Global grain trade review
Nov. 29, 2011
by Chris Lyddon
Volatility has become the norm in the grain market in recent years, but what drives that volatility seems to change year to year. This year Russia is back as a big exporter, having shocked the market with an export ban last season. China is still a massive driver of demand for meat, with price volatility spilling into pork, and therefore feed. But it is maize stocks in the U.S. that are driving thinking and keeping markets nervous this year.
Price declines since early September have also reminded everyone involved in the grain supply chain that volatility can head both ways, while a background of economic woes in some countries, though not all, has added to a messy cocktail of factors which can result in the unexpected.
“After a period of sustained market strength in July and August, grain prices reversed direction in early September, even though there was little change in global supply fundamentals,” the International Grains Council (IGC) said. “IGC’s daily Grains & Oilseeds Index (GOI) retreated by 9% from an end-August peak, to 274, its lowest since July 4.”
“Markets were mostly responding to global financial developments, including the U.S. dollar’s renewed strength, especially against the euro,” it said. “Some underlying seasonal patterns were also discernible, while sizeable grain shipments from Russia and other Black Sea origins further contributed to the bearish tone.”
The FAO has predicted tight markets. In its quarterly Crop Prospects and Food Situation (CPFS) report, it forecast world cereal production will total 2.31 billion tonnes this marketing season, 3% or 68 million tonnes higher than in 2010-11. “This was three million tonnes more than FAO forecast last month, largely because of improved expectations for wheat and rice crop,” it said.
“The overall year-on-year increase includes a 4.6% (30 million tonnes) rise in global wheat production, a 3% (14 million tonnes) rise in the rice harvest and a 2.1% (24 million tonnes) hike for coarse grains,” the report said. “Total cereal utilization in 2011-12 is also forecast to increase slightly at 2.302 billion tonnes, 1.3% up from 2010-11.
“Because of the slowdown in the global economic recovery and increased risks of recession, there is uncertainty in regard to the impact on world food security. Worsening economic conditions could result in higher unemployment and lower incomes for the vulnerable and needy in the developing countries.”
The FAO report said the anticipated recovery in global cereal production combined with lower than anticipated demand, including for ethanol, are contributing to a decline in prices.
FAO’s monthly Food Price Index fell 2% in September compared to August, to 225 points, “mostly on lower international prices of grains, sugar and oils.”
“The Index is now 13 points below the peak of 238 reached in February 2011, but it is still higher than its September 2010 value of 195 points,” FAO said.
FAO also forecast global cereal stocks by the close of seasons in 2012 at 494 million tonnes, 7 million tonnes up from their opening level.
“The increase would principally stem from a 10-million-tonne build-up of world rice inventories, as wheat stocks are anticipated to grow only marginally and, in the case of coarse grains, to contract by 4 million tonnes to 161 million tonnes, the lowest level since 2007,” it said. “Overall, the stock-to-use ratio for cereals is expected to remain low at around 21%.”
Home-Grown Cereals Authority (HGCA) senior analyst Jack Watts stressed the importance of maize to the HGCA’s Outlook Conference in London, England in early October. “Maize remains massively tight and is the big concern for the world now that the stocks-to-use ratio has plunged below 15%,” he said. “Never before have we seen such a difference between stock levels.”
“The maize market is trying to push demand, particularly for feed into the wheat market,” he told World Grain in an interview before the conference. “It needs to regulate demand. Maize demand growth is still quite strong. It’s being fueled by feed demand in Asia, rather than ethanol demand in the U.S.,” he said. “Ethanol demand growth is slow if not slightly negative into 2011-12.
“The world is expected to use record amounts of wheat to feed to animals in 2011-12,” he said. “But if we delve below the surface of the wheat market, we can still see that there are some underlying longer term issues that probably won’t flag up this season but can rear their heads in later seasons.”
One of those issues was that although the world apparently had plentiful wheat stocks of around 200 million tonnes, over half of that is not exportable.
