Roundup

CEREALS SUPPLY AND DEMAND

A good cereal crop is expected in 2005

Early prospects for the 2005 cereal crops point to a decline from last year’s record level, but output is nevertheless expected to remain above the average of the past five years. Based on conditions of crops already in the ground and planting intentions for those still to be sown later this year and assuming normal weather for the remainder of the 2005 cropping seasons, FAO’s first forecast puts world cereal production at 1 971 million tonnes (including rice in milled terms), some 4 percent down from 2004. Virtually all of the decline is expected among the major producing (and exporting) countries in North America and Europe, where, despite generally satisfactory conditions so far for the crops already in the ground, the overall cereal area is expected to be down slightly, and yields are assumed to drop from last year’s record levels. Cereal production in the developing countries is expected to remain virtually unchanged. An increased output is tentatively forecast in Asia, but this could be offset by slight reductions elsewhere among the developing countries.

Table 1. Cereal production: first forecast for 2005, rice in milled terms (million tonnes)

Tighter supply and demand is foreseen for 2005/06

If current production forecasts materialize, world cereal output in 2005 may not be sufficient to meet next year’s expected utilization without a drawdown of world carryover reserves. On the assumption that world cereal utilization in 2005/06 would be close to its trend, at 1 995 million tonnes, the deficit would have to be met by a notable reduction of about 24 million tonnes in world stocks. If so, world cereal stocks by the end of the seasons in 2006 could decline to 425 million tonnes. At this level, the global cereal stocks-to-use ratio would be around 21 percent which is similar to the current season when production is at record but utilization above trend. In fact, should next season’s cereal utilization also exceed trend, the drawdown on world reserves may become even more significant, which could result in sharp price increases.

 

Further upward revision of the 2004 production estimate

With the harvest of the last of the 2004 crops now near completion, FAO’s latest estimate of the 2004 global cereal output has been revised further upward to 2 057 million tonnes, an increase of 9.2 percent over the previous year and a record level. The latest revision reflects increased estimates for wheat and coarse grains, which more than offset a reduction for rice in the light of drought impact on the secondary 2004 paddy crops in Asia. Most of the increase in 2004 cereal production occurred among the developed countries, particularly in the EU and the United States. However, output also rose in the developing countries, although less sharply, growing by 3.1 percent.

In the 84 Low-Income Food-Deficit countries, the aggregate cereal output in 2004 is estimated 4.4 percent higher than in the previous year, with a strong increase of 10 percent in China more than compensating for declines in other countries. Excluding China and India, the aggregate production of the rest of the LIFDCs is seen to have declined marginally. By contrast, production of roots and tubers, the second most important staple in developing countries, is estimated slightly up in 2004/05.

Global cereal utilization to rise above trend, mainly for feed

For the first time in a decade, world cereal utilization in 2004/05 is forecast to exceed the trend by a significant margin of almost 2 percent. Mainly as a result of record world production, food, feed and other uses of cereals are all forecast to rise in 2004/05, reaching a total of 2 013 million tonnes. This would be about 58 million tonnes (3 percent) above the previous season and also 9 million tonnes more than was reported in December. Food consumption of cereals is forecast to rise by about the same rate as population growth, to about 973 million tonnes, resulting in almost unchanged per caput consumption in both developing and developed countries.

The amount of cereals used for feed is forecast to reach 753 million tonnes. This represents a strong growth of almost 5 percent from the previous season, driven mainly by record feed grain production in the United States and large supplies also in Europe. Industrial use of cereals is also forecast to expand sharply, although most of the increase is expected in the United States where grain-based ethanol production is booming.

Substantial build-up of world cereal stocks

World cereal stocks for crop seasons ending in 2005 are now forecast to reach 450 million tonnes, up 39 million tonnes, or about 10 percent, from their reduced opening level. This is the first build-up of stocks in five years. The anticipated expansion is mainly driven by a record world cereal output in 2004.

On the basis of individual cereals, the most significant increase is expected for maize followed by wheat, while rice carryover stocks are expected to decline again this season. Most of the forecast accumulation in world cereal inventories would be among the major exporters, with their combined stocks rising to 230 million tonnes, representing over 50 percent of world inventories. This would also constitute a notable improvement from the previous season when aggregate stocks of cereals held by the major exporters stood at 154 million tonnes, or about 37 percent of the world total.

Wheat and coarse grain prices remain weak while rice prices are on the rise

Against this backdrop of ample exportable wheat and coarse grains supplies, and the likelihood of this situation continuing also in 2005, international prices for these grains are generally weak and below the levels in the previous season. Rice prices have risen since last November reflecting adverse weather conditions for the secondary paddy crop in several major producing countries. As of February, Thai rice prices were well above their level a year ago.

Table 3. Cereal export prices (US$ per tonne)¹

World cereal trade higher than anticipated in December

Based on the latest indications, international trade in cereals in 2004/05 is forecast at 231 million tonnes, up 3 million tonnes from the previous report but still slightly below the previous season. The upward revision since the previous report mostly reflects changes to the forecasts for wheat imports. Compared to the previous season, the developed countries are expected to import less, particularly the EU. The reduction in this group of countries would more than offset an expected increase in shipments to developing countries, mainly of wheat to China where demand is strong.

Table 2. Basic facts of the world cereal situation

NON-CEREAL BASIC FOODS

Meat market to recover in 2005 but uncertainties persist

Early indications for 2005 point to some recovery in meat consumption as markets open up and exportable meat supplies increase. However, meat markets in 2005 could still be influenced heavily by food safety concerns, in the wake of Asian human fatalities due to AI and BSE, as well as by shifting exchange rates, and production and trade policy developments.

Prices of meat rose throughout 2004 reaching the highest levels recorded since the early 1990s. The FAO international meat price index averaged 102 points in 2004, against an average of 90 in 2003, with the poultry and beef prices up 22 and 14 percent respectively from their levels of a year ago. Prices of meat decreased somewhat in late 2004 but in early 2005 received upward pressure from limited exportable supplies in some of the major Asian markets. However, the expected opening of markets and increase in export supplies, could lead to an easing of some meat prices in 2005.

OTHER RELEVANT AGRICULTURAL COMMODITIES

International prices of banana recovered in 2004 reflecting higher demand in the northern hemisphere and changes in the import of system of the 10 countries that joined the EU in 2004.

Sugar prices strengthened in 2004 and early 2005 reflecting shortfalls in supplies, which are forecast to continue in 2005 reflecting strong import demand and unfavourable production prospects in India.

Coffee prices have recovered somewhat from record low levels. Whether structural changes in the coffee sector and markets can sustain the current upward trend, however, remains to be seen.

Uncertainty about West African production and exports of cocoa weigh heavily on the sector; wide swings in production and prices for the remainder of 2005 are not to be discounted.

Despite record production in the past three years, a combination of factors, including currency, industry shifts and strong demand, is sustaining tea prices at stable levels.

Reduced plantings of cotton are expected among the world’s largest producers (Brazil, China, India, Pakistan, the United States) in response to last year’s depressed levels. This could lead to some recovery in cotton prices. However, to induce a significant uptrend the shift out of cotton production would have to be so large that only a modest price effect may be anticipated.