Tackling new challenges

by Chris Lyddon
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Change was a common theme at the International Grains Council’s (IGC) annual conference in June in London, England. From the feed industry’s top lobbyist came a reminder that the challenges facing the industry could be even greater than the demand increases widely under discussion now. There were presentations from areas and sectors with specific problems and reports on big changes to the way the industry works.

Alexandra de Athayde, executive director of the International Feed Industry Federation, examined the role of feed in the demand for grains worldwide and the likely increases as population and affluence grow.

“Feed takes up about one-third of world cereal used,” she said. “Regardless of the short-term fluctuations, we definitely need to produce more.”

She noted the United Nations Food and Agriculture Organization estimates showing that the world will have to produce around 60% more food by 2050 and Organization for Economic Cooperation and Development estimates showing it will need 20% more food by 2020. FAO estimates suggest that animal protein production will grow at least three times by 2050. Meats (poultry/swine/beef) will double. Dairy will double. Aquaculture production will grow tenfold.

The reality might be even more dramatic. If the trend carries on at the same rate as it has done in the last 30 years, the world will need six times the production by 2050.

“We are in this together and we need to have more cooperation,” she said.

De Athayde was also concerned about the effect on supply and demand of renewable energy. “We see big competition for feed,” she said. But there was also scope for using the co-products from the renewable energy industry.

Specialist durum wheat market

Emilio Ferrari, purchasing director, durum wheat and semolina, for Barilla, outlined how the giant Italian pasta company operates in the specialist durum wheat market around the world.

“We use 1.4 to 1.5 million tonnes a year of durum,” he said. “It accounts for 40% of pasta net sales (worldwide). Eighty percent of semolina used in our plants is produced in our mills.”

Durum wheat accounts for 5% of the total wheat crop. “Durum wheat is more resistant to dry weather and less resistant to cold weather,” he explained. “It’s mostly a cash market. There is no futures market that is working properly.”

The sensitivity of durum wheat to disease is a factor in its lower production. “One reason durum is grown in arid areas is that it is more susceptible to fusarium,” he said.

The flow in the world market in durum grain is mainly from North America to Europe. “Consumption is mainly concentrated in the Mediterranean area,” he said. “Fifty percent of export business is done by Canada.”

He expressed some concern over the possible effect of changes to Canada’s marketing system. Private companies might have a more short-term approach than the Canadian Wheat Board (CWB). The CWB had more control over farmers, although in theory the advent of a greater number of sellers meant greater liquidity. There would be new logistic patterns and a risk of less focus in breeding on clients needs.

Production of durum is not growing while volatility has increased recently.

“Consumption for food usage is quite stable,” he said. “In the main developing countries when they consume pasta, they use common wheat. There is an increasing gap in breeding which means you have less growth in yield than, for example, common wheat,” he said.

He also noted strong competition for land from biofuel production.

“The supply and demand balance is tightening,” he said. “It’s not a transparent market. So it’s very important to have market intelligence.”

Barilla’s approach to risk is to turn it into an opportunity. It’s dedicating resources to long-term (five to 10 years) market intelligence with the objective to anticipate future trends. It’s also developing contracts in collaboration with suppliers in key producing areas, with innovative pricing formulas, such as cost-plus fee cultivation contracts, contracts based on a cap and floor price range, long-term coverage and financial hedging. The company-wide risk management plan is to define a purchasing strategy linked with the company strategy (selling prices, profitability levels, etc.), with a clear definition about purchasing target prices, volumes and coverage strategies.

Cultivation contracts, with 250 suppliers in eight countries, account for about 50% of the Italian durum wheat supply.

Canadian grain market opens up

The liberalization of the Canadian market to which Emilio Ferrari had referred was explained by Brent Watchorn, senior vice-president, grain and crop input marketing for Richardson International Ltd. of Canada.

“As of Aug. 1 of this year, we will be opening up that market,” he said. “We have existing contracts that we will execute. Already in the Canadian market you see players such as ourselves that are buying wheat from producers.”

They’ll also be doing export deals. “We cannot physically execute those until Aug. 1,” he said.

Some farmers will continue to supply the CWB. “The wheat board doesn’t do price pooling that farmers had become accustomed to,” he said.

He noted how a fall in the number of elevators had been combined with a rise in the number capable of loading 100-car trains. “This just demonstrates the amount of capital that players in Western Canada have put back into their facilities,” he said.

Canola is increasingly important. “Since 2001-02, canola has really become a key crop in Western Canada,” he said.

Canola processing capacity has risen. He put the amount available in 2008 at “about 5.4 million tonnes of crush capacity in Canada and the U.S., with most of it in Canada. In 2012, we see crush capacity going to 9.3 million tonnes. By 2016, we could probably go to 12.2 million tonnes.”

Canola is a profitable crop. “If you look at producers in Western Canada, they are growing canola because of the returns,” he said.

And another oilseed is becoming prevalent north of the U.S. border. “Soybeans continue to push north out of the U.S. into Canada,” he said.

He said Canadian producers are becoming more sophisticated. “Producers are getting much more aware of what global supply and demand is,” he said. “They are doing very well financially.

“The wheat board has a lot of customers globally that they have good relations with. I think they will maintain those relationships.”

Iraq seeking bigger role

Khairullah Hasan Babakr, minister of trade of Iraq, used his speech at the IGC Conference to stress Iraq’s long history in the grain sector and its determination to again become a major player. “Agriculture in Iraq has a long history,” he said. “It’s one of the oldest areas where wheat was planted. Iraqi grains, until 1979, used to be exported to the world market.”

A series of wars with Iran, Kuwait, an international coalition, and the economic siege that followed them led to a massive loss of markets. “Iraqi has become one of the biggest importers,” he said.

He put the annual import demand at 4.5 million tonnes of grain, including approximately 3 million tonnes of wheat.

“There are measures by the Iraqi government to plant wheat, barley and rice,” he said. “Production has increased from 300,000 tonnes in 2003 to 2 million tonnes in 2011.”

Products including wheat, sugar, rice, vegetable oil and baby milk are distributed to Iraqis under a food card system.

“Our real need is for and a half million tonnes for this distribution,” he said. “In 2011, Iraq imported 2.5 million tonnes of wheat.”

Babakr predicted reduced local production in 2012 because of a lack of rain in producing areas. He stressed Iraq’s unique role in rice production, particularly the production of its unique amber rice. “This type of rice is only available in Iraq, and we want to keep it in production,” he said. “The ministry of agriculture is encouraging production, but production is declining.”

The government also encourages production of wheat, barley and other grains. “The government distributes seeds and subsidizes these products,” he said.

Chris Lyddon is World Grain’s European editor. He may be contacted at: chris.lyddon@ntlworld.com.