A bullish forecast
August 01, 2007
by Arvin Donley
If the main forecasting institutions are correct, grain and oilseed commodities are entering a boom era when prices will steadily climb over the next decade.
In May, the European Commission (EC) issued its 2007 Outlook for World Agricultural Commodity Markets based on the latest 10-year projections by the Food and Agricultural Policy Research Institute (FAPRI), the U.S. Department of Agriculture (USDA) and the Organization for Economic Cooperation and Development (OECD) and United Nations’ Food and Agricultural Organization (FAO).
The report concluded that demand for grain- and oilseedbased biofuels is currently driving commodity prices higher, and that trend is expected to continue for the foreseeable future.
COARSE GRAINS After a two-year period in which production lagged behind consumption, causing a draw-down of global coarse grain stocks, output is expected to increase considerably in 2007-08 in response to current high prices. The EC report said this will occur mainly from an increase in acreage and a return to normal yields.
FAPRI, USDA and OECD-FAO are expecting continued annual growth of 1.2% to 1.4% in production and consumption, driven by feed demand and increasing industrial use. The global stocks-to-use ratio of maize, which was just 12% in 2006-07, is expected to remain low over the next decade.
The U.S., by far the largest producer and consumer of coarse grains, will likely see total maize acreage rise to nearly 900,000 acres — the highest total in more than 60 years — by 2010, according the USDA. The shift toward maize will primarily be at the expense of soybeans.
The USDA also projects that biofuels will consume more than 30% of the U.S. maize crop by 2010. Because of the higher maize prices, feed use will drop 10%, accounting for between 40% and 50% of consumption. Likewise, maize exports are predicted to fall, reducing the U.S. share of global trade to between 55% and 60%. Typically, the U.S. accounts for 60% to 70% of world maize exports.
The report said trade in coarse grains is expected to grow even faster than consumption, and if the projections materialize, world trade could rise by 15 to 24 million tonnes.
Both FAPRI and OECD-FAO project that China, currently the world’s second-biggest consumer of coarse grains, will see stronger growth in consumption than production. Thus, the country is forecast to go from being a small net exporter to a net importer of around 4 to 5 million tonnes.
Coarse grains consumption is also expected to grow at a faster pace than production in the European Union (E.U.), causing net exports to fall to 5 to 7 million tonnes by 2015-16, according to OECD-FAO and the EC. By that time, Ukraine and Russia are expected to have a higher combined net export capacity than the E.U. OECD-FAO and FAPRI are both forecasting a sharp jump in coarse grain exports from Argentina, predicting a rise from 12 million tonnes to 17 or 18 million tonnes by 2008-09. The outlook for global coarse grain prices is bullish, with FAPRI projecting that world coarse grain prices will stay at U.S.$150 to $160 per tonne until 2016-17, 50% above the average of the past decade.
WHEAT The groups are forecasting a slightly less dynamic scenario for wheat. Production and consumption are expected to grow slowly, with expectations for annual growth ranging from 0.7% (FAPRI) to 1.2% (OECD-FAO). About 80% of total wheat use is for human consumption, and per capita consumption is falling.
FAPRI and USDA are projecting that wheat prices will remain high, above $200 per tonne, which is 40% above the average of the past decade. Despite the high prices, no increase in planted area is expected.
The report also said that in the E.U., by far the world’s largest wheat producer and consumer, net exports are expected to rise to 10 to 14 million tonnes per year by the end of the projection period, as production grows faster than consumption.
Projections for China, the world’s second-largest wheat producer, have changed over the past year as demand has slowed. Last year, OECD-FAO and FAPRI forecast China to be a net importer by the end of the projection period, but now the world’s most populous nation is expected to be roughly self-sufficient.
FAPRI expects India, a small net exporter for the past six years, to be a net importer of about 3 to 4 million tonnes per year over the next 10 years. Slow growth in wheat production and consumption is expected in the U.S., which should remain the world’s top exporter, with a market share of approximately 25%.
With production forecast to expand, Australia is expected to see its exportable wheat surplus grow to around 20 million tonnes by 2015-16. For Canada and Argentina, export prospects are positive, with about 15-17 million tonnes and 11 to 12 million tonnes, respectively, expected to be shipped, as production is boosted by high prices.
