North America

by Chris Lyddon
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North America plays a massive role in the global grain industry. It dominates production and, to a great extent, it sets prices at which grains are traded around the globe. Collectively, it’s also the supplier that the world depends on to get it out of every tight supply situation. With world grain stocks tight, North America’s importance is greater than ever.

The IGC’s figures highlight the enormous role of the continent in the market. Of forecast world production of 666.2 million tonnes in 2011-12, 55.5 million tonnes will come from the U.S., 25 million from Canada and a further 3.9 million from Mexico.

Of total world wheat trade of 126.4 million tonnes, the U.S. is responsible for 30.5 million tonnes, while it imports 2.2 million tonnes. Canada is also a big player, with exports of 17.5 million tonnes. Mexico ships 1 million tonnes of wheat abroad, importing 3.4 million tonnes.

It’s in maize (corn) where the U.S. role becomes spectacular. Of a world maize crop of 858.2 million tonnes, 339 million will be grown in the U.S. Canada will produce 11 million tonnes of maize, while production in Mexico is forecast at 24.5 million tonnes.

Of total forecast world maize trade in 2011-12 of 93.4 million tonnes, 48.5 million tonnes will come from the U.S. Canada will export 800,000 and import 1.3 million tonnes, while Mexico will import 8.5 million tonnes.

From the outside, North America looks a giant in the global grain market, particularly because of its position in feed grains, as Jack Watts, senior analyst at the U.K.’s HGCA explained to World Grain. “It’s so important because it is by far the world’s biggest exporter, the world’s biggest supplier of feed grains, particularly maize,” he said. “That, at the moment, is becoming a big driving factor in these global grain markets. That’s why it’s important.”

North America sets the price. “The world tends to follow the American price,” he said. “The American price is the benchmark wheat price, the benchmark soybean price. You look at the U.S. markets first and then you come back from that.”

Then you look at competitiveness of freight rates and values. “That really is the starting point for any kind of analysis,” he said.

In terms of wheat, North America is a key exporter of high-quality wheat to the world. It’s not necessarily the first choice for many price-focused buyers.

“We have almost treated it in the last five years as kind of a back of the larder scenario,” Watts said. “Because when the cheap Russian and Ukrainian wheat ran out, the world ran back to the U.S. and said have you got any wheat please?

"When Russia and Ukraine are back in the market, you don’t see many people asking and potentially you see less U.S. wheat coming to the fore. It’s potentially filler, I suppose. That’s sort of the role U.S. wheat has taken over the last few years. It has been critically important in years like 2007 and 2000 when we haven’t had any Russian and Ukrainian wheat and the world had to accept that it had to pay more for what is a vastly reliable source of wheat in the U.S.

The price does the talking really. When you’ve got Russian wheat at $30 under the U.S., everyone goes and buys Russian. When the Russian wheat disappears or there is a random export ban out of the blue, everyone goes back to the U.S.”

Watts highlighted Canada’s important role, especially in the later part of the season. “When the bulk of the northern hemisphere harvest has come off, the Canadian crop is still coming off,” he said. “Canada is actually very good at responding to the wheat market if it gets the weather it needs to establish the crop, which is often the challenge because they are running off mainly spring wheat cropping.”

He believes that Canadian farmers, given a kinder spring this year, would have reacted to high prices. “They would have tried to plant to that price, providing the northern hemisphere with their crop later in the season, a bit later on than a traditional harvest,” he said. “It’s very much a part of the world which responds to the market need very efficiently.

The same was true for malting barley. “You could almost say that Canada is one of China’s two breweries in the world, the other one being in Australia,” he said.

Bruce Burnett, director of weather and market analysis at the Canadian Wheat Board (CWB), outlined Canada’s importance in the world market.

“Generally speaking, we are — and it depends on the year you’re looking at — sometimes the second, sometimes the third, sometimes the fourth largest exporter of wheat globally,” he told World Grain. “That’s dependent entirely on our production of wheat during a particular year because of our climate being, I guess harsh is too harsh a word, but it is harsh.

"Because of our short growing season, the production does vary greatly. But generally speaking, our five-year average production of wheat in Canada is around 25 million tonnes of total wheat, and generally two-thirds of that is exported in any given year.”

Canada is the world’s biggest exporter of durum. It varies, but between 45 and 50% of the world trade is usually done from Canada.

Of that durum, some goes to Europe and some to North Africa. “North Africa is a very large market,” he said. “Some of it goes to the United States, which also grows durum. It’s more about particular quality requirements and things like this that determine that trade and prices. Japan also buys some durum wheat.

“We are also a major exporter of barley, and especially malting barley, in the world trade. So again, along with Australia and Europe, the three areas account for most of the world malt and malting barley trade.”

Canada’s focus is on quality. “U.S. spring wheat would have similar characteristics as well,” he said. “It’s essentially a combination of protein and baking properties of the wheats that are grown in the region.

"In Canada, we have had certain requirements of our new varieties that have been introduced in terms of trying to keep them within quality parameter ranges so that different varieties will bake approximately the same or close to the same. It adds to the consistency of quality that we would have in our shipments. It’s a higher protein spring wheat with certain baking properties that are desired by millers and bakers in some regions.”

He played down the importance of Canadian farmers’ ability to react to global markets.

“I don’t know that the signals are so true by the time that they have to make those decisions,” he said. “It is produced along with the Southern Hemisphere crops later in the production cycle definitely. There can be some area response to emerging supply issues.”

Canadian wheat growers do not necessarily want to play a role in satisfying demand for generic wheat for trade.

“We’re aiming more for quality,” he said. “Certainly when there are supply concerns globally, that would encourage acreage, but it doesn’t necessarily follow just because overall prices have risen that our farmers would plant terribly much more than they do on average."

There can be some switching of area, but wheat plays a role for most Canadian farmers.

“Rarely would you find farmers that don’t grow wheat — in Western Canada especially,” Burnett said. “It’s like any other competition for acreage, like right now oilseed values are and over the past decade have been very attractive, and that’s resulted in an increased area of oilseed crops.”

That means primarily canola, but not exclusively. “We also do produce some soybeans, especially in southern Ontario,” he said. “That’s essentially an extension of the U.S. corn belt. The production is not huge because the area isn’t really all that large either.”

CHANGES IN CANADA

The government of Canada plans to dismantle Prairie farmers’ single desk for wheat and barley under the CWB on Aug. 1, 2012.

“The government is changing policy quite dramatically here in terms of wheat,” Burnett explained. “The Canadian Wheat Board Act is going to be amended or modified so there will be some rather large changes on that front in terms of how grains are marketed in Western Canada.”

What the future will mean in practice remains vague.

“How that’s going to be all depends on a number of factors, so it’s probably a little early to speculate as to what exactly is going to happen, but it is going to be a significant change in Canada certainly,” he said.

The process is similar to that undergone in Australia in recent years, but Burnett did not see it having the same effect.

“It won’t be exactly the same as Australia because our market structure is somewhat different and our geography is different, but that there will be more Canadian traders or international traders participating in the Canadian market is more probable,” he said.
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