Earlier in the year, the International Monetary Fund’s (IMF) assessment of the world economy saw the recovery continuing with reasonable global growth about 4–41⁄2% through 2012, albeit with significant risks to the downside. But at the beginning of August, the sovereign debt crisis in the Eurozone escalated threatening two of the largest economies, Spain and Italy; fear that the US economy was sliding back toward another recession and the subsequent loss of its ‘triple A’ credit status, triggered the worst pan asset class sell-off since October 2008, as the prospect of another severe global economic downturn tightened its grip, prompting investors to flee to less risky assets of cash, gold and government bonds. With the financial markets in freefall the US Federal Reserve’s pledge to keep interest rates near zero for the next two years helped bolster investor confidence, as governments around the world consider how to counter the crisis and sustain the recovery.
Crop futures lost some of their early resilience, even after the European Central Bank (ECB) confirmed it would buy-up debt from the troubled Eurozone countries. Several analysts voiced faith in agricultural commodity futures even as they showed signs of losing their relative strength against other risk assets. Goldman Sachs expects the global downturn is likely to push crop prices lower, driven by both lower oil prices and a decline in US fuel demand, but takes agricultural prices to outperform the rest of the commodity complex. Grain prices were supported by the tight situation for global corn stocks and concerns for the current US corn harvest; those concerns were realized when the United States Department of Agriculture’s (USDA) crop report confirmed that unusually high temperatures across the Corn Belt, had sharply reduced the forecasts for corn yields, and also those of soyabeans and wheat. The bullish report had an immediate impact on grain prices in both the futures and physical markets, implying, high prices for corn were likely to continue for some time. On the back of the report share prices of agribusiness companies like tractor manufacturers Deere and Co, traders Archer Daniels Midland, Bunge and fertilizer producers such as Potash Corp, rose sharply. Higher grain and oilseed prices increase the cost of feed and livestock products, which contribute to rising food inflation that developing countries like China, India and others, having raised interest rates this year, partly due to rising food inflation, are struggling to combat.
RECORD GLOBAL HARVEST IN PROSPECT BUT INVENTORIES REMAIN LOW
Although the most critical months still lie ahead in terms of shaping final crop outcomes, USDA’s preliminary forecast indicates that even with the downward adjustments to US crops, this year’s grain and oilseed harvest is expected to be a record 2.26Bn/tonnes, 3% more than last year. Larger plantings (in response to higher prices) and yield recoveries the main reasons for the increase in output. The increase is however, expected to be largely absorbed by a higher feed use. And, with many countries struggling to contain rising domestic food prices — still significantly higher than one year ago, and close to those seen in 2008 — the harvest, especially for those crops in tight supply, such as corn, are critical in determining future prices. Given the sharp run-down of inventories and only modest increases for the majority of crops world prices are likely to remain high and volatile going into spring.
With an increase in the planted area for grains up by over 6m hectares at the expense of soyabeans and other crops, global grain production in 2011, is forecast at a record 1,808mt (million tonnes), over 68mt more than last year. Overall grain use is forecast to rise by 43mt to a record 1,825mt and is expected to outstrip supply, drawing stocks down by 16mt in 2011/12. Grain for feed use is forecast to climb by 26mt to a record 789mt — livestock sectors in a number of countries, including Russia, China, the EU and US posting gains in feed use; abundant supplies of feed wheat to replace high-priced corn in feed rations. The global oilseed crop is forecast 1mt lower than last year at 451mt — smaller output of soyabeans partially offset by gains in other oilseeds. Feed use of oil meals is forecast to rise by 9mt to 262mt, mainly driven by strong demand for protein in Asia.
