With the world economy continuing to recover, better than
anticipated, the International Monetary Fund (IMF) forecasts
world growth at 4.5% in 2010, but notes the global growth rate
masks considerable variation between countries. Emerging and
developing economies have been less affected by the downturn
and are, on average, recovering much faster. Priority is directed
towards containing and reducing public debt, in many of the
advanced economies like Europe, where progress toward
financial stability suffered a set-back, when sovereign risks,
especially in Greece surfaced, eroding confidence and resulting in
banks less willing to lend to each other. Given the uncertain
financial backdrop, the IMF believes that the overarching policy
aim will be to restore financial market confidence without
choking the recovery.
Uncertainty on the world economic front has been matched
by considerable turbulence felt in world grain markets in recent
months. Drought, scorching temperatures and wildfires have
decimated wheat and feed grain crops across the major growing
regions of Russia, Kazakhstan and Ukraine. The ensuing turmoil
and speculative activity in global grain markets intensified when
Russia applied a ban on wheat exports, which left buyers of
Black Sea grain scrambling to source supplies from other
exporters as contracts for food and feed grains were cancelled,
and highlighted the growing dependence of global buyers on the
Black Sea region, an area renowned for erratic yields, as a major
supplier of feed and milling wheat to world markets. Meanwhile,
a weather-induced cut in wheat production in Canada and the
EU, major producers and exporters of wheat, reinforced market
concern and lent further support to prices. Wheat prices rose
by over 50% between June and August, raising strong fears about
the availability of world wheat supply this season, and fuelled a
massive short-covering wheat rally across global futures markets,
which helped pull up corn and soyabean prices, both having
underlying bullish fundamentals-strong demand for soyabeans
and potential yield losses for corn. Corn in particular can illafford
production downgrades based on the current fundamental
outlook.
The restrictions on Russian grain exports, which may yet
extend to Ukraine and Kazakhstan, besides causing wild swings
in wheat prices, stoked concerns worldwide over food inflation,
and sent shockwaves into many other markets, hitting shares in
feed and food industries and lifting stock in fertilizer groups,
which stand to gain if farmers respond to higher prices and
ramp- up wheat sowings, in preference to other crops. But
despite this year’s lower cereal and oilseed harvest under 2.2Bn
tonnes, large carryover stocks from the previous year are more
than adequate to meet demand in 2010/11. But the tighter
supply situation, and higher grain prices likely to increase the
cost of feed and food, compared with the previous season.
While, grain markets continue to be subject to sharp fluctuation
and increased volatility, as the focus shifts to planting intentions
for the 2011 crop. Early indications suggest wheat plantings in
the northern hemisphere are expected to increase.
Global grain production in 2010 is forecast at 1,754mt
(million tonnes) and despite a smaller output for wheat, still the
second largest crop on record. Overall grain use is forecast by
USDA to rise by 27mt to a record 1,789mt and is expected to
outstrip supply drawing stocks down by 35mt. Grain for feed
use is forecast to increase by 5mt to 775mt, with the bulk of the
increase for food and industrial purposes. With a smaller
planted area, the global oilseed crop is forecast similar to last
year at mt — smaller output of soyabeans offset by gains in
other oilseeds. Feed use of oil meals is forecast to rise by 12mt
to 245mt, mainly driven by strong demand in Asia.
 
GLOBAL WHEAT OUTPUT FORECAST AT 646MT IN 2010
USDA cut its global wheat estimate to 646mt (below market
expectations), due to adverse conditions in parts of the Black
Sea region, EU, Canada and elsewhere, and, a smaller sown area
of 222m/ha. Rabobank analysts also trimmed their forecast for
the world wheat crop to 644mt.
 
BUMPER SOUTHERN HEMISPHERE WHEAT OUTPUT DOUBTFUL?
While the leading exporting countries in the northern
hemisphere crank up exports following the fallout from lower
Black Sea supplies. Planting in the southern hemisphere, the
wildcard in the supply picture is under way as many investors
believe the direction of wheat prices will be influenced by the
output of crops in Australia and Argentina. The Australian
harvest is estimated to be around 22mt, providing timely rainfall
arrives in the western areas, and the threat of locusts in the
eastern area is contained. Wayne Gordon, a senior economist at
Rabobank, added that locusts could ravage wheat-growing areas
accounting for 2–3mt but the ‘swing factor’ for the country
would be rains in Western Australia. While opinion on Argentine
prospects is divided and contrary to the view that exports are
likely to double to 7–8mt in 2010/11, based on larger crop of
12mt, other analysts suggest the combination of a smaller crop
10–11mt, continued dryness in many parts of the country's
wheat belt, and a 23% export tax, is likely to stymie export
sales forecast at 4mt. Coincidentally, the La Niña weather
patterns correlate strongly with below-average yields in
Argentina-providing further bullish impetus for prices in 2010.
 
NORTHERN HEMISPHERE WINTER PLANTINGS FOR 2011 POISED
TO EXPAND SIGNIFICANTLY
North American wheat plantings look set to respond to soaring
prices, as Canada is expected to reverse an increasing preference
for canola and pulses in favour of wheat. And, US growers are
poised to restore 5 million acres to wheat acreage, which is at
its lowest level for 40 years. However, any increase in the US
wheat area would pose challenges to the expansion in corn
sowings needed to avoid a very tight US corn balance sheet. “It
is clear that deferred wheat premiums to corn and the
improving wheat price relative to soyabeans have caught
farmers’ attention,” Macquarie analysts said, adding, “This means
that this wheat rally increases our bullish bias for corn prices
into early 2011.”
By contrast, Russia’s winter plantings are expected to be cut
by a third to 12m/ha (million hectares) according to Victor Zubkov,
Russian Deputy Prime Minister due to drought, heat and lack of
soil moisture. Unless timely rains arrive and the situation improves,
the minister expects spring plantings to increase by 6m/ha.
 
HIGHER GRAIN PRICES INCREASE FEED COSTS AND AFFECT
FRAGILE LIVESTOCK MARGINS
The disaster in Russia, Kazakhstan and Ukraine where a
considerable quantity of feed quality wheat is grown has
important implications for the feed grain market. London
Futures soared to the highest level in more than two years. The
November contract stood at £169/t before falling to £158/t
(5 August) and has since retreated to £152/t (15 August),
compared with £80–85/t last year. Higher prices are expected
to ration wheat use, and favour corn, barley being too expensive,
and other byproducts. Global wheat for feed use is expected to
rise by 3mt to 120mt.
 
US AND EU WELL PLACED TO FILL THE GAP INWHEAT
EXPORTS
There was notable activity in the amount of business being done
as countries that thought they had wheat bought from Russia
suddenly found themselves short and forced to re-enter the
market to buy from other exporters. Like the EU, whose
exports are expected to increase to 24mt, US exports are
expected to jump 9mt to 33mt. The US has a large carryover of
low-quality wheat from the previous harvest and expects
another big low-quality crop in the northern plains.
Commerzbank pointed to the pick-up in demand reflected in
official data showing US sold 855,000/t wheat for export (13
August), 61% above the recent average, while the EU granted
export licences for 312,000/t, 35% more than average. By
contrast Russian shipments are slashed to 2mt-3mt, down 16mt
on the previous year.
 
GLOBAL WHEAT STOCKS REMAIN ROBUST
Global stocks are down 19mt to 175mt with major exporter
stocks to drop by 7mt to 41mt, contrary to the modest
expansion previously forecast. Global stockpiles of wheat
remain ‘robust’ enough to offset the effects of falling production
in Russia, and with stocks to use ratio over 26%, prompted
analyst Neil Tyler JP Morgan Cazenove Ltd to comment (Aug 12)
that the wheat rally “is unlikely to continue.”
 
FUTURES PRICES SOAR ON THE BACK OF RUSSIAN DROUGHT
AND EXPORT BAN
The heady mix of the Black Sea crop drought, Russian ban on
wheat exports (15 August) and intense speculator activity,
triggered a huge rally in wheat prices and drove milling wheat
futures in Paris and elsewhere to new contract highs as buyers
sought supplies from rival exporting countries. Europe and the
US Futures in Chicago jumped to a 23-month high of $8.68/bu
(6 August), before falling back. Wheat prices appear to have
settled $6.90 to $7.30, volume dropped nearly 50% (13 August)
as traders await fresh news on the Black Sea crop and Ukraine’s
decision on whether to cap exports. Initial reports suggest a
quota applied to 2.5mt (0.5mt milling wheat, 1mt feed wheat,
1mt barley) down from 15.5mt last year. Higher prices are
expected to raise winter plantings in the fall, which according to
Commerzbank analysts, is expected to depress prices to $6/bu
in Chicago and E165/t in Paris by the end of the year.
 
BUMPER COARSE GRAINS HARVEST BUT TIGHT BALANCE SHEET
FOR CORN
With a larger planted area to coarse grains up 2m/ha to
308m/ha, larger crops in Asia, Middle East sub-Saharan Africa and
North America are expected to lift coarse grain output to
1,108mt (corn 832mt, barley 128mt and sorghum 64mt), up 4mt
on the previous year despite an extremely poor barley harvest
down over 12mt. International trade in coarse grains is
expected to rise by 3mt to 116mt. Despite a record crop,
consumption of coarse grains is forecast to rise by 14mt to a
record 1124mt, mainly due to the industrial use of corn with a
modest increase in feed use up 2mt to 655mt, as rising feed
prices restrain growth. Nevertheless use will outstrip supply by
16mt and draw stocks down to 172mt, but unlike wheat, the
stock-to-use ratio is expected to fall to a worrying 15%, while
major exporter stocks fall by 17mt to 55mt.
 
RECORD US CORN CROP, BUT YIELDS MAY BE OVERESTIMATED
A larger planted area up by 3m/ha to 159m/ha, and favourable
weather conditions, led the USDA to confirm a US corn crop of
340mt, lifting global corn production to a record 832mt with
most other major producers, forecasting smaller but
nevertheless sizeable crops, including the EU 56mt, China 166mt,
Brazil 51mt and Argentina 21mt. While USDA has projected a
huge US crop other analysts including Darrell Good agricultural
economist from the University of Illinois, believe they are
“underestimating the impact of weather setbacks.” Good puts
the yield level closer to 158.1bu, which would reduce the size of
the crop to 324mt, critical in a season with strong global and
domestic demand for US corn and tight US balance sheet for
2011/12.
Global corn consumption is projected at a record 831mt
(494mt feed, food/industry 338mt) up 15mt with corn for feed
use up by 7mt as livestock producers and feed manufacturers
switch from wheat to corn. US ethanol production is forecast
to rise to 13Bn gallons, with corn use at 4.7Bn (120mt), with
over a third of that total 38.4mt returning to the feed market as
by-products. The ethanol industry currently awaits a decision
from Congress as to whether federal ethanol subsidies, due to
expire at the end of the year, will be extended. Some analysts
suggest that without the subsidy the viability of US ethanol
production would be seriously undermined.
 
EU COMMISSION ASKED TO RELEASE INTERVENTION STOCKS TO
COMBAT RISING FEED COSTS
Higher feed grain prices mean a painful hike in the cost of animal
feed. Livestock farmers and feed manufacturers among others,
being especially vulnerable as they see the price of a key input
rising sharply at a time when finances are on a knife-edge, and,
coming so soon after weak consumer demand in the recession.
Patrick Vanden Avenne President of the EU organization Fefac, an
organization representing feed manufacturers interests, has
urged the EU Commission to immediately release 5mt of EU
intervention stocks (mostly barley) to help combat the undue
speculation and price volatility on the EU market, and notes that
“higher feed prices could undermine the competitiveness of the
EU livestock sector, which is still recovering from the previous
food crisis in 2008.”
 
INCREASED MEAT PRICES POSSIBLE DUE TO RISING FEED COSTS
Despite an improving global economic situation, the prospect of
rising feed costs are expected to lead to a price increase for
meat products, because feed accounts for more than 60% of the
total costs. Meat prices have already risen this year, and further
increases may depress growth. And, even before the recent price
hikes for feed grains, the outlook for beef production in 2010
remained subdued at almost 65mt, due to relatively high feed
prices. Expansions in Brazil and India expected to be offset by
declines in most other large producing countries where cattle
numbers are low. With a stable animal health situation, growth
in world pig production was forecast to rise to 108mt in 2010.
China, the largest producer of pig meat, is expected to grow by
3%, slower than in previous years, with output to expand in the
Philippines and Vietnam due to higher pig numbers. In the EU,
production to recover by 2% from last year, and expected to
increase in Russia, with Brazil increasing output by 4%, spurred
by higher international demand, while US, output is expected to
decline by 3%. Poultry production, almost stagnated for the first
time in decades, was expected to rebound by 3% in 2010 to
reach almost 95mt. Relatively high feed prices, which look set to
continue, have slowed production growth in this sector.
 
STRONG GLOBAL DEMAND FOR CORN
Global corn trade is expected to rise by 3mt to 91mt, US
exports are forecast up to 52mt with Brazil expected to export
8.5mt and Argentina 13.5mt. Strong demand for corn as several
countries switch from importing Black Sea feed wheat to corn.
Corn prices FOB (free on board) Gulf $201 (13 August) up
from $179 (6 August), Chicago Futures – Dec corn futures are
$4.24.75 (17 August).
 
