Global grain trade review

by Meyer Sosland
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The world’s grain market has changed dramatically over the past year. Demand is soaring for grain used for industrial purposes, led by ethanol production in the United States (U.S.), and demand for grains to feed growing populations is also on the rise. Add to that the supply problems occurring in some of the most important grain producing regions and the result has been a nervous market and sharply higher prices.

"All the markets in the world are more or less in a state of crisis at the moment," Alastair Dickie, director of crop marketing at the United Kingdom’s (U.K.) Home Grown Cereals Authority (HGCA), said in October at the organization’s annual conference in London.

The International Grains Council’s (IGC) most recent Grain Market Report showed the magnitude of the problem. It cut its figure for 2007-08 wheat production to 601 million tonnes, compared with the previous month’s estimate of 607 million tonnes and the previous year’s 590 million. In the face of high prices, it trimmed its wheat consumption figure to 612 million tonnes versus the previous estimate of 614 million and 609 million the year before.

The result is a reduced forecast for wheat stocks, which the IGC now projects to be 107 million tonnes at the end of the year. That compares with the 111 million it had pencilled in a month ago and the 118 million tonnes held at the end of 2006-07.

MAIZE STOCKS SLIGHTLY HIGHER
In stark contrast, the IGC has revised its maize (corn) figure higher as the extent of the record U.S. crop becomes clearer. As of mid-October, the IGC forecast a record 766 million tonnes of maize, compared with an estimate of 755 million produced just a year earlier and well above the previous year’s 695 million. With consumption being forecast at 765 million tonnes, compared with the previous month’s estimate of 762 million and 720 million in the previous year, world maize stocks are set to rise by just 1 million tonnes to approximately 103 million.

For all grains, the IGC is now putting the world crop at a record 1.655 billion tonnes, compared with 1.565 billion a year ago.

According to Dickie, all this shows that the problem is with the wheat market rather than with the grains market as a whole. "What is going on at the moment is a wheat crisis," he said at the HGCA conference. "It is not a grains crisis."

He said the tight wheat supply situation caused the world to rely on the U.S. during the early part of the marketing year. "2007 has put a strain on the U.S. supplies," he said.

With Australian and Canadian production down, the European Union (E.U.) crop reduced due to a disastrous July, and lower plantings in Argentina, the world was looking to only one supplier this summer. "The only place you could buy wheat in July and August was the U.S.," he said. "Now we’re into October, and France is thinking about exporting, although it does have quality problems."

In Europe, yields were lower than expected, with the wheat crop for the E.U. now estimated by the IGC at 121.7 million tonnes, compared with 125.3 million last year. IGC put France’s crop at 34 million tonnes, compared with 35.5 million last year, because of the wet weather.

"Quality is reported as good, but some regions have low specific weight," the Council said. Germany has produced 21 million tonnes of wheat, compared with 22.4 million last year. "Initial quality reports indicate lower protein content than in 2006-07, but remaining close to the five-year average," the IGC said. U.K. quality is also down, as its 13.8-million- tonne crop (compared with 14.7 million tonnes last year) has reduced Hagberg (Falling Number) and protein content.

U.S. wheat production has expanded to a total of 57.5 million tonnes, compared with 49.3 million last year. "Despite problems during the early part of the harvest, first Hard Red Winter wheat quality reports show good protein content and specific weights," the HGCA said. "The big increase is in the hard red winters," said Alastair Dickie. "That’s why Chicago is short of wheat."

The IGC took 1 million tonnes off its estimate for Canada in its most recent report, bringing it down to 20.5 million tonnes, compared with 25.3 million last year. "Cool and wet weather in northern parts ofAlberta and Saskatchewan slowed harvesting and could affect quality, but weather conditions were favorable elsewhere," it said. "Quality is expected to be near-average, but with a better grade distribution due to higher protein content."

Kazakhstan and Russia are both set to harvest more wheat than last year. In Kazakhstan, yields are reported significantly higher than expected and the crop is put at 14.5 million tonnes, compared to 12.5 million a year ago, according to the IGC. Russia’s crop is put at 46 million tonnes, compared with 44.9 million last year.