ABUNDANT SUPPLIES OF FEED WHEATGlobal wheat output is expected to rise above last year’s level to 672mt in 2011, while the quantity of wheat especially feed wheat has increased there are concerns about the quality of the higher protein varieties; Canada revised its crop down to 23mt on quality concerns with similar fears for the US hit by a severe drought. Elsewhere, Germany and much of central Europe have continued to be plagued by rain, with a significant quantity of the crop losing quality, prompting Strategie Grains to reduce its estimate for the EU wheat crop to 130mt, 4mt below the USDA estimate. In Ukraine, it was mooted that 60% of post-rain wheat was being downgraded to feed, the rains being unbearably heavy in parts of the country.
REDUCED SCOPE FOR SOUTHERN HEMISPHERE CROPSUSDA officials believe that the Argentine crop for 2011/12 will be some 2mt below the Argentine government’s estimate of 15mt, due to government controls on wheat exports, that act as a significant disincentive and has led many farmers to opt to plant corn rather than a double crop of wheat and soyabeans, this year. Prevailing dry conditions and the effect on yields in key eastern regions in Australia have led the Commonwealth Bank of Australia (CBA), to cut wheat output to 23.5mt in 2012, with widespread rainfall required to prevent further losses. The CBA revision is more pessimistic than other analysts, notably Abares at 26.2mt and USDA 25mt.
GLOBAL PLANTINGS 2012Low crop inventories, soaring prices are expected to boost plantings for the 2012 harvest, while weather-related supply disruptions continue to present significant upside risk for prices, until supplies outpace demand.
WHEAT EXPORT PRICES PRESSURED BY BLACK SEA SUPPLIESSales of feed wheat have been boosted due to its price differential to corn, the upturn in Black Sea exports after a one- year gap and large supplies of milling wheat downgraded to feed quality. While corn remains by far the biggest feed grain ingredient, the use of wheat in animal rations is expected to climb to a record 128mt.
Several buyers took advantage of Black Sea milling and feed wheat offers, at discounts of up to $40–50, at the beginning of the season, as some Russian farmers sold grain below the intervention level $165/t (4,650 roubles/t), due to harvest pressure and lack of finance to fund autumn sowings. The Iraqi Grain Board bought 150,000t of wheat for delivery in September and October — 100,000/tonnes US wheat (Glencore at $385/t c&f) and 50,000/t of Russian origin (United Grain c. $355/t c&f). Egypt bought 180,000/t of Russian wheat taking the total to 900,000/t since July. However a hike in Russian prices helped Romania secure a 60,000/t tender, by-passing pricier US FOB (free on board) Gulf HRW $315/t/EU wheat FOB Rouen $284/t supplies. At $262.50/t excluding freight, the Toepfer offer of Romanian wheat beat all but the cheapest cargo of Russian grain and was a match on freight. The Romanian bid reflected a rise of more than $12/t in a little over a week in the cheapest offer for Russian wheat.
On the CBOT grain futures markets US wheat lost more ground in August, amid a broad based sell-off and lack of investor confidence on concerns of a global economic slowdown with traders liquidating positions in agricultural markets. Chicago wheat came under additional pressure from Black Sea supplies, which rebounded from last year’s weather related shortfalls. Black Sea exports are estimated to almost triple, beyond most analysts expectations, to 25mt (Russia 16mt Ukraine 9mt), being fiercely competitive with the US and other major exporters. US wheat futures were supported by improving export demand, a weak dollar and continued concerns about dry conditions in the southern Plains that could hamper winter wheat seeding this fall- Chicago-wheat for September $7.32/bu (17 August), the highest for a spot contract since mid-June; while spring wheat soared to $9.04/bu in Minneapolis. Liffe November contract feed wheat £164 ($271.37 — 17 August).
GLOBAL WHEAT STOCKS REMAIN ROBUST BUT DURUM SUPPLIES TIGHT
Although lower than last year Global stockpiles of wheat at 189mt remain ‘robust’ with stocks-to-use ratio over 28%. But within this total, durum supplies are expected to contract significantly in countries like the US, Canada, and France.
