A Roller Coaster Ride Ahead?

by Teresa Acklin
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Grain officials see precarious supply/demand balances and greater price instability into the new century.

By Diane Montague European correspondent

   The next 10 years will see more price instability in world grain markets than at any time in the past 50 years, and political and economic changes, population growth and production technology will fuel a steadily expanding supply and demand situation that will become even more difficult to predict, according to speakers at the third annual World Grain Conference in Brussels, Belgium.

   Conference speakers had little doubt that production would be able to keep up with demand. However, the emergence of huge and fast-growing new markets, inevitable blips in production and the reduction of government-funded stocks all point to a period of extreme unpredict-ability, they said. The conference was organized by Agra Europe (London) in association with Sosland Publishing, publisher of World Grain.

   "I am absolutely convinced that over the next 10 years, the market will be a rough and rocky ride in which price fluctuations will increase," said Brian Oleson, executive director for planning and communications with the Canadian Wheat Board.

   Assuming no major breakthroughs in technology, the C.W.B. estimates that annual world wheat production will increase to 593 million by 2000 and 625 million by 2005, compared with the 1989-93 average of 559 million tonnes annually. The increases would represent an annual growth rate of slightly more than 1%, compared with about 0.67% in the 1970s and 1980s. World trade is forecast to increase to 104 million tonnes in 2000 and 118 million by 2005 from just under 100 million in the 1989-93 base period.

   Dr. Oleson said the actual increase in trade would be much more dramatic because the picture was distorted by the recent large reduction in imports by the former Soviet Union.

   For many years, the F.S.U. had averaged between 15 million and 20 million tonnes a year, equal to nearly a quarter of world trade. But since 1993-94, imports have dropped sharply; if that decline were excluded, the underlying strength of the market becomes clearer, showing an average growth rate of 1.1 million tonnes per year, he said.

Asian Outlook

   The biggest overall increases in imports in the next 10 years, said Dr. Oleson, will be in Asia Pacific countries; imports by 2000 are expected to rise to 45 million tonnes, accounting for one third of total wheat trade, from 33 million. Other big growth areas will be parts of Africa, the Middle East and South America.

   But the make or break factor in the world wheat market is China, which is now the largest producer and importer of wheat in the world.

   "With an annual production of over 100 million tonnes, a 10% fluctuation in output can dramatically change import needs from one year to the next," noted Dr. Oleson.

   In the past three years, China's wheat imports have varied from 4.5 million to 12 million tonnes. Nevertheless, the C.W.B. expects imports to rise by 35% over the 1989-93 base period to 16 million tonnes by 2005.

   The emergence of Asia as the driving force in world grain markets was also highlighted by Germain Denis, executive director of the International Grains Council. Focusing his remarks on Far East Asia, Southeast Asia and the Indian sub-continent, Mr. Denis said import requirements in these regions would sustain longer-term world grain prices, while production in Asia would remain a major influence on world grain market stability.

   In 1995, Asia accounted for 45% of global grain imports excluding rice, as increasing prosperity in many countries meant Asians were eating more and better food. Even some countries that are virtually self-sufficient in grain will be limited in expanding production further by the availability of land and water.

   Mr. Denis noted that changes in diet were also promoting trade in value-added grain products such as meat and noodles. In fact, these are expanding faster than trade in grains.

   But grain imports will not necessarily expand at a regular pace, Mr. Denis said. Asia is still, on average, 90% self sufficient in cereals, he said, and in the past 10 years, wheat and coarse grains production has expanded by 23% and rice production by 17%. China and the Indian sub-continent now produce more wheat together than the European Union and North America combined, but the good crops of recent years might not be repeated every year, he noted.

   Within the overall regional figures, there are very large variations among the different grain economies of Asia, for both wheat and coarse grains, Mr. Denis noted.

   "Japan is by far the largest grain importer in the world," he said. "But it is a mature market offering stability but no further growth."

   On the other hand, markets in Southeast Asia are growing fast, with rapidly expanding livestock industries creating greater requirements for coarse grains, he said.

Central Europe Outlook

   Two speakers highlighted Hungary, Romania, Slovakia, Poland — and Russia — as major areas of uncertainty in terms of grain production and demand for the foreseeable future. Since the breakup of the Soviet Union, production has fallen sharply, but this could change once economic and social conditions settle down. The implications for the European Union's agricultural policy are considerable.

   Daniel Lacfi, chairman of the commodity trading organization Gabona Company Ltd. of Budapest, said that grain production in the four Central European countries in the 1990s ranged between 52 million and 61 million tonnes, equivalent to 25% of E.U. production. Wheat production in the past five years has ranged between 17 million and 23.5 million tonnes, which is only about two-thirds of 1980s output.

