Demand growing in a volatile market
July 01, 2007
by Meyer Sosland
The growth of biofuels, rising population and the increasing affluence of some of the world’s biggest developing nations are fueling rising demand for grains around the world. The industry is in high spirits, but it’s going to have to get used to volatility, delegates at the International Grains Council’s annual conference in London on June 12 were told.
Karel Valken, Global Head Trade and Commodity Finance Agri Commodities at Rabobank, spoke optimistically about the grain sector. "We’ve been experiencing in the last few years an unprecedented growth in our industry," he said. "There’s a good spirit going on in the industry."
He predicted sustainable growth in demand for grain, with demand in 2015 up 14% from the 2005 figure. He said it is partly driven by the world meat market, which is growing with affluence. "People go from rice to fish to meat," he said.
Valken also predicted growth in the world meat market of 25% over the next decade, driven by growing markets in developing countries.
Rabobank puts 2006 ethanol production in the United States (U.S.) at 16.1 million
tonnes, 90% of it produced from maize (corn). Brazil produced 14.4 million tonnes from sugar cane, while the European Union (E.U.) produced 1.6 million tonnes, 80% of it from cereals. "If you look at the numbers for 2009, you see growth of 100%," he said.
Price rises had triggered an expansion in grain production, and the market was becoming more attractive for producers, consumers, traders and investors. "Grain markets are becoming more attractive for all participants, even for the banks," he said. "Volatility is driven a lot by new participants in the market."
"The funds are constantly surprising the physical players," he said. "On the other hand, they provide the liquidity that we need."
Lord Jeff Rooker, British Minister for Sustainable Farming and Food, told the conference that the grains sector will have to get used to change. "It’s clear that the grain and oilseeds sector faces a future where market uncertainty will be more prevalent," he said.
He wants to see freer markets. "It is clearer than ever that a global liberalized market is the right solution in the long term," he said. "We’ve seen in the last year that the grain and oilseeds markets are truly global."
Rooker supports a successful conclusion to the Doha Development Round (DDR) of trade negotiations. "The European Union is completely committed to a successful DDR conclusion by the end of this year," he said. "The European Union’s done much to put its own house in order. We’re all watching carefully the preparation of the U.S. farm bill," he said.
He also backed the European Commission’s suggestion that production constraints like set-aside should be ended when the E.U.’s Common Agricultural Policy goes through its 2008
Health Check. The growth of biofuels has made that an even more desirable aim. "In the European Union, we need to free the arable sector to produce for this new sector by removing constraints on production," he said.
CHINA’S GRAIN SUPPLY The grain sector in China has gone through enormous changes, but there’s no need to worry about its ability to supply itself with grain, Qiangming Shang, director of the China National Grain and Oils Information Center, told the conference.
"There is no big problem in Chinese domestic supply," he said. "The Chinese grain market will maintain stable development, and we will continue to open our market to the outside world."
Wheat production in China peaked in 1997 at 132 million tonnes. But by 2003, it declined to a point in which production was much lower than demand.
Since then, there has been a recovery, and Shang was hopeful that would continue. "According to our information now, we think wheat production will maintain the level of last year and maybe have a slight increase," he said. "That is because in some mixed areas farmers prefer to plant wheat rather than rapeseed." He put China’s wheat crop at 105 million tonnes in 2007.
The rise is expected despite a longterm decline in the area planted. "For 2005-06, the planted area has experienced a certain amount of recovery, but in the long term it will continue to decline," he said.
The government had moved to support the wheat market, requiring wheat to be sold in designated wholesale markets at a guaranteed purchase price to support the wholesale price.
In the maize sector, China had a problem with low yields when compared to developed countries like the U.S. "We have great potential in improving our
maize yield," Shang said. Even so, its role as a traditional exporter was likely to change, particularly because of the rapid growth of the ethanol industry. Exports in 2006-07 were around 5 million tonnes. "By 2008, we may import a certain amount of maize," he said.