Regarding the future export picture, the biggest disagreement is over Russia. OECD-FAO projects net exports of 5 to 6 million tonnes (below the export peak of 9 million tonnes in 2005-06), based on robust domestic demand, while FAPRI believes the surplus will be double that amount.
The organizations agree that Ukraine’s exports will stabilize at 6 million tonnes per year.
OILSEEDS The biofuels boom has affected the oilseeds markets but to a lesser extent than grains. In particular, rapeseed and rape oil prices increased by nearly onefifth during 2006, thanks to increased demand for rape oil for biodiesel.
However, oilseeds and vegetable oils are in plentiful supply. World soybean stocks are at record levels, and with a large South American crop expected, the surplus should grow even higher in the immediate future.
World oilseed production and consumption have grown strongly over the last 25 years, and although it could still slow down, most analysts are still expecting growth of around 2.3% per year over the next decade, which would be double that of cereals.
Because the increase in yields likely won’t be sufficient to meet growing demand, global oilseed acreage is projected to increase by about 1% per year.
The organizations agree that trade will continue to grow faster than consumption, and could increase by 20 million tonnes over the projection period. Prices — already relatively high — are expected to continue on an upward trek. FAPRI, for example, is forecasting prices to increase by 20% over those of the past 10 years.
With more of its soybeans earmarked for the domestic biodiesel industry, the U.S. may well be overtaken by Brazil as the world’s biggest oilseed exporter. U.S. exports are expected to fall from 30 million tonnes in 2006-07 to between 23 and 26 million tonnes by the end of the projection period.
Meanwhile, Brazil is expected to approach the 30-million-tonne mark in exports in 2007-08, and FAPRI and USDA believe that Brazil’s exports may even double by 2015-016, giving it nearly 50% of the market share. OECD-FAO takes a more conservative outlook, predicting that Brazil’s oilseed exports will reach 38 million tonnes. As for Argentina, South America’s second-largest oilseed producer, the organizations project annual export totals ranging from 6 million to 13 million tonnes.
China’s insatiable appetite for oilseeds is expected to grow even more, as analysts believe the world’s largest net importer may double its intake to about 50 million tonnes, absorbing half of the oilseeds traded in 2015-16.
There is significant disagreement between the various agencies on the path the E.U., the world’s second-largest import- er of oilseeds, will take. FAPRI, OECDFAO and USDA anticipate net imports of 13 to 18 million tonnes, while the EC projects an import total of 35 million tonnes by 2013-14. Which projection is correct will depend on whether the E.U. responds to growing biodiesel demand by increasing oilseed crush capacity or by importing more vegetable oil. However, there is agreement that the oilseed trade axis between the U.S. and E.U., which dominated the landscape not too long ago, is being replaced by trade between South America and China, which in 10 years are expected to account for roughly half of the oilseed trade.
Growth forecasts for production and consumption of oilseed meal are in the range of 2.3% to 2.7%, but meal prices are expected to weaken during the projection period by 5% to 10%, compared to the average of the past decade.
The trade outlook for the two biggest oilseed meal exporters — Argentina and Brazil — is positive. By 2016-17, Argentina is expected to increase net exports from 27 million to 35 million tonnes. Brazil’s exports could reach 18 to 20 million tonnes. If that projection comes to fruition, the two South American countries would account for 75% of global exports in 2016-17.
The E.U., by far the biggest importer of oilseed meal, is likely to increase its net imports by 2 to 4 million tonnes to reach 25 to 30 million tonnes.
Vegetable oils are expected to continue to be the fastest-growing sector within the oilseeds complex. FAPRI projects that growth in consumption and trade will increase by between 2% and 4% per year. Based on that strong demand, FAPRI expects prices to increase by nearly 50% over the next 10 years, compared to the average over the past decade. Last year, OECD-FAO anticipated a price increase of about 20%.
By 2016-17, FAPRI predicts that twothirds of all vegetable oil exports will come from Malaysia and Indonesia, which are both significant producers of palm oil.
Among the world’s major soybean producers, Argentina’s vegetable oil exports are forecast to grow from 7 million tonnes to nearly 9 million tonnes. Brazil’s exports could also increase from 2 million tonnes to around 3.5 million tonnes.
The two largest importers of vegetable oil — China and India — are expected to remain in those positions. OECDFAO foresees little change in Chinese imports (7 million tonnes), but FAPRI forecasts an increase to between 8 million and 13 million tonnes.