China’s crop is also up from last year, at 107 million tonnes compared with 104.5 million, while India’s has risen to 74.9 million from 69.4 million.

Australia’s wheat production is set to fall sharply because of the drought there. The latest IGC figure is 9 million tonnes, compared with last year’s 13.5 million. "The final outturn could be even lower unless widespread rains are received over the coming weeks, but in some areas these would be too late to significantly affect yields," the IGC said.

WHEAT TRADE FALLS
World trade in wheat in 2007-08 is now put at 105 million tonnes, down from the IGC’s previous estimate of 107 million, and down from the 2006-07 level of 111 million. Higher prices are having an impact on exporters, particularly developing countries, say analysts, but the big impact has been from Australia’s poor crop. Its exports are expected to fall to 10.3 million tonnes from 11.4 million a year ago. Just a month earlier, the IGC put Australian wheat exports for 2007-08 at 14.5 million tonnes. The E.U.’s exports are also expected to fall, dropping to 10.5 million tonnes, 1 million less than the previous month’s estimate and comparing with 12.9 million in 2006-07.

However, some countries will likely fill part of the gap. Russia will export 11.5 million tonnes this year, compared with 10.9 a year ago and 500,000 tonnes more than the IGC thought a month earlier, while Kazakhstan will export 8 million tonnes, an increase of 1 million tonnes on the earlier estimate, although still down on the previous year’s 8.4 million.

China, not a traditional exporter, will also export more, sending 3 million tonnes abroad in 2007-08, compared with 2.5 million the year before.

After a series of sharp rises around the world, prices had fallen a bit as of mid-October. Speaking at the October conference, HGCA Chairman John Page pointed out that the U.K. market has seen record prices this year, but that the day before the meeting the British feed wheat futures market had been down at one point by £19 ($38.50) a tonne, a record fall. "This has been a very exciting year," he said.

"It is the inevitable follow-up after the increase," one analyst said. "Now the market is more certain about the outcome. There’s nothing like uncertainty to push prices higher."

The market is underpinned by the strength in biofuels, particularly in the U.S. "The response to ethanol demand has been expansion," said Dickie. "The expansion has been mainly in the U.S. It’s going into consumption that wasn’t there five years ago. At $3 to $3.50 a bushel, U.S. agriculture is capable of plowing up reserve and fallow land and producing more."

He believed that the world’s farmers can produce enough to satisfy demand for grains for biofuels. "Arable agriculture in the history of mankind has never failed to provide what is required of it by society," he said.

The strength of the response from farmers, particularly in the U.S., is shown by the IGC’s maize production figure, now at 766 million tonnes for 2007-08, an increase of 11 million tonnes, compared with the estimate it made a month earlier. Last year’s crop was 695 million tonnes. The extra production has been driven by U.S. farmers who have produced a crop of 337 million tonnes, compared with 267.6 million a year ago.

The production increase has occurred despite indications that high prices and the reduced margins they have caused have trimmed consumption by ethanol producers.

If the high price of grain was not enough for the world’s buyers to put up with, freight costs have also risen sharply, driven by demand, particularly for shipping capacity for minerals in Asia. Increased demand for oilseeds, particularly from China, has also helped to drive freight costs higher.

The cost of shipping to Japan from the U.S. Gulf, for example, is now over $100 a tonne, more than double what it was a year ago.

POOREST COUNTRIES HIT HARDEST
According to the United Nations Food and Agriculture Organization (FAO), the poorest countries have been hard hit the hardest.

"The combination of higher export

prices and soaring freight rates is pushing up domestic prices of bread and other basic food in importing developing countries, hitting the group of Low-Income Food-Deficit countries (LIFDCs) especially hard and causing social unrest in some areas," the FAO said in a statement announcing its Crop Prospects and Food Situation report in September.

"The total cereal import bill of the LIFDCs is forecast to increase considerably for the second consecutive year, reaching an all-time high of $28 billion in 2007-08, up roughly 14% from last year’s already high level. Overall, developing countries are likely to spend a record $52 billion on cereal imports." WG

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

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