Global cereal supply and demand brief

World cereal balance becoming tighter

With many of the main 2006 cereal crops already gathered or nearing maturity, latest information indicates a slightly smaller output than was foreseen earlier this year in July. FAO’s forecast for world cereal production in 2006 now stands at about 2 013 million tonnes, almost 8 million tonnes down since the previous report and 1.6 percent less than the 2005 output. With this revision, the shortfall in production compared to the expected utilization in 2006/07 has grown, and a larger drawdown in global cereal stocks is now forecast. Much smaller crops to be harvested later in the year in exporters in the southern hemisphere – Australia and Argentina – are likely to add to this supply pressure, keeping prices firm and adding to their volatility during the second half of the marketing season. Notwithstanding this development, an adequate level of cereal carryover stocks from the previous season combined with relatively good production in several major importing countries are expected to prevent any involuntary rationing of demand. However, such an eventuality cannot be ruled out in 2007/08 should world cereal production fail to rebound significantly in 2007.

Low global supplies call for a closer monitoring of world food situation

As one of its principal mandates, FAO monitors closely the world food supply and demand situation and is expected to alert the international community in case of any imminent danger to the global food security. Any tightening in global food supplies is always regarded as a cause for concern primarily because of its repercussions for international prices and subsequent impacts on the import bill of many food importing developing countries, especially those in the lower income category. Declines in this year’s cereal production, lower levels of stocks and a sharp increase in international prices have raised questions about the global food situation. The main concern is the declining stocks and whether supplies will be adequate to meet demand without world prices surging to even higher levels.

The apparent tightening of the global food balance is largely confirmed by the six leading market indicators used by FAO for its regular assessment of world cereal supplies. The following provides a brief discussion of those indicators; their meaning and what they imply for this season.

The first indicator (see Figure 1) is the ratio of world cereal ending stocks in any given season to world cereal utilization in the following season. The ratio for this season is 20 percent, down from 23 percent in the previous season and well below 28 percent at the beginning of this decade. Large draw downs of stocks in China has been the main factor for a declining trend in the global stocks-to-use ratio in previous years but lately it is in the EU and the United States where stocks are seen to decline most.

The second indicator measures the ability of the five major grain exporters (which includes both the EU and the United States) to meet the global demand for wheat and coarse grains imports. This indicator is the ratio of the exporters’ supplies (i.e. a sum of production, opening stocks, and imports) to their normal market requirements (defined as domestic utilization plus exports of the three preceding years). For the current marketing season, this ratio is forecast at 1.22, which implies that supplies in 2006/07 could exceed requirements by about 22 percent. This is in a sharp contrast to the previous two seasons when supplies exceeded requirements by 34 to 36 percent.

The third indicator (see Figure 1) is the ratio of the major exporters’ ending stocks, by cereal type to their total disappearance (i.e. domestic consumption plus exports). As with the second indicator, the ratios for both wheat and coarse grains point to a sharp decrease from the previous season; for wheat from 23 percent to about 15 percent; and for coarse grains from 18 percent to 13 percent. However, for rice, the expectation is for a small increase from 15 to 16 percent.

 

One underlying factor for year-to-year variations in supply situation is change in production. The fourth indicator (see Figure 2) shows the size of this change at the global level and for all cereals. In 2006, world cereal production is forecast to decline by 1.6 percent, and this decline follows a 1 percent contraction already in the previous year. In spite of this, however, production levels in both years are still above average. While two years of consecutive declines may still be regarded as a cause for concern, the overall change may be mitigated by developments at regional levels or on a commodity basis.

Because the Low-Income Food-Deficit Countries (LIFDCs) are more vulnerable to changes in their own supplies and their own production levels are critical for their food security, the fifth indicator (see Figure 2) shows only changes in production of the LIFDCs as a group. This indicator suggests a more positive development in that total cereal production by the LIFDCs is expected to increase by some 2 percent in 2006 and this follows an even stronger growth in 2005 when production expanded by over 5 percent.

 

Since the LIFDCs grouping includes such large countries as China and India, it may be prudent to consider aggregate cereal production developments in LIFDCs excluding these two countries. This is the purpose of the sixth indicator (see Figure 2). According to this indicator, even without China and India, total production of the other LIFDCs is expected to expand by 2.4 percent in 2006 which is again a positive outcome although in the previous year it grew more strongly, by 8 percent.

As shown, the first three indicators which deal more exclusively with stock levels and export supplies, point to a situation that can generally be characterized as less stable than in the previous season. On the other hand, a brighter perspective can be drawn from the last three indicators which primarily provide information on production. This contrasting situation raises the need for closer monitoring of supply and demand in world cereal markets especially during the planting period for the next season. For this season, major markets seem to have already factored in tighter supplies as demonstrated by the increases in international prices. These strong prices are likely to encourage higher plantings and therefore result in larger production next year. However, given the anticipated decline in cereal closing stocks, should weather problems prevent an increase in world production next year, supplies during 2007/08 would become much tighter and this could lead to a more significant upward movement in international prices than has been witnessed already.

