Global Grain outlook

by Susan Reidy
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Dry weather in southern Russia and Kazakhstan coupled with the ongoing political struggles in Ukraine will be critical factors in the success of the wheat crop from the region, according to one trade expert.

While the wheat crop in Ukraine might be adequate, a key problem for this year’s harvest is the lack of cash flow, said Michel Portier, chief executive officer of Agritel, Paris, France, during the Global Grain North America Conference this May in Chicago, Illinois, U.S. Portier joined several global trade experts in discussing supply and demand factors as well as other issues impacting grain prices globally.

It is very difficult to transfer funds to Ukraine, he said, and the farmers need cash to buy things such as fertilizer and other chemicals. That’s why it’s critical the weather continue to be favorable, he said.

He noted that 70% of the nation’s wheat export market comes from the western region, which could be a problem if Russian President Vladimir Putin sets his sights on the area.

Portier said wheat production in Ukraine is expected to be down 3 to 4 million tonnes from the 22 million tonnes produced last year. Russia will also be down 4 million tonnes to about 48 million tonnes. He estimated Kazakhstan’s harvest at 15 million tonnes, but said the figure was optimistic given the dryness in the region.

Together, production from the three countries will be down about 8 million tonnes from last year. Portier said the nations will still be able to export, but there is no place for adversity.

Soybean crushing

Lin Tan, executive president of Hopefull Investment and Holding, a soybean crushing company in Beijing, China, explained the crushing industry in China and its outlook for the current harvest.

China’s soybean crushing capacity is large at 135 million tonnes, and new plants are built every year, adding 5 to 10 million tonnes of new capacity, Tan said. Crushing facilities can be divided into three categories — state-owned, foreign and private companies.

In explaining the expansion, Tan said crushing companies like to occupy the market so they build plants in different locations. They also believe the market will go in the future, so they build new facilities trying to work ahead of the market, he said.

The most important reason for the large capacity, Tan said, is that companies use it as a hedging function. China typically has a negative crush margin. Last year, there was only a few weeks when the margin was positive.

“When you have a huge crushing capacity, a company can play around with the processing capacity,” Tan said. “If the market is good, they can speed up processing. If the market is not good, they can slow down.”

A large import volume of soybeans is expected this year, he said, partially because some cargoes were lost in Brazil due to poor logistics. To make up for that loss, importers started booking more U.S. soybeans.

China is producing less soybeans, he said, with farmers changing more land to corn and rice, while at the same time incomes are improving. When people have more money, they will spend it on food. Additionally, there is a migration of farmers into the city, where they can make more money.

“There will be a big demand in the future for meat and oil, which is why we will keep importing more soybeans in the future,” Tan said.

In China, there are two markets for soybeans — meal for livestock feed and oil, which is mostly used for cooking. Meal isn’t imported, but oil is, Tan said.

“The soybean import market is driven by the need for meal, not oil,” he said. “If we don’t have enough oil, we can import it.”

The livestock market increases 5% to 7% each year, which means the country needs a 5% to 7% increase in soybeans each year to provide the livestock feed.

“Soybean imports every year will have to increase 3 to 4 million tonnes,” Tan said. “If you do that calculation for 10 years from now, you can expect the country will import 100-110 million tonnes of soybeans in that period.”

Wheat outlook

Michael O’Dea, senior risk management consultant with FCStone, New York City, New York, U.S., gave an overview of the world wheat market, focusing on the winter wheat crop in the U.S. The hard wheat crop in the southern plains, which provided 66% of that wheat variety in the U.S. last year, is in very poor shape, he said.

During a recent visit to western Kansas, O’Dea said he saw that the wheat is short and has an extensive amount of freeze damage. He dropped his harvest estimate from 730 million bushels to 700-705 million bushels.

“What you’re going to see is a tremendous amount of abandonment, levels that we haven’t seen since the 2006-07 crop,” he said.

But what it makes even more interesting is that the crop in the northern-tier states is going to be good, which means exports are going to push further north, O’Dea said. That means it will compete for the same infrastructure as spring wheat, winter wheat, corn and soybeans.

Brazil was the big market changer in hard wheat this year. The U.S. exported 4 million tonnes of wheat there this year, simply because there wasn’t much else available. Brazil has started its wheat harvest, and the acres are up, which means the potential for a very good wheat crop.

However, El Niño could bring rains to southern Brazil, which could cause quality issues, O’Dea said.

“Typically it’s a feed wheat,” he said. “If they run into quality problems, they will be more reliant on the U.S. and Argentina.”

Growth in livestock sector translates into more feed, protein demand

With incomes growing around the world, the livestock sector is experiencing a dynamic time, said Randy Blach, chief executive officer of CattleFax, during the Global Grain North America Conference in Chicago, Illinois, U.S., in May.

Blach provided an overview of the trends and developments in the livestock industries and what that means for feed and protein demand. He noted that as incomes grow, there is a correlation with people wanting a higher quality meat protein in their diets.

“When we’re talking about beef, pork or poultry, all those items tend to benefit when we see rising incomes,” Blach said.

When ethanol production started taking a large chunk of the corn market in the early to late 2000s, livestock producers couldn’t stay profitable. Cost gains went up so rapidly that livestock production didn’t grow and remained flat for the last seven to eight years, he said.

But now that the corn market has answered the new demand brought by ethanol, the protein output in the U.S. is going to grow fairly significantly over the next four to five years, assuming there are no hiccups relative to the crop, Blach said.

He noted that the markets are very connected, and one can’t change without having an impact on the other. If corn prices can stay in the $3.50 to $6 range per bushel, there will be a higher percentage of total corn and soybean production from the U.S. exported as protein.

“We’re already exporting 40 pounds per capita, and that will be over 50 pounds by 2020,” Blach said. “There’s an opportunity for everybody in that.”

Overall, about 51% of the 2013-14 corn crop will go toward feed usage, assuming all ethanol co-products come back into the market to replace corn.

Along with the impact of ethanol, drought has hurt livestock profitability and therefore total animal numbers. Since 2000, beef cow numbers are down 19% or 9 million head.

The numbers have been declining for quite some time, Blach said, but part of that is also efficiencies. The same amount of meat that used to require five calves now only takes four.

“Don’t get hung up so much on the numbers,” he said. “Total cattle inventory is the smallest since 1952, but the beef production is 2.6 times larger. We don’t need to see cattle grow 10 million head, we just need to see 2 to 3 million head.”

He expects to see growth in beef cattle by 2016. Dairy cows have already experienced growth, with an addition of 1 million head since 2000.

“We are feeding more dairy animals than we have in any time in the history of our industry,” Blach said. “About 20% of the feed supply will go to dairy animals. This has been change that is happening around the globe. “

Pork production was expected to grow 2% this year, but with the PEDv virus killing young pigs, that has changed to a 4% drop, he said. Pork prices are at record highs.

Broiler production was the first to benefit from lower corn prices, and output is expected to be up 2% to 3% this year.

“There is potential for poultry output to grow even faster,” Blach said.