Turmoil in durum wheat markets

by Meyer Sosland
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In a year that has seen unprecedented turmoil in the international supply of durum wheat, the leading semolina millers and pasta manufacturers of Europe, together with key representatives from the Americas, held their Annual General Assembly in London, U.K. in May.

The focus of the discussions was inevitably concentrated on how the industry can best handle the current supply shortage and the resulting high prices as well as what prospects can be expected over the coming months.

Three guest speakers were invited to give presentations showing the perspectives of their organizations and their forecasts of what the durum processors, both semolina millers and pasta manufacturers, might reasonably expect.

The event was co-organized by European pasta organizations UN.A.F.P.A. and Union des Associations de Semouliers de l’UE., which are both supporting members and sponsors of the International Pasta Organization.

The 2008 Annual General Assembly opened with a formal reception at the headquarters of nabim, the trade association for the British milling industry. The annual general business meetings and presentations on the following day were held at the nearby hotel Le Meridien Piccadilly, where most of the delegates were accommodated.

Italy, with pasta production of 3.1 million tonnes, exports of 1.7 million tonnes and consumption of 1.7 million tonnes produced from 5 million tonnes of durum, dominates the international trade in finished pasta. Of the 7 to 8 million tonnes of durum wheat traded internationally, Canada normally provides 50% to 60%. Canadian durum is grown on 5 to 6 million acres in Alberta, Saskatchewan and Manitoba provinces. Across the border in the United States (U.S.), the states of Montana and North Dakota are also substantial durum producers.

Daniele Bianchi of the European Commission opened the presentations with an outline of the adjustments proposed to the CAP (Common Agricultural Policy) of the E.U. He stressed that these adjustments do not constitute reforms since the proposed reforms have been in place since 2003, and there is no intention of changing these principles.

The progressive decoupling of subsidies as initiated in 2003 is enabling a move toward a "freedom to farm" without grants and subsidies in exchange for production. Leaving the market to do its work will ensure that the agricultural sector is more responsive to demand, he said. Particularly in the case of durum, the higher prices seen now will lead to greater production, which Bianchi said will gradually reduce and stabilize future prices. The Commission does understand that a wholly free market has its own difficulties.

Bianchi confirmed that the Commission recognizes the concern of UN.A.F.P.A. regarding the imbalance of power in trade relations between food companies and large supermarkets. Throughout the E.U., retailing is dominated by a small number of large supermarket chains, and there is a need to strengthen producers to ensure buying power is not abused by forcing down prices to unsustainable levels and imposing unfair conditions upon producers. This is of particular concern when durum prices have soared so dramatically. Bianchi believes that by giving farmers the potential to respond and stimulating entrepreneurship, Europe could become self-sufficient in durum production within a few years.

Bianchi noted that while Europe is moving toward free trade, other countries such as Ukraine are moving in the other direction. It is therefore essential that World Trade Organization (WTO) rules are negotiated and upheld, he said.

The Commission plan is to ensure that the proposed adjustments to the CAP are all in place and can be implemented before January 2009, when the new Lisbon Treaty is scheduled to go into effect across all the member states.

Due to the dominance of durum trade by Canada and the exceptional quality of CWAD (Canadian Western Amber Durum), it was appropriate that the next speaker was Chris Gillen, marketing manager of the Canadian Wheat Board, who gave a specific analysis of the durum market worldwide and some of his broadly encouraging thoughts. He stated that if no unforeseen problems arise in the producing countries, supply will better match demand of 7 to 8 million tonnes during 2008-09 and the tendency will be towards lower prices. It is estimated that 10% more durum will be planted worldwide this year. However, he said volatility will continue until at least the fall, by which time the extent of the harvests in the important growing regions will be assured.

Gillen said weather conditions over the next few months will play the biggest role in determining the size of the harvest. Canada, which lost perhaps 1 million tonnes in 2007 due to the hot, dry July, has currently seeded about 25% of the planned crop and needs to achieve 100% by the end of May. The U.S. crop could prove crucial, and a large risk premium will continue until the North American harvest is in. North Africa, particularly in Morocco and Algeria, is experiencing below average moisture levels so far this year, but Mexico is set to make up some of the shortfall. Meanwhile, the crops in Syria and Turkey seem to be in trouble.

Other factors affecting prices include:

• freight rates, which tend to hurt Australia in particular due to its remote location;

• substitution of spring wheat into the mix by pasta manufacturers not constrained to maintain 100% durum in their recipes,

• the high price of rice in Asia, which is stimulating an increased interest in durum-based foods;

• agricultural policies, such as the phasing out of "set aside" in the E.U. as well as the U.S. Farm Bill and the weak U.S. dollar; and

• speculation creating a "synthetic" market above the futures.

Gillen stated that Canadian export durum is currently being offered at about $605 to $615 f.o.b. St. Lawrence for new crop positions compared with $250 a year ago. This statement stimulated a lively and, at times, provocative discussion among those attending the meeting.

One delegate said Canada holds the reserve stock for the world and therefore should adopt a less aggressive posture. Another begged Gillen to "please moderate the market in a more responsible way."

Gillen responded that Canada did not in reality have reserve stocks to hold back in order to exploit the shortages and in the longer term also wished for a stable market.

The meeting was concluded by a lively and far-ranging presentation by Professor William Wilson from the Department of Agribusiness and Applied Economics at North Dakota State University. His objective was to put the durum situation into an international trading context and to explore the many factors that need to be taken into account in assessing likely future trends.

Wilson said he is convinced that certain "megatrends" will be the crucial factors in agricultural production and consumption over the next 8 to 10 years. These include:

• The China situation, where demands will continue to grow at an unsustainable rate and food price inflation is a real cause for concern. For example, its increasing demand for soybeans has become so great that over half of Brazil’s exports are now going to China.

• Biofuels, though not directly the cause of shortages, are starting to impact on food supplies. The profitability and thus anticipated growth in biofuels is uncertain. The U.S. Energy Information Agency has produced forecasts of growth that have proven to be hopelessly underestimated. The healthy margins achieved in 2006 have since collapsed and some new biofuels plants, especially in Europe, have been put on hold.

• Genetically modified (GM) technology is having a huge effect on agriculture almost everywhere outside the E.U. and is encouraging a change in the crops selected for growing in what were traditional wheat-producing areas. For example, in North Dakota 30% of former wheat-growing land is now being used to grow canola and soybeans. New developments in GM include drought resistant maize, which will enable a significant expansion of potentially arable land, and RoundupReady2, which is about to be commercialized.

• Risk and volatility have doubled for many agricultural activities. The key factors causing volatility are: stock levels, which are difficult to increase due to the demands of the ethanol program; events in other countries, including weather; and mutual fund trading in which electronic trading now results in nearly instantaneous swings in the market. As a result of risk, there will be a greater need to diversify.

UN.A.F.P.A. said in the coming year it will continue to represent, monitor and lobby on behalf of the industry in areas as diverse as the impact of the CAP, biofuels, food legislation and international relations through the IPO. WG

Bryan McGee, an independent milling consultant, can be reached at bryan@bcmcgee.co.uk.