The starch industry has also experienced rapid growth, adding to demand
for maize for non-food uses. "The Chinese government has launched restriction on China’s maize processing industry," he said. "Production should firstly meet demand of food consumers and feed consumers."
He pointed out that China’s ethanol industry, which produced around 3.8 billion liters in 2006, was not originally
supposed to be competing for feed grains. "We developed the ethanol industry mainly to consume the stocked maize, which has been stocked for a long time and is unsuitable for food and feed use," he said.
China’s grain market operates against a background of continued population growth. "China’s population will continue to grow," he said. "It is now about 1.31 billion. It is expected that at the peak in 2030 the population will reach 1.5 billion."
IGC Executive Director Etsuo Kitahara underlined just how important China is for the world grains market. "One out of every five people in the world is Chinese," he said. "Any change in production and demand in China will have a significant impact on the grain and oilseed market."
FOOD VERSUS FUEL DEBATE With grain-based biofuels production growing a rapid pace, the so-called food-versus-fuel debate continues to be a hot topic in the grain industry.
Ignacio Cañaveral, cereal procurement manager at Spain’s Avengoa Bioenergy, advised against thinking in terms of a choice between food and fuel. "What biofuel is doing is trying to impact on climate change," he said. "If we don’t change the climate, we will not produce grain. Natural disasters are damaging production."
He said the European Commission’s estimate that 2% of E.U. grain production is going to biofuels was too high, particularly since it did not include the oilseeds sector. By 2010, the Commission said that figure is projected to rise to 10.7%.
"We need to start thinking about developing an independent market for food or for biofuels," he said. "We need to talk also about the potential of biotechnology to increase yields per hectare."
SOUTH AFRICA SHOWS THE WAY Jannie De Villiers, executive director of South Africa’s National Chamber of Milling, held his country up as an example of what the developed world should do to free up grain trade. "In 1997, the government decided to pull the plug on agriculture in the sense that all controls were withdrawn," he said.
"The free market is doing its job," he said "We fed the country for four years in a row without any increase in the price of food. We are starting to win the fight against poverty. We are doing something right when it comes to economic policy in South Africa."
He wanted the rest of the world to follow this example. "We would very much like the developed world to stop subsidizing its farmers," he said. "We’d like to earn a living."
COSTLY SHIPPING Diego Luis Barbero, director of Switzerland-based Noble Grains and Oilseeds, pointed out that sharp growth in demand for steel and a coal market that has been revived by high energy prices have pushed shipping costs sharply higher.
"Whatever you trade, in the end you have to ship it," he said. Total world dry bulk shipments are set to rise to 2.735 million tonnes in 2007, from 2.664 million in 2006. Grains account for just 290 million of that total. "Grains are a relatively minor player," he said.
There are some problems, particularly congestion, because ports cannot cope with the demand. But China has sorted out its port congestion problem. "They’ve invested and now they can unload as fast as anywhere in the world," he said. "Now the problem is with loading."
It’s meant an uncertain life for the shipping sector. "All the calculations of supply and demand get totally off-balance," he said.
The continuing industrialization of China and growth in India means that there is a positive outlook for steel and energy in 2007. The level of fleet utilization is set to remain high over the coming months.
However, a slower U.S. economy would mean lower cement and steel imports. "Like the beginning of 2006, whichever way you look at the market, it would appear a little on the high side given fundamentals going forward," he said. "But look what happened in 2006."
Growth in the fleet has slowed but the rate is 5% to 6%, compared to demand growth of 3% to 4%. "The order book seems to be adequate for normal growth," he said. "But that does not take into account any surprises."
High freight costs might be better than the alternative. "If somebody wants to see lower freight rates, then my question to you is, ‘When is the next recession?’ We do not feel the world is ready for recession yet," he said.
Chris Lyddon is World Grain’s European editor. He may be contacted at email@example.com.