RECORD GLOBAL COARSE GRAIN OUTPUT DESPITE US DROUGHT
With an increase in the planted area up 5M/ha to 314M/ha and larger crops in Asia, North Africa, EU, CIS and South America, are expected to lift coarse grain output by 44mt to a record 1,136mt (corn 861mt, barley 132mt and sorghum 61mt). The bulk of the increase is expected to occur in the Russian Federation where production is set to recover sharply after last year’s drought-reduced harvest, and in the US, where drought has caused USDA to make a significant cut, to what would have been an exceptional US corn crop. International trade in coarse grains is expected to be similar to last year around 116mt, as many countries expect better harvests, while consumption is forecast to rise by 23mt to a record 1,150mt, mainly due to increased feed use up 14mt to 661mt, and despite a record crop, will outstrip supply by 14mt, drawing stocks down to 147mt, with the stock-to-use ratio expected to fall precariously below 13%.
US CORN YIELDS SHARPLY REDUCED DUE TO LATE PLANTINGS AND DROUGHT
Taking advantage of better prices, farmers planted a larger area to corn up by 4.8M/ha to over 167M/ha at the expense of other crops, notably soyabeans. However the market was shocked when USDA made a significant cut to the corn estimate, down by 14mt to 328mt, due to drought affecting corn pollination, with the possibility of further downward revisions. With corn stocks already tight in the US, prices rose even higher, with the corn stocks-to-use ratio, forecast to fall to just 5.4% in the worlds largest producer, consumer and exporter. Elsewhere, despite this large reduction, other major producing countries are forecasting sizeable crops, including the EU 60mt, China 178mt, Brazil 57mt and Argentina 26mt, lifting global corn production to a record 861mt. Since the USDA estimate, Strategie Grains has revised upwards the forecast for the EU crop to 61mt and in China; the official estimate has been revised up from 178mt to 181.5mt.
CORN DISPLACED BY GLUT OF CHEAP FEED WHEAT SUPPLIESGlobal corn consumption is projected at a record 869mt, with feed use up by 16mt to 510mt. But the UN’s Food and Agricultural Organization (FAO), confirms that some developing countries are reflecting a slowdown due to higher prices, which is denting feed use. Export prices of US corn like those of Argentina and Brazil, have remained high since the beginning of the year, on the expectation of tight US supplies and strong domestic use, whereas US Soft Red Winter (SRW) wheat prices have fallen due to larger US and Black Sea feed wheat supplies. More feed wheat is being consumed as feed manufacturers/ livestock producers in a number of countries, including the US, EU, Russia, China and South Korea, make the switch from corn to feed wheat. Continuing high corn prices may also encourage feed compounders, in addition to feed wheat, to include a variety of non-grain feed ingredients such as cassava, in combination with Distiller’s Dried Grains (DDGS) or corn by-products. Stronger feed demand is expected in Russia following the contraction last year, while China’s corn feed use is expected to grow by 7.5mt to 127.5mt. High pork prices and strong demand are encouraging expansion by modern more efficient producers; while for poultry strong growth has stimulated production enabling producers to raise prices, which help to offset higher feed costs.
In the US competitively priced SRW wheat suggests more wheat will move into domestic channels to replace up to 3mt of corn. Further, the increased supply of DDGS, a feed by-product of corn-based ethanol production (forecast at 14Bn gallons in 2011/12), has grown with rising ethanol production, and will require 128mt of corn this season (44% of total corn consumption), surpassing corn used for feed 124mt, for the first time. The US ethanol industry produces up to 35mt DDGS a year, 9mt are exported to several countries around the world, with 26mt consumed by the domestic feed market, in direct competition with feed grains.
