Global cereal supply and demand brief

FAO's first forecast for 2006 points to another slight decrease in world cereal production

Based on the condition of cereal crops already in the ground and planting intentions for those to be sown later this year, and assuming normal weather for the remainder of the season, FAO's first forecast for world cereal production in 2006 points to a decrease of about 19 million tonnes, to 2�015 million tonnes. However, even at this lower level, world cereal output in 2006 would be the third highest on record and above the five-year average.

Table 1. Cereal Production¹ ( million tonnes)

FAO forecasts world wheat output in 2006 at almost 620 million tonnes, down 6 million tonnes from 2005. The decrease from the previous year mostly reflects smaller harvests anticipated in the European CIS and the United States of America due to area reductions following unfavourable winter weather conditions. By contrast, good yield prospects are expected to help production to recover in the EU and North Africa, while prospects for major wheat producing countries in Asia are mixed. A good harvest is expected in China, but in India the crop will be lower than earlier anticipated.

Regarding coarse grains, FAO provisionally forecasts world production in 2006 at about 973 million tonnes, down nearly16 million tonnes from the level in 2005. However, in spite of this decline, global production would still exceed the average of the past five years. Most of the decrease is expected in the United States, where in March the Government projected a possible 5 percent decline in this year's maize area. Also in Argentina, the planted area is 10 percent smaller and harvesting is currently underway amid wet weather which is likely to lower yields. A sharp drop in output is also forecast for the Republic of South Africa, mainly reflecting a decrease in the maize area due to low prices during the planting period and a high level of carry-over stocks.

For rice, the paddy season is well advanced among countries located south and along the equator, but is just starting in the northern hemisphere, where the bulk of the world's rice is produced. Based on the first and very tentative FAO forecast, global rice production in 2006 could rise to 423 million tonnes (milled terms), about 3 million tonnes more than in 2005.

Cereal production in 2005 down from the previous year's record

With firmer information available on the last of the 2005 crops, FAO's latest estimate of world cereal production in 2005 has been revised upward to 2�034 million tonnes (rice in milled terms), an increase of nearly 30 million tonnes since December but still below the previous year's record. While harvested areas remained largely unchanged from the previous year, the average yields fell slightly because of less favourable weather conditions which mostly affected wheat and coarse grains crops in several developed countries. However, in the developing countries and, more notably, in the Low-Income Food-Deficit Countries (LIFDCs), 2005 saw a significant increase in cereal harvests.

Table 2. Basic facts of the world cereal situation ( million tonnes)

Global rice production rose sharply in 2005, up 11 million tonnes, which lifted it to a record high of nearly 420 million tonnes (milled terms). This result reflected relatively favourable weather conditions in Asia, western Africa and South America and the positive effects of high prices in 2004, which had prompted a general increase in plantings. For wheat, latest estimates put global output in 2005 at 626 million tonnes, 6 million tonnes below the previous year's record. Wheat production soared to record levels in Asia and recovered significantly also in Australia but these increases were not sufficient to fully offset for sharp declines in the EU, North Africa and Argentina. World coarse grain output in 2005 is estimated at 988 million tonnes, 36 million tonnes below 2004, which was, however, a record year. The bulk of the decline was due to smaller barley and maize harvests in the EU and the United States while the overall coarse grain production in the developing countries and the LIFDCs (as groups) increased slightly.

Cereal utilization expanding at a slower pace in 2005/06

After a robust growth in world cereal utilization in 2004/05, up 2.5 percent from the previous season, the rate of growth in 2005/06 is forecast to slow down to about 1.5 percent, to reach 2�038 million tonnes. At this level, world cereal utilization would be slightly above global cereal production in 2005. Reduced feed grain supplies, resulting from lower levels of coarse grain production, a rebound in international grain prices, and outbreaks of animal diseases have contributed to slower growth in overall cereal feed utilization in 2005/06. Total feed utilization in 2005/06 is currently forecast at 746 million tonnes, down 7 million tonnes, or 0.8 percent, from the previous season. Feed use of coarse grains is forecast to drop most, by about 10 million tonnes compared to the previous season, to 618 million tonnes. The bulk of this decline is concentrated in a few countries, namely the United States, the Russian Federation and Ukraine.

By contrast, food usage of cereals is expected to demonstrate another modest growth in 2005/06. Total food use is forecast at 982 million tonnes, up 17 million tonnes, or 1.8 percent from 2004/05. The increase leads to a slight rise in world per caput consumption level of cereals, to 152 kg, and a marginal improvement also in per caput food consumption in LIFDCs, to nearly 157 kg, the latter driven almost exclusively by a strong recovery in the cereal supply situation in several countries in western Africa and higher consumption of rice and coarse grains as food. About 420 million tonnes of rice are estimated to be consumed in 2005/06, mostly as food, 6 million tonnes more than in the previous year. On average, per caput rice food intake could rise slightly to 57 kg per year. Industrial usage of cereals is also forecast to register a strong growth in 2005/06 but the increase is mainly associated with higher use of maize for production of ethanol in a handful of countries, led by the United States. The recent surge in fuel prices has further accelerated efforts by many countries to invest and expand their grain-based ethanol production capacity to meet their growing fuel needs, a trend which is expected to continue as countries try to lessen their dependency on petroleum.