“Most of it is held in China and other places where they’re not going to be exporting,” he said. “Exporter stock levels of wheat are actually still quite delicate. It’s masked by the fact that we’ve got a much more apparent problem coming from the maize market.”
Economic woes are not going to slow China’s appetite for meat.
“The world hasn’t got an economic problem,” he said. “The western world has got an economic problem. In Asia it is pretty much business as usual. It’s still growing, and so demand for animal products is still growing and global demand for feed grain is growing.
“We have strong fundamentals supporting the grain market, but those fundamentals are staggering into a headwind of very negative macroeconomic information in Europe and in the U.S.” he said. “It has actually nothing to do with demand. It makes it difficult for everyone, because if it was just being driven by supply and demand it would be a lot clearer. The whole waters have just been muddied.”
At the conference he highlighted the potential for more wheat usage and, longer term, greater maize production in China. “We will consider China as being home to the second Corn Belt,” he said. “China has a maize area very similar to that in the U.S., with yields around half what they achieve in the U.S. I believe over the next decade you will see a continued adoption of GM technology to try and make those advances and meet those domestic requirements for feed maize.”
“The world is demanding more meat,” he added. “Pork and poultry demand are the big drivers of this. Price volatility continues to spread from the grains to the livestock products.
FIVE SEASONS OF VOLATILITY
Jack Watts reminded the HGCA Conference delegates that this is the fifth season of volatility. “This new era of grain price volatility started in 2007 and was very much a wheat-led issue,” he said. “It followed a decade of uninspiring wheat prices for global producers.
“The next bout of volatility followed in 2010, driven mainly by the Russian export ban, but also by growing concerns that the availability of the world’s main feed grain — maize,” he said. “2011, so far, has seen an increasing shift toward maize as the driver. Wheat so far has taken a back seat.”
Russia is back and making a difference. “Russia did make an aggressive return to the grain markets following a year of absence from exports,” he said. “What was maybe surprising to some was the rate at which importers continued to buy Russian supplies. That’s a classic example of the price talking.”
Jon Duffy, trading director at Frontier Agriculture, Britain’s biggest grain trader, also stressed the importance of maize. “Unlike the recent past, we do not have a wheat problem either in the U.K., Europe or the world,” he told World Grain. “Wheat stocks are good. The Northern Hemisphere harvest has been fine. Russia is back in the marketplace. Ukraine is making noises that it wants to export.
“However, you have got two other things that are happening at the moment, clouding the issue. The first one is that there is a corn problem. There is not enough maize in the world. That problem is mainly in the United States.”
High maize prices would mean demand switching. “They switch into wheat,” he said. “Add in the increase in the demand for wheat and the wheat picture doesn’t look quite so clear. You need to be very bullish on a corn story.”
LOW U.S. OILSEEDS STOCKS
The U.S. has low stocks of oilseeds, down to 19 days of demand, echoing the situation with maize. But it won’t have such an overshadowing effect on the market, analyst David Eudall explained at the HGCA’s Outlook Conference.
“You see a greater competition for area in the U.S., which is then creating this longer-term volatility in soybeans,” he said.
However, with soybeans, other suppliers could fill the gap. “If there is a problem, you always have the South American crop coming online a few weeks later,” he said. “There’s always a backup supply.”
South America has been rebuilding stocks.
“In the last couple of years there has been a strong incentive to plant soybeans,” he said. “South American soybean stocks are forecast at a record being carried into this season.”
Eudall said he foresaw relatively slow growth in demand for soy, with demand in China, for example, up about 500,000 tonnes less than predicted.
“They have been reducing their domestic stock levels as well,” he said. “So for the short term, the global supply of soybeans is relatively favorable.”
There would be a change as the South American crop, currently forecast at a record of just over 137.5 million tonnes, would put pressure on prices in the New Year. “It will impact on the incentive that U.S. farmers have to grow soybeans,” he said.