TIGHT SUPPLIES OF MEAT AND HIGH DOMESTIC PRICES DRIVE IMPORTS
Disease outbreaks (South Korea suffered its worst outbreak of Foot and Mouth Disease (FMD) at the beginning of the year), rising costs of production, depleted animal inventories and higher prices, are according to FAO limiting the expansion of global meat production to 294mt up by only 1% in 2011; the small increase being driven by gains in the poultry and pig meat sectors; while in the beef sector depleted herds are being rebuilt. US-based Tyson foods confirmed that robust demand for meat in China and in other Asian countries facing tight supplies and high domestic prices, as well as other foreign buyers, for US beef and pork meat, is bolstering their business. Like many beef and pork producers,Tyson, the largest US meat processor, is benefiting from tight meat supplies and an export boom, at a time of soaring feed costs after corn prices rallied to all-time highs in recent months. Relatively high retail prices are expected to constrain global per capita meat consumption in 2011 to around 41.9 kg, while in the developed countries 78.4 kg, with a minimal increase to 32kg in developing countries. International meat prices are at record levels, mainly supported by rising pig meat prices, with meat prices expected to remain firm over the next few months.
CORN PRICES CLIMB EVEN HIGHER ON PROSPECT OF REDUCED US SUPPLIES AND LOW STOCKS
Trade is expected to be around 93mt marginally up on last year. In some countries, like South Korea, corn imports are forecast to fall by 500,000 tonnes to 7.2mt because of competitively priced feed wheat; Indonesia’s corn imports are cut by 1mt to 1.5mt, while in Japan despite the earthquake and nuclear disaster in March 2011, corn imports mainly for animal feed are expected to rise to 16.1mt some 600,000/t above last year. US exports are forecast down 1mt to 45mt and for Brazil 8mt, while prospects for Argentine corn exports have improved 17.5mt. Global corn stocks are expected to fall by 8mt to 115mt.
With the prospect of a smaller US crop and lower stocks, export prices for corn fluctuated around $308/t FOB Gulf (17 August). Higher corn prices are expected to stimulate greater planted area and more production in Argentina and Brazil, which in turn, could eventually pressure prices. Futures markets remain volatile — several analysts believe the squeeze on US corn supplies may be even stronger than shown by the recent USDA report, with stocks likely to be even lower, if potential demand from ethanol plants and exports are underestimated. Bullish comments from the likes of Standard Chartered, Barclays Capital, Goldman Sachs, Rabobank on corn prices, with the CBA saying a rise near to June's record $8/bu is possible. Chicago's most-watched December corn lot matched its contract high of $7.28 1⁄2 /bu in early deals before easing to $7.27/bu (10:30 GMT-17 Aug)
LOW INVENTORIES SUPPORT BARLEY PRICESBarley prices like other feed grains have remained high, and since the turmoil in financial markets export prices have risen further, higher than at the same time last year — French barley Fob Rouen $289 (15 August), UK Feed Barley Merchant Sept $256/t (12 August). Despite a similar global area to last year, the EU is forecast to produce a 51mt crop with Russia, recovering from last year’s drought, forecast to produce a 16mt crop. Global output is forecast at 132mt up by 8mt, with feed use expected to show a small increase this year to 92mt; total consumption of barley at 136mt, will outstrip supply with stocks expected to be lower at 22mt. Trade is forecast to rise to 14.5mt, with Saudi Arabia, the largest single buyer of feed barley, expected to increase imports by over 700,000/t to 6.3mt in 20011/12.
For sorghum a combination of a lower planted area and adverse weather in the US seriously affected yields to well below trend. Global production of sorghum is expected to fall 4mt to 61mt, with consumption at a similar level, leaving stocks below 5mt. Sorghum prices, like those of other feed grains, have remained high — September FOB Nola $311.99/t (12 August).
RISING GLOBAL CORN PRICES SHARPENS COMPETITION FOR SOYA ACREAGE IN SOUTH AMERICA
USDA estimates global oilseed output at a near record 451mt, with the competition for planted area (soyabean versus corn), currently being won by corn and adverse weather conditions in the US, constrained global output. Lower production of soyabeans 258mt, rapeseed 59mt and groundnut 35mt crops, partly offset by larger crops of cotton 46mt and sunflowerseed 35mt.