SOARING PRICE FOR BARLEY SUPPORTED BY SMALLEST BARLEY
CROP IN TEN YEARS
The price of barley, an important feed grain for the livestock
industry, has more than doubled in two months. At the end of
July French barley FOB (Rouen) was quoted at $226 compared
with $149 a year ago, but in one week French barley (Rouen)
had risen to over $305/t FOB (6 August), before retreating to
$256/t FOB (13 August). Besides lower sowings, reflecting a
weak barley price until the spring, and, the removal of EU
intervention support. The crop had been hurt by drought in
Russia and Ukraine, which has cut output to 10mt and 9mt,
respectively, their combined output down by 10mt, with EU
output down 7mt to 55mt. The global barley crop is forecast at
128mt, the smallest crop for ten years, with barley in the unusual
position of trading on a par with milling wheat. Consumption of
barley, although outstripping supply is set to fall to 142mt with
feed barley down 2mt to 98mt. End stocks have fallen by 15mt
to 21mt. In contrast global output of sorghum is expected to
increase to 64mt matching consumption with several countries
posting gains, including Mexico, Nigeria and Sudan, leaving stocks
of 5mt unchanged.
 
OILSEED OUTPUT SIMILAR TO LAST YEAR WHILE US YIELDS MAY
PROVE BETTER THAN EXPECTED
Global oilseed output at 440mt is similar to last year according
to the latest report from USDA, although smaller soyabean
254mt and rapeseed harvests 57mt have been offset by gains in
other oilseeds, including cottonseed 44mt, groundnut 35mt,
sunflowerseed 32mt (even with the 2mt decline in production
for Russia and Ukraine), palm kernel 12mt, with a smaller
increase for copra 6mt. Lower rapeseed production (especially
in the EU and Canada), trade and stocks expected to lead to a
substantial reduction in world crushing, reducing supplies of rape
oil and meal.
While the US soyabean crop is expected to be a record
93mt, some analysts believe that the USDA yield data for
soyabeans may be understated at 43.06bu/acre-Darrel Good
agricultural economist from the University of Illinois estimates
the US soya crop to be higher with yields closer to 43.7bu/acre,
and more in line with brokers’ expectations. Alaron analyst Tim
Hannagan suggests the soyabean forecast underestimates new
crop usage, and believes there is scope for ‘aggressive’ upward
revision. And, while USDA forecast lower crops for both
Argentina and Brazil of 60mt and 50mt respectively, Oil World
suggests the strength in world prices not apparent pre July, will
be sufficient to ensure that south American plantings exceed
expectations. Global trade in oilseeds is forecast at 105mt, with
stocks down to 74mt.
 
ACCELERATING CHINESE CONSUMER DEMAND FOR HIGHER
PROTEIN DIETS, SPURS DEMAND FOR SOYABEANS
Increasing demand in Southeast Asia and East Asia especially
China, for higher protein diets and to build stocks (forecast at
13mt by the end of 2010/11), has led to rising soyabean imports,
expected to reach 52mt up 2mt on last year. A report from
China’s National Grain and Oils Information Centre suggests
that crushers are making healthy margins on soyabeans, lending
further support to imports. In less than ten years China’s
import dependence has increased substantially as production has
not kept pace with domestic demand. The EU is also forecast to
increase imports of soyabean meal up to 23mt, at the expense of
soyabeans cut by 400,000/t to 12.6mt. Global oilseed meal
consumption is forecast to rise from 233mt to 245mt by
2010/11. While the US and India show a small increase, China’s
use of oilseed meal is up by over 5mt to 61mt.
 
SHARP INCREASE IN CRUSHING SOUTH AMERICAN ‘ OLD CROP’
SUPPLIES, COMPETEWITH NEW US SOYA CROP
Trade in soyabeans and soyabean meal expected to increase to
91mt and 57mt respectively. US exports of soya are expected
to fall to 42mt (beans 39mt meal 8mt), with Argentine exports
to rise 42mt (beans 12mt, meal 30mt), with a similar export level
forecast for Brazil 42mt (beans 29mt meal 12mt). While old
crop soyabeans supplies will be tight in the US by end August
2010, soyabean stocks in the rest of the world are sharply up to
63mt. Argentine and Brazil hold 42mt, up 13mt, and likely to
lead to sharp increase in crushing as well as exports of
soyabeans, oil and meal through September/February 2010/11,
competing with new US crop supplies.
Tight supplies of vegetable oils look likely in 2010/11,
exacerbated by the sharp decline in world supplies of rapeseed
and canola will increase price pressure, with additional soy and
palm oil required to cover demand. Larger crushings will create
burdensome supplies of soy meal and necessitate lower prices
to stimulate demand. Oil World forecasts vegetable oil prices are
likely to strengthen relative to oilmeals.
International prices of soyabeans have firmed US NO 2 FOB
Gulf U$430 (13 August). Following a projected record US
soyabean crop for 2010, US futures prices rallied (13 August), on
continued strong export demand mainly by China, and concern
about potential yield losses from variable weather patterns,
including hot temperatures during the critical pod-setting phase
of the US crop, and overly wet conditions and storms flooding
key areas, a particular concern for Iowa. For the remainder of
August, analysts are looking for the weather to be more
favourable to protect yields and achieve the forecast record
output.