   The main reasons for the fallback were uncertainties over land ownership following privatization and a general shortage of finance affecting availability of reliable machinery and the use of fertilizers, pesticides and quality seed. Dr. Lacfi said he expected production could recover slowly as the economies of these countries improved, but output would return only to the production levels of 1980s by 2000 and would not substantially exceed them even after that.

   However, he did not think that expanding production in these countries would add to the E.U.'s problems of overproduction.

   "There is a widely felt and discussed worry in the E.U. countries that with the enlargement of the E.U., the grain surplus of candidate countries would cause a problem," said Dr. Lacfi. "I cannot share these worries.

   "The level of food consumption in these countries is very low. Meat consumption compared with the 1980s dropped in several places by up to 50%. By the expected gradual increase in people's income, a good part of the increased production should be absorbed locally," he said.

   Similar problems of reduced production in the current year and lack of resources for investment in future years are affecting Russia. Dr. Andrei Sizov, president of SovEcon Ltd., the Moscow-based analysis and consulting service, said that despite some improvement in grain production in 1996, there were still serious supply problems.

   However, a poor harvest in the Ukraine and shortage of finance for imports from outside the Commonwealth of Independent States was likely to mean that total imports would fall short of actual requirements.

   Dr. Sizov said that Russia's 1996 grain harvest was expected to total only 70 million tonnes, the third-lowest figure in the past 30 years. The main reasons are a drop in the area under cultivation to 53.8 million hectares, a serious summer drought and lack of money to pay for fertilizers, seeds and machinery repairs. The situation was made worse by the fact that grain stocks were also very low at the start of the season, having been cut by 13 million tonnes in 1994-95.

   Despite the decline in feed requirements, Dr. Sizov said he expected Russia would import between 7 million and 8 million tonnes of wheat and coarse grains in the 1996-97 marketing year. Most of this will come from the C.I.S. countries, particularly Kazakhstan, and are likely to be financed in a new way by credit guarantees from Russian commercial banks rather than through central government purchasing, he said.

Policy Considerations

   The problems facing policymakers and the often unfortunate impact of their decisions on the market came out in surprisingly frank remarks from David Roberts, deputy director general for agriculture in the European Commission.

   The decision to fix the normal rate for area set-aside in Europe at 17.5% rather than 15% was, he said, a recognition by the Council of Ministers that "the best assumption one can make about the future is that it is unknowable and that it would be wrong to weaken a long-term supply control instrument because of predictions of long-term world cereal shortages."

   Mr. Roberts said this recognition that it was wrong to base long-term policy decisions on short-term conjectural situations was welcome and almost surprising considering how frequently in the history of the Common Agricultural Policy the policymakers had failed to take the longer view. Recent decisions on stocks and set-aside levels have contributed to the market pressures in the past 12 months, he said.

   "In retrospect," said Mr. Roberts, "a more cautious stock reduction policy would have enabled the stocks to be disposed of more cheaply and a greater stock availability in 1995-96 would have been extremely useful in enabling us to avoid the excessively high market prices we saw during that marketing year.

   "This in turn might have helped the Council to make smaller reductions in set-aside than those we have seen over the last three years and to have reduced the risk of a rather abrupt upward movement in set-aside in 1997-98," he admitted.

   Outlining the likely direction of the next stage of the reform of the CAP and the changes necessary to bring in the Central European countries, Mr. Roberts said there would be a further move away from supporting farm incomes through prices and more use of agricultural support provided by direct aids.

   "The days when rural communities could best be supported by sustaining high agricultural prices are numbered," he said, adding that the part played by export refunds or production-linked subsidies seemed destined to decrease.

   Another speaker forecasting an exciting time for world grain markets was George Pope, minister counsellor for agricultural affairs with the United States mission to the European Union.

   The changes brought about by the farm policy reforms in the United States and the E.U., along with the next round of multilateral trade negotiations, will change the dynamics of the market place further. In addition, the effect of governments in reducing their roles as holders of market stabilizing stockpiles would create "heretofore unseen price volatility."

   Mr. Pope said the impact of governments in bringing about boom and bust situations in the market place — with policies that were wrongly timed or difficult to reverse — could be seen in the pattern of subsidies, surpluses and restrictions since the beginning of the century.

   "Policies are often out of date before they are finalized," said Mr. Pope. "In this century, the velocity of change in agriculture has far outpaced the ability of policymakers to develop programs that are in step with the realities of the market place."