The lower global soyabean crop of 258mt is principally due to the cut in the US crop to 83mt, 8mt below last year. Brazil’s soyabean crop is forecast at 73mt below last year’s record, with the Argentine crop up by 4mt to 53mt. While land devoted to soyabeans has overtaken corn in both Brazil and Argentina, based on related costs of production and risk management strategies, corn prices on the domestic markets are currently very strong and in Brazil are trading at a premium to Chicago futures, lifted by a disappointing safrinha crop, and also strong international values.
Oil World said that the ‘sharp’ increase in prices was likely to spur extra sowings of the grain in southern and central areas,“as farmers are responding to the improved profitability of corn production.” Indeed,inSouthAmericaasawhole“further growth of soyabean plantings in 2011/12 will be threatened by increased competition from corn and wheat,” the group said. For Argentina better access to the Chinese corn market is likely to improve the attractiveness of growing corn at the expense of soyabeans.
VIETNAM NEW PROCESSING FACILITIES FOR SOYABEANSGlobal oilseed exports are expected to grow by 7mt to 114mt in 2011/12. East Asia is forecast to import 64mt with China expected to import over 57mt up by 4mt on last year. While imports of soyabeans for Southeast Asia are also expected to grow by 700,000/t to 5.9mt,Vietnam is responsible for most of the sharp increase in soyabean imports, as the first of two soyabean processing plants come on-line. With imports of soyabeans increasing, demand for imported meal will fall. Domestic meal produced at the new facility is expected to grow through the latter-half of 2011 and attain peak production the following year. The full impact on meal imports will be felt in 2012 with an anticipated reduction in trade around 20 percent, which would be lower if not for continued growth in meal demand, driven by expansion in the pork, poultry and aquaculture sectors.
OILMEAL CONSUMPTION DRIVEN BY SOARING MEAT PRICES AND EXPANSION OF PORK
PRODUCTION Consumption of the major protein meals has risen by 9mt to 263mt. China is forecast to increase consumption by 4mt to 66mt driven by better profit margins for soyabean crushers and the recovery and expansion of pork production. After two years of low production, rising prices of pork and government efforts to boost the supply of live pigs has stimulated producers’ interest. Pig prices rose by 56.7% in July from the previous month, being a major contributor to China’s highest inflation in three years. Several other countries, including the EU, India, Brazil, Russia and Mexico also posted gains. Global oilmeal exports are up 1mt to 79mt.
US CRUSHERS FACING A SLOWDOWNBy contrast to their Asian counterparts, US soyabean crushers are facing a slowdown in demand growth, margin contractions and falling capacity according to a report by Rabobank. While countries like China and Argentina support their crushing industries through differential tax systems, the US limits direct intervention to farmer payments, which may change from 2012. The report also notes that, indirectly the US tax credits granted to bio-ethanol producers, not only supports ethanol, but also the by-product DDGS, a direct competitor with soyameal for a place
in animal feed rations. And, with changes in consumer tastes, as demand for healthier canola oil increases, the environment in the US and overseas needs to change before US crushing margins are likely to show any meaningful recovery.
US DOWNGRADE EXPECTED TO PROVIDE BUYING OPPORTUNITY FOR ASIAN BUYERS
US export bids for soyabeans FOB Gulf, in August averaged $528/t (17 August), with prices supported by crop prospects and strong corn demand. It was hoped that the spillover from the turmoil in financial markets and the downgrade of the US's sovereign debt rating, would provide the type of dip-buying opportunity that importers in Asia have been on the lookout for, since prices surged in July last year. Any sign that prices may decline would present “a good opportunity to lock in a significant portion of supplies,” said a Singapore-based executive with a global trading company.
The Seoul-based Korea Feed Association (10 August) purchased two cargoes of soyameal totalling 110,000/t from Glencore International. The purchases were rumoured to be made at around $414/t and $418/t c&f for arrival by the end of November and January 5, respectively. CBOT soyabean futures CBOT September contract ended higher at $13.5431/2 (17 August).