Cereal stocks declining again

After a sharp rebound in 2005, world cereal stocks by the close of the seasons ending in 2006 are likely to decline to 462 million tonnes, down 7 million tonnes, or 1.6 percent, from their opening level. This decline would have been much higher given the fall in world cereal production in 2005 but a slow increase in total cereal utilization in 2005/06 is considered to require a smaller reduction in world inventories than would have been the case if utilization continued to grow at the previous season's pace. The anticipated drawdown in world cereal stocks mostly represents a decrease in world wheat and coarse grain inventories, given sharp falls in their production in 2005. Based on the latest supply and demand estimates for 2005/06, the global cereal stocks-to-utilization ratio, which compares the level of inventories at the close of a season to utilization in the next, would stay at around 23 percent, similar to the previous season and 2 percentage points above the low reached in 2003/04.

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Total coarse grain stocks are currently forecast to reach 189 million tonnes, down almost 5 million tonnes from the previous season, with most of the decline in the EU and the CIS countries in Europe. Wheat stocks are also forecast to decline, to 174 million tonnes, down 3 million tonnes, with drops in stocks in the EU, China, Morocco and Turkey exceeding increases in several other countries, most notably in Australia and Canada. For rice, in spite of sizeable gains in 2005, global production would be just sufficient to cover utilization, so global rice inventories are likely to be unchanged around their opening level of 99 million tonnes. If confirmed, this could signal the conclusion of the downward adjustment process of stocks initiated in 2000.

Cereal trade to decline slightly in 2005/061

Cumulative small declines in exports of nearly all major types of cereals contribute to almost 3 million tonnes reduction in world cereal trade to 241 million tonnes in 2005/06; out of which world wheat trade is forecast to reach 109 million tonnes, coarse grains 104 million tonnes, and rice 27.9 million tonnes. The bulk of the reduction in world cereal trade is driven by only a handful of importing countries, mostly LIFDCs. This season's lower wheat purchases by China account for most of the decrease in world imports. In China, wheat imports are forecast to decline by nearly 6 million tonnes following the rebound in domestic wheat production. Elsewhere, smaller maize imports by Canada and rice imports by Nigeria, Bangladesh and the Philippines are also contributing to the forecast decline in world cereal trade this season. However, a number of countries are also seen to increase their cereal imports in 2005/06; most notably, Iraq which is returning to the world market as a major wheat buyer, countries in North Africa which need to import more wheat this season due to poor harvests in 2005, and Brazil, which is forecast to increase its purchases of not only wheat and maize but also rice, due mainly to tighter supplies and strong demand.

On the export side, total cereal shipments by major exporters are seen down for wheat but up for coarse grains and rice. In the wheat market, subdued world demand coupled with large supplies from the Russian Federation and Ukraine has lessened the impact of this season's sharp decline in exportable supplies in Argentina. In the coarse grain market, larger sales are expected from all major exporters except for Australia while higher exports from China, the Republic of South Africa and the Russian Federation are also seen to offset reductions from Brazil, Bulgaria and Romania. For rice, exports are seen to contract somewhat in 2006, reflecting expectations of smaller shipments from India, Pakistan and the United States, only part of which is likely to be compensated by larger sales from China and, in particular, Thailand.

Cereal prices gaining strength in 2005/06

International prices for all major cereals registered considerable gains in 2005/06 (July/June) and most prices have also edged upwards during the first quarter of 2006. Since the beginning of the current marketing season, wheat prices remained largely above the corresponding period in the previous season because of a decline in 2005 production and a cut in Argentine supplies and consequently exports. The new 2006 crop wheat received initial supports from the uncertainty for this year's winter wheat planting, unfavourable weather and strong sales. During the first quarter of 2006, wheat prices averaged about 14 percent higher than in the corresponding period last year. However, improving crop outlook in recent weeks and early prospects for a reasonably balanced world supply and demand situation in 2006/07 have lessened the possibility of much higher wheat prices in the coming season. For rice, the FAO rice price index, which had been stable at 101 from June to December 2005, rose to 103 in January 2006 and to 105 in February and March 2006, partly sustained by large purchases by several countries in Asia, and a tightening of export availabilities in major exporting countries. Coarse grain prices have also strengthened since the start of the season. In spite of increased world production and large supplies of feed wheat, international prices remained strong, driven mostly by strong demand for industrial usage, mainly ethanol production in the United States, and still strong feed demand despite the spread of avian influenza. In recent weeks international prices also strengthened in reaction to reports of smaller maize plantings in the United States while speculative buying in the futures markets, fuelled by surge in prices of metals and energy, also provided support.

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