There is enough land available to satisfy the world’s demand for extra grain production. It needs better infrastructure and supportive policies, but the Black Sea region can come up with the extra capacity to handle increased demand for years to come, a recent conference in London was told. Those attending the HGCA’s Grain Market Outlook conference also got to hear about the rising cost of fertilizer, the attitude of bankers to agriculture and the industry’s increasing frustration with European regulators’ foot-dragging over crop biotechnology.
"The world actually has a lot of area to give," Simon Bentley, head of grains at LMC International, told the conference. "For the foreseeable future, there is enough area for grain."
He described the Black Sea region as one of the few areas in the world with tens of millions of hectares of additional and accessible arable land to sow to grains and oilseeds. "If we get the price, we will get the area response," he said.
Since 2004, the region had added 7 million hectares to planted area of grains. "It’s provided most of the swing capacity in the world’s grain market. When you look around the world at where agriculture can expand, two regions jump out: South America and this one," he said. "The U.S. is full."
The Black Sea region has the potential. "Yields are comparable with the best in the rest of the world," he said. "Thirteen percent of the world’s land surface area is in Russia alone."
However, he identified several major hurdles the region would face. In the long term, the biggest challenge was infrastructure, with the poor condition of rail links to ports adding to supply chain costs. He put the cost of getting from the farm to f.o.b. at $65 a tonne. "They’re actually discussing increasing the amount of rolling stock," he said. "They’re taking control."
In the short term, the region is a victim of its own success, having expanded area at a time when stocks have risen. He expected demand growth to cure the problem.
For now, any extra expansion is more likely to come from increased yield as land is taken over by bigger, more efficient farms. "As you transfer land from traditional enterprises to more modern enterprises, you roughly double yields," he said.
A recovery in livestock production will also play a role in encouraging more wheat production. "As livestock recovers slowly, you’ll start to see domestic grain area recover in this part of the world," he said.
The events of the last two years could have been dramatically different. "If we hadn’t had a financial crisis and the Black Sea hadn’t responded, you would have seen prices you wouldn’t believe," he said. He suggested that the U.S. would have responded by curtailing biofuel production to put more grain onto the market.
"At $100 a tonne, they’re going to remain a low cost and important source for wheat," he said.
He was concerned about what might happen to Russia’s big grain stocks. "In the near term, there’s eight million tonnes of wheat sitting in Russia that they don’t actually want to hold," he said.
The Russians were watching the construction of two big ethanol plants, currently under way in Britain, with interest. The British government has been getting worried about where food is coming from and its Department for the Environment, Food and Rural Affairs has been looking closely at the situation. "More, not less, trade is needed and agriculture must be allowed to respond to world market signals," Susanna May, deputy director of its Food and Farming Group, told the conference. "Our openness to trade does make the U.K. very resilient."
The agricultural industry has a good record. "Global production consistently outpaced global population," she said, but still advised caution. "We can’t be complacent."
FERTILIZER COSTS EXPECTED TO RISE
"We believe that in 2010 nitrogen fertilizer prices will move upwards," Marina Simonova of British Sulphur Consultants predicted. "This will be supported by improved demand." Farmers would be compensating for reduced fertilizer applications in 2009, while the industry had rationalized in the wake of the financial crisis, as well as running down inventories.
She stressed the importance of gas markets in predicting price moves for fertilizers. The largest cost component (gas) of nitrogen fertilizers leads to producers’ exposure to the volatility of gas markets," she said.
BANKERS STILL HAPPY TO LEND TO AGRICULTURE
The worldwide financial crisis has caused many farmers to worry about whether they’ll be able to get credit, said Martin Redfearn, National Agricultural Specialist for Barclays. "The question we’re always asked is can we still get money," he said. "Is credit still available? Yes."
Its long-term nature helps to make farming more attractive than some other industries when it comes to borrowing money. "Agriculture is about long-term stuff," he said. "Long-term strategies need long-term funding.
The combination of many farmers’ conservative attitude to lending money and the conservative attitudes of their bank managers to lending it to them is the ideal combination from the bankers’ point of view. "We love lending to agriculture because they pay us back," he said. "We just continue to trade with the farming industry just as we have for the last 300 years."
"I’m not sure any of you who grow broad acre crops will have noticed the so-called crisis," he said. "Does it justify a change in long-term strategy? In my view, no. Broadly speaking, it seems to us in banking that nothing much has changed."
He did warn that high demand when supply is limited would push up the cost, whatever the government thinks money should cost. "Base rates are 0.5%," he said. "So what?"
IRRITATION OVER GM
The conference’s closing questionand-answer session gave a snapshot of the industry’s burgeoning irritation with regulators over GMOs. "There is no such thing as GM-free now," said Andrew Knowles, strategy coordinator at BPEX, the HGCA’s equivalent in the pigmeat industry. "Most producers are paying a £60-a-tonne premium to secure IP (identity preserved) GM-free soya. I don’t know how much of it would stand up if it was tested."
National Farmers Union Cereals Advisor Guy Gagen expressed disappointment with the attitude to GM at U.K. and European levels of government. "We’ve got enormous potential damage to our livestock sector who are the biggest customers for our cereals."
Mark Stevens, a farmer from Devon, was enthusiastically pro-GM after a study tour in Brazil gave him a chance to see the environmental advantages. He was particularly impressed by a type of grass bred for increased nitrogen production. "We could do without artificial nitrogen," he said.
Mark Hall of Syngenta, one of the biggest companies involved with biotechnology, criticized the European approach to regulation. "There is plenty of technology to bring in to Europe, but the trouble is that the regulatory environment has prevented us from doing so," he said. "A lot of the new technology that is coming in the crop protection industry is really being targeted at other parts of the world."
"I lay the blame pretty firmly at the door of the government and DEFRA," said farmer Rad Thomas, an HGCA board member. "They’re obsessed with food security and environment, but at the same time they’re denying us the chance to use GM technology."
Jerry Dyson, strategic sourcing manager for Molson Coors reminded delegates that market acceptance was the important hurdle for genetically modified crops. "Until there is a market for products made from GM, we’re not going to change our stance, which is GM free," he said.
Mark Button, arable manager of farmers co-operative Dengie Crops, underlined the importance of consumer attitudes. "Our customers in the U.K. are not particularly keen on GM," he said. "The fact that they don’t want it is the important thing. Our customers on the continent don’t want it to an even greater extent."
HGCA Chairman Jonathan Tipples offered the authority’s view. "Our policy is that we will be driven by the science," he said. "The problem is that it is being driven by certain newspapers and pressure groups."
He had his own views as a farmer. "I won’t grow it until someone wants to buy it."
The biotechnology companies had taken the wrong approach. To gain consumer acceptance, GM crops had to show advantages for the consumer rather than the farmer. "Until there’s something for them, they won’t be interested," he said.
There are two big ethanol plants under construction in the U.K., and many in agriculture and the grain market expect them to change the way the market works dramatically. David Maxwell, grain procurement and animal feed manager for one of them, Vivergo Fuels, was asked what effect it would have and what type of wheat he’d be looking for. "It’s a great opportunity for U.K. agriculture and U.K. farming," he said.
He is not looking for very specific quality. "When you’re looking to purchase a million tonnes of wheat into a single site, your opportunities to pick and choose are limited," he said. "It’s difficult to be picky."
He stressed that the industry in Britain is in its early stages. "It has to mature," he said. "It’s a new industry."
Chris Lyddon is World Grain’s European editor. He may be contacted at: