Roundup

CEREALS SUPPLY AND DEMAND

The supply and demand outlook for 2005/06 eases as the season progresses

The forecast for global cereal production has been revised upward since the previous report in September, reflecting the arrival of firmer, and mostly favourable, information on the harvests still underway or just recently completed around the world. FAO’s forecast for cereal output in 2005 now stands at almost 2 005 million tonnes (rice in milled terms), almost 22 million tonnes up from the September forecast, but still down, by 2.4 percent, from the previous year’s record output. With this revision, the shortfall in production, compared to the expected utilization in 2005/06 has been reduced and, subsequently, the expected drawdown in global stocks is not as large as appeared necessary earlier in the season. Based on the latest figures, the global cereal stock-to-utilization ratio^1/ now stands at 22 percent, close to the level in the past two seasons, but below the long-term average of some 30 percent. However, the relatively large inventories forecast to remain among the major exporting countries likely continues to be an important mitigating factor against upward price pressure on international cereal markets.

 

Table 1. Basic facts of the world cereal situation

Recently gathered 2005 crops better than expected and early prospects for 2006 are favourable

A large part of the latest upward revision to the global cereal output forecast for 2005 is attributed to better maize yields emerging in the United States as the later developing crops, which had benefited from rains in the latter part of the season, were gathered. As a result, the estimate for world coarse grain output was raised by some 12 million tonnes to almost 971 million tonnes, still about 5 percent below last year’s record but well above the average of the past five years. Also contributing largely to the revision in the 2005 global cereal output estimate since September, has been the evidence of larger rice crops being gathered in virtually all the major producers in Asia after a generally favourable monsoon. The estimate for global paddy rice output in 2005 now stands at a record 622.5 million tonnes (415.8 million tonnes in milled terms), 7.2 million tonnes up since September and 2.6 percent more than the previous year’s crop. Regarding wheat, the last two months have also seen some overall upward revision to the global output estimate, to almost 619 million tonnes, primarily a result of continued favourable conditions for the Australian crop in the lead up to the harvest, which is now underway. At this level of output, the world wheat crop in 2005 would be only 1.3 percent less than the record in 2004. Virtually the entire drop in the 2005 cereal production is expected among the major exporting countries in North America and Europe, where crops have fallen from the record levels of the previous year. In the developing countries, the increase in this year’s production is more marked in the group of Low-Income Food-Deficit Countries, particularly when the largest countries China and India are excluded. Overall, generally satisfactory conditions during the 2005 cropping seasons have resulted in improved cereal harvests in most regions, with the exception of North Africa, and some countries in Southern Africa and South America, where crops were affected by adverse weather.

Early prospects for the newly-planted 2006 winter wheat crop are generally favourable. Conditions for planting and crop establishment have been good in most parts and tentative estimates point to larger areas sown in several major producing countries. However, early prospects are uncertain in Southern Africa and in parts of South America reflecting inadequate rains for planting and farmers’ reduced sowing intentions in response to low domestic prices.

Total cereal utilization to increase in 2005/06 but feed use declines

The FAO forecast for world cereal utilization in 2005/06 has been raised by 10 million tonnes since the previous report to 2 025 million tonnes, up just 1 percent from the previous season. This month’s upward revision is mainly driven by higher cereal production estimates for 2005, which should lead to increased food and other uses of cereals. Despite abundant supplies of feed wheat, the reduction in coarse grains production this season has resulted in overall lower feed supplies, leading to a small decline in feed use after substantial growth in the past two years. Most of the decline in feed usage is expected in the main producing and exporting countries, namely the United States and the EU. By contrast, the global use of cereals as food is forecast to increase by 2 percent in 2005/06. In per caput terms, the cereal food consumption remains almost unchanged in developed countries but increases slightly in developing countries to 158.6 kg, the same level as in 2003/04. Food consumption of wheat and rice remains stable, but that of coarse grains is up, mainly reflecting a recovery in consumption in Western Africa following a sharp decline in the previous season, when the cereal harvest was reduced by dry weather and pests.

Global cereal stocks to decrease but less than previously expected

The FAO forecast for world cereal stocks at the close of crop seasons ending in 2006 has been raised to 444 million tonnes, 13 million tonnes up from the forecast in September. However, at this level, the total inventories would still be below their opening level, by 21 million tonnes, or 4 percent. The latest revision follows the recent indications that the final 2005 production outcome will be larger than previously anticipated, in particular for coarse grains and rice. The overall reduction over the season is forecast largely in inventories of wheat and coarse grains, mostly in major exporting countries, in Brazil and in several North and Southern Africa countries affected by drought-reduced harvests. Stocks also fall in China to compensate for lower imports. However, the major exporters’ shares of the aggregate wheat and coarse grains stocks would still be maintained at about the previous year’s levels of 32 percent and 49 percent respectively. After the latest revisions, global rice inventories are expected to change little over the year, ending-up just marginally below their opening level. This is bringing to a halt the run of significant declines in each of the past five year’s, deriving mainly from China, where the 2005/06 closing stocks are forecast a bit higher than their opening levels.

Cereal prices are up from the previous season

International cereal prices are generally above those at the same time last season. Generally lower import demand and large supplies of feed wheat from the Black Sea region have limited the increase in prices of US origin wheat, which by late November were unchanged from the September level. However, Argentine prices are sharply above their levels of a year earlier as a result of the large expected decline in domestic production. International maize prices have strengthened this season due to reduced exportable supplies in China and Brazil coupled with strong demand in several southern African countries. In recent weeks, faster sales from the United States following the resumption of exports from the hurricane-affected Gulf ports provided some support to US maize and sorghum prices but, by the end of November, quotations remained at the same level as in September. By contrast, prices of white and yellow maize from South Africa have increased significantly in the past month mainly reflecting strong regional demand and a weaker Rand against the US dollar. Regarding rice, despite the arrival of abundant new-crop supplies on the market in northern hemisphere countries, international prices have remained relatively stable since September. However, the recent improvement in the 2005 crop outlook is expected to be a major downward influence on prices in the coming months.

Table 2. Cereal export prices (US$ per tonne)¹

World cereal trade lower in 2005/06

Based on latest indications, international trade in cereals in 2005/06 has been revised upwards by about 3 million tonnes since the previous report, to nearly 239 million tonnes, still some 2 percent below the estimated shipments in the previous season. The forecast decline in global trade mainly reflects improved 2005 cereal harvests in a number of major importing countries, notably in Asia. Among the individual cereals, trade of wheat and rice contracts but that of coarse grains increases slightly. Significant declines in wheat imports are anticipated in China and Pakistan driven by higher domestic production, while Bangladesh, Indonesia and the Philippines account for more of the anticipated decline in world rice trade following bumper crops this year. By contrast, higher imports of coarse grains are expected in the EU but also in a number of countries in Southern Africa where this year’s harvest where reduced. In these countries, imports are mostly expected in the form of food aid.

NON-CEREAL BASIC FOODS

Global production of milk to increase in 2005 sustained by strong grow in Asia

The FAO international dairy product price index, that reached a 15 year high of 165 in September 2005, declined slightly to 163 in November. Prices remained at high levels reflecting steady demand in parts of South East Asia and North Africa, coupled with limited supplies in traditional exporters and reduced export subsidies by the European Union. Production of milk in 2005 is forecast 2.2 percent higher than in the previous year. In developing countries, the output is expected 4 percent up mostly reflecting strong growth in India, China and Pakistan. In developed countries, the output increases only marginally, with a higher output in the United States, but a decline in New Zealand and unchanged production in Australia.

Record oilseed carryover stocks and favourable prospects for 2005/06 output keep prices under pressure

Oilseed prices weakened towards the end of the 2004/05 season (October/September) after strengthening mid-season, and returned to about the level a year earlier. The weakening was largely due to evidence of record oilseed carryover stocks, following strong growth in production during the year, which contributed to create an excess of supplies compared to utilization. Latest information points to continued growth in oilseeds production in 2005/06, albeit at a much slower rate (2 percent), than the surge in the previous season. As a consequence, the growth in meal and cake production will also slow down. Growth in oils and fats production will also be less pronounced during the year.

Regarding utilization, consumption of both oils and meals is forecast to increase in 2005/06. Consumption of oils/fats is expanding in response to sustained income growth in several countries in Asia, South America and the east of Europe, while consumption of meals/cakes is expected to be stimulated by reduced prices as a consequence of surplus supplies on the market. Increased crushing of high meal-yielding oilcrops is expected during the year in order to meat the sustained growth in demand for oils/fats. Following from the increased oilseed production during 2004/05, and even after allowing for increased utilization, inventories of oils/fats and meals/cakes were well above the historical averages at the close of the season. During the current 2005/06 season, oil and meal inventories are expected to be reduced slightly as utilization growth will outpace that of production, but will remain relatively high.

Sugar production forecast to increase in 2005/06 but will remain marginally below consumption

World sugar production is forecast to increase by 3.7 percent in the new 2005/06 season (October/September), to reach 147.8 million tonnes (raw sugar equivalent), and the bulk of the growth is anticipated among the developing countries. However, continuing growth in consumption, also mostly in the developing countries, would lead to a total utilization of 148 million tonnes, implying a reduction in global inventories again this year. As a reflection of this, world sugar prices remain relatively firm and stable.

OTHER RELEVANT AGRICULTURAL COMMODITIES

Banana markets were characterized by high prices in the last quarter of 2005, reflecting firm demand and reduced supply, primarily due to adverse weather in Latin America. The supply situation is expected to remain tight into the beginning of 2006, keeping upward pressure on prices. Coffee markets recovered considerably in October, after falling from May to September, which was largely a seasonal factor. The October average price was 82.5 US cents per pound, 35 percent up compared to a year earlier. The coffee market remains underpinned by a tighter supply and demand balance: output is forecast to decrease in 2005/06 while consumption is expected to grow and global inventories of green coffee will fall. International cocoa prices rose to slightly in September to 67.22 US cent per pound but slipped back down in October to 65.9 US cents per pound following reports of higher exports expected from Côte d’Ivoire. The recent weakness in prices, compared to the level at the start of the year is attributed to concern over an estimated global production surplus in the 2005/06 compared to consumption, as well as the effect of a stronger US dollar. The FAO Tea Composite Price stood at US$1.68 per Kg in September 2005, 1.5 percent up from August, as seasonal demand boosted prices in most tea auction markets. Prices were up in all the main tea auctions with the exception of Kolkata where prices are seasonally low coinciding with the main harvest period.

1.  Compares the level of inventories at the close of a season to utilization in the next. Utilization for 2006/07 is a trend value based on extrapolation from the 1995/96-2004/05 period.