by the 1992 reforms, and although there are some excesses in terms of payments to farmers, the changes had resulted in prices which would ensure competition on world markets, he said.

   On its side, the European Union will continue with the same export policy it adopted last season, which meant concentrating on the domestic market to keep prices as low as possible. Vigorously defending the use of the export tax, Mr. Legras said it had nothing to do with an embargo. The tax was an integral part of the European Union's market management system linked to the world market, he said, used to allow the E.U. to balance domestic prices.

      Untapped Sources

   Some of the factors contributing to the new confidence in the world grain situation are coming from newly emerging producers and rising production in developing countries.

   A new source of grain on world markets and a producer of some of the highest quality grain in the world is Kazakhstan, previously one of the largest suppliers to the Soviet Union, where it provided 20% of market requirements. Ruslan Azimov, president of the Kazakh International Agroindustrial Exchange, said the harvest in his country this year was expected to amount to at least 18 million tonnes, of which 8 to 9 million tonnes would be exported.

   Production had fallen since the break up of the U.S.S.R. because land that was not suitable for cereal growing had been taken out of production, Mr. Azimov said. There also was a lack of funds for fertilizers and equipment.

   However, new measures are being introduced to help farmers and increase production, he said. These include the supply of 250,000 tonnes of seed and a special leasing fund to help pay for machinery and spare parts. Measures have been taken to open up agricultural markets by ending the monopoly on procurement and creating a state support fund for agriculture.

   Mr. Azimov said involvement of private firms in the market was growing. The Kazakh Agroindustrial Exchange has become one of the biggest information centers in the country, and last year it initiated the establishment of the Association of Grain Exporters, which includes the largest grain companies purchasing produce from independent farmers, he said.

   Argentina, one of the world's traditional suppliers, is expecting a record crop of 50 million tonnes, of which wheat will account for 15 to 16 million tonnes, according to Carlos Basco, national director of markets for the Argentine Ministry of Agriculture.

   This compares with the three-year annual average wheat production of 10 million tonnes and illustrates how Argentina's farmers are responding to better market conditions and improving technology, Mr. Basco said. A combination of these factors is expected to lead to a 50% increase in production in the next five years, he added.

   Argentine exporting facilities also are being improved following privatization of the terminals. Loading capacity now is running at 36,000 tonnes an hour compared with 26,000 tonnes in l990, he said.

      New Trends

   Reviewing the likely trends in supplies for the milling and brewing industries, Bernard Valluis, director general of Soufflet Negoce, France, said future demand patterns for cereals would be governed by the trend towards more prosperous consumers, increasingly living in towns, with a growing requirement for bread, chicken and beer. These markets can be met by importing either the raw materials or processed products in the form of flour or malting barley.

   More than 95% of world wheat trade is in milling wheat, Mr. Valluis noted; of the total world production of 536 million tonnes of wheat in 1995-96, the 95 million tonnes of wheat traded was nearly all milling wheat. Trade in wheat flour amounted to 8.2 million tonnes of wheat equivalent following the pattern of 8% to 9% of total world wheat trade. The European Union was the biggest supplier of flour, accounting for 58% of world exports, followed by the United States, which supplied 18%.

   World production of barley ranges from 153 million to 178 million tonnes and world trade between 13 million and 18 million tonnes. While a very large proportion of barley is used in animal feeds, some 19 million tonnes is used for malt, producing 14.8 million tonnes of processed grain. Of the total 1995-96 world trade in malt, the European Union accounted for 50%, Canada and Australia for 10% each and the United States for 4%.

   The form in which grain is imported will depend on economic and industrial conditions in different countries, Mr. Valluis said. Countries producing grain have the competitive advantage of lower raw material and transport costs plus a market for co-products.

   For instance, of the 11 new malting projects announced last year, seven were in China. As far as wheat is concerned, there are milling investments throughout the region including Malaysia, the Philippines, Indonesia, Vietnam and Thailand as well as China, Mr. Valluis confirmed.

   In countries where there is no market for animal feeds, the economic arguments for investment in industrial processing were less. The decision is then based on balancing access to lower cost processed materials against security of supply.

   However, Mr. Valluis said the concentration of population in many areas of Asia would also mean there would be an ongoing market for imported flour.