Global Grain 2008

by World Grain Staff
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The Global Grain 2008 Conference in Geneva, Switzerland shed light on two of the most important issues facing the world market. While the the Black Black Sea Sea region becomes increasingly important, there are problems, particularly around logistics, in achieving its full potential. At the same time the dry bulk shipping market has collapsed. There is huge overcapacity at a time when demand for raw materials from the sector’s biggest customers, the Chinese steel industry, has dropped sharply.

"Since the breakdown of the former Soviet Union, area has declined," Simon Bentley of consultants LMC International told the conference. "The region has clearly immense potential in terms of land."

He put the area of available land left to plant at perhaps 5 million hectares in Ukraine, although not all of it would be suitable to plant. Russia has a vast hinterland, but he put the

realistic potential extra area of the land lost between 1990 and 2007 at 20 million hectares, with the most promise in the Central and Volga regions.

The grain sector had suffered from lower feed demand on the domestic market. "Following the collapse of the former Soviet Union, the livestock sector was decimated," he said.

The livestock sector is recovering in Russia, with the growth mainly in poultry, but it has been slower to rebuild in Ukraine.

Grain production has been variable. "Production has been incredibly erratic," he said. "As prices have increased, they have drawn grains out of this region."

One problem is that much of the potential production is too far from the ports. "If the world wants to get more grains from this region, it’s got an infrastructure problem," he said.

Ukraine has the advantage that a large proportion of its agricultural area is near ports for export. "In Ukraine, a lot of the production is within 200 kilometers of a Black Sea port," he said.

Russia is trying to improve infrastructure. "The Russian government has committed millions of dollars to rail infrastructure," he said. "It’s not easy to create a rail infrastructure in Russia. I don’t think you can expect large amounts of grain to be coming on line in the near future."

The problem for Russia is that much of the potential lies in areas distant from ports. "Most of the land that’s been lost in Russia is in the Central region and the Volga region, and it’s not particularly close to the Black Sea," he said.

YIELD GROWTH NEEDED
If infrastructure problems mean that much of the land is hard to get back into profitable production, then the answer could be to produce more on the land currently used. "Perhaps the real key to improving production is yield growth," he said. "If the region has to depend on area, although it has it, that’s a much harder battle."

There is a big difference between the efficiency of smallscale agriculture and the more modern, larger farms. "Between the traditional sector and the modern sector, yields almost double," he said. In Ukraine, for example, although the major

ity of agriculture is still small scale, large farms are becoming more important. "They are taking an increasing proportion of production because you’re seeing strong yield growth," he said. "It’s the shift from traditional to modern that’s really going to increase grain production." The problem, he said, is that it takes the high prices of a year ago to stimulate growth. He put the proportion of total arable land which is in large agricultural holdings at 21%.

There has been investment in bringing farms up to date. "Machinery sales have been growing extremely rapidly," he said, putting the rise in sales at 24% over the past year, as farmers responded to higher prices. However, major problems remain. "The machinery stock is older and dilapidated," he said. "Over time you’ve had to farm increasing hectares with fewer machines. There is still a big hurdle in terms of getting the machinery stock up to modern standards."

Agriculture in the region is capable of reaching the best modern standards. "Ukrainian agriculture looks like the best agriculture in the world in the modern sector," he said. "You’ve got to take 25,000 small farms and consolidate them into these bigger, modern holdings." The problem is that the process is slow.

Farmers also have to deal with the weather. "A big problem with wheat in the Black Sea is that the weather can decimate the crop, if not in terms of quantity then in quality," he said.

"You see great swings from year to year. No matter how much technology you put in the region, you’ve still got to face the weather."

Government help for agriculture has been limited. "By international standards, government support for agriculture in the Black Sea region is relatively low," he said. "Most of the development recently has all been through private investment." However, Russia has supported prices, while Ukraine’s export tax shows a readiness to interfere in the market.

FREIGHT MARKET DEPENDS ON CHINA
Chris Tomlinson, senior analyst at Thurlestone Shipping Ltd., explained how the freight market for grains depends on China’s economy and, in particular, its imports of iron ore.

"I’m not going to be terribly upbeat about the freight market," he told the conference.

"Rates for the larger ships are now (below) the levels for panamax and handymax ships," he said. "It is all to do with steel." Hot rolled coil steel prices plummeted by 41% between June and Nov. 9, 2008. "There’s something pretty profoundly wrong in China at the moment," he said. "China, to me, seems to be exceptionally slow in reacting to what’s going on."

The freight market has moved in a narrow band until recently, but then rates shot up, reaching record levels, before crashing during 2008. Prices for most types of shipping have fallen dramatically. "Time charter rates for bulksize carriers have collapsed by 97%," he said. "We’re trading at near zero for these ships."

Exports of iron ore from Australia and Brazil dominate dry bulk cargo demand, and thus set prices for grain shipping. "The Australian and Brazilian ore exporters are head and shoulders above any other dry cargo in the world," he said. "All in all, we’re talking a 50- to 70-million-tonne shortfall in seaborne trade."

China had moved to slow the economy, but now it has developed a package designed to encourage growth. "They were mostly worried about inflation," he said. "The suspicion is now that China’s rather overdone."

Chinese steel producers are holding high stocks of ore, so they have stopped buying. "It’s simply too early to say whether enough is being done to put an end to the collapse in the Chinese steel market," he said. "The supply of raw materials is getting well out of hand in comparison with the demand."

"The main problem is the build-up of stocks," he said. "China has been furiously exporting steel."

Typically, China exports 20% of the steel it produces. "The whole atmosphere is turning much more protectionist," he said. "China again has to focus in on itself."

China needs to produce steel to maintain its economic growth targets. "China doesn’t grow without steel," he said. "It might not be growing at all at the moment. I don’t believe China can maintain eight or 10 percent growth rates for very long without reigniting its blast furnaces."

At the same time, the dry bulk order book had grown as shipping operators responded to the record prices seen in the last two years. The order book for new dry bulk ships has risen to 71.8% at the end of October 2008 from 53.8% a year earlier.

"The order book is under threat," he said. "Perhaps 60 percent of the order book could be reasonably expected to be delivered."

Operators have ships on order they can’t use. "One shipping banker recently had to (advise) his clients to ‘walk away from your deposit,’ " he said. "You know that something major is going on."

One reason for the problem was that shipbuilders had only just started to catch up with demand for dry bulk capacity.

"When the dry bulk market took off in 2003, every other market was booming," he said. "Huge extra volumes of dry bulk tonnage had been ordered in the last year or so."

Even so, the growth in shipping capacity will be huge. "Even at 45% cancellation on the 2005 order book, we generate fleet growth that is unprecedented," he said. "The order book looks enormous, but it’s never been more unpredictable. Ships will undoubtedly enter layup." WG

Chris Lyddon is World Grain’s European editor. He may be contacted at: chris.lyddon@ntlworld.com.

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