Bigger coarse grain crop emerges in 2006 but wheat is sharply reduced

The reduction in world cereal production forecast since the previous report in July results mainly from downward revisions to the forecasts for wheat, and a slight reduction for rice, which more than offset an increase for coarse grains. Summer drought in several European countries sharply diminished wheat yields, while hot and dry conditions are adversely affecting prospects for the crops still to be harvested in the main southern hemisphere producers – Australia, Argentina and Brazil. The 2006 global wheat output forecast has been reduced by 19 million tonnes since July, and now stands at 596.3 million tonnes, 4.6 percent below last year’s good level, but still above the average of the past five years. By contrast, FAO’s forecast for global coarse grains production has been increased slightly since the last report to 992.3 million tonnes, which would bring output almost to the level now estimated for last year. The outlook for the harvests currently underway or to start in the coming weeks in many northern hemisphere countries has improved significantly since July. This has more than offset a reduced outcome in Europe, where the crop is largely gathered, and deteriorating prospects in Australia and South America. Regarding rice, at this time of the year, all the main 2006 paddy crops have been planted and some are harvested along and south of the equatorial line. The paddy crops in the temperate climatic zones in the northern hemisphere are also mostly gathered. As the season is progressing, particular attention should be paid to the rainfall pattern in South Asia, where the monsoon should start receding in September/October. For many countries, those rains constitute the main source of water supplies for growing the second, irrigated, paddy crops that will be sown over the last quarter of the year. Over that period, southern hemisphere countries will also be planting their first 2007 paddy crops. Consequently, a recent warning by various institutions monitoring climatic conditions of a likely strengthening of an El Niño event in the last quarter of 2006 and early 2007 has become a matter for concern. The weather phenomenon was already associated with drier-than-average conditions in August in Indonesia, Malaysia and most of the Philippines.

Since the arrival of the monsoon around June, several countries, especially in Asia, have suffered from an erratic rainfall pattern, which has given rise to flooding episodes and lingering dry spells. As a result, FAO has revised downward its forecast for global paddy production in 2006 by 2 million tonnes to 635 million tonnes (424 million tonnes in milled terms), which would be just marginally up from 2005.

Table 1. Cereal Production¹ ( million tonnes)

Lower production and higher utilization leading to smaller ending stocks

Based on the latest estimates, world cereal utilization in 2006/07 is likely to reach a record 2 061 million tonnes, up 1.3 percent from the previous season’s peak. This expansion is associated not only with a modest rise in food consumption, generally in line with population growth, but a strong growth in industrial use, driven mainly by higher usage of maize for producing ethanol, and a recovery in animal feed usage. In view of this year’s cut in world cereal production, the forecast increase in total cereal utilization can only materialize if stocks are drawn down which is what is expected to occur. FAO forecasts world cereal stocks by the close of seasons ending in 2007 to reach 422 million tonnes, indicating a drop of 47 million tonnes, or nearly 10 percent, compared to their opening level at the start of the current season. Except for rice stocks, which are likely to increase, wheat and coarse grains stocks are both expected to end the season well below their opening levels. The anticipated declines in wheat and coarse grains stocks are expected to occur mostly in the EU and the United States as a result of the decline in their production together with strong domestic demand and exports. On the other hand, and as an emerging feature this season, ending stocks in China are heading for the first significant increase in 7 years facilitated by higher production this year.

Table 2. Basic facts of the world cereal situation ¹ ( million tonnes)

Global cereal trade nearly unchanged in 2006/07

Global cereal trade in 2006/07 is forecast at 244 million tonnes, virtually unchanged from that in the previous season and marginally below the 2004/05 peak. A small increase anticipated in international wheat trade is likely to be offset by reduced shipments of coarse grains and rice.

World trade in wheat is currently forecast at 111 million tonnes for 2006/07 (July/June), up 700 000 tonnes (less than 1 percent) from the previous season. Imports by several leading wheat importing countries are forecast to remain unchanged or decline in 2006/07, reflecting a generally favourable domestic supply situation. However, in a few cases, foreign wheat purchases are expected to rise sharply. In India, because of the shortfall in this year’s government held stocks and rising prices, imports are forecast to reach a 30-year high of at least 6 million tonnes. The State Trading Corporation of India has already purchased about 5.5 million tonnes from abroad while the Government has also removed all import duties until the end of this year in order to encourage imports by private traders. Also in Brazil, given the current prospects for much lower wheat production, imports are forecast to increase to 7.5 million tonnes, up 2 million tonnes from 2005/06 and the highest in six years. Regarding wheat export supplies this season, higher sales from major exporters are seen to compensate for the anticipated supply contraction in Ukraine and the Russian Federation.

Global trade in coarse grains in 2006/07 (July/June) is currently forecast at 105 million tonnes, down slightly (600 000 tonnes) from the previous season. Most of the anticipated decline is driven by slight reductions in barley and sorghum. However, in spite of its high prices and a possible slow-down in total feed usage, world trade in maize is expected to enjoy another strong year, approaching 80 million tonnes; or slightly above the previous season’s record. Canada, Egypt and Kenya are forecast to import more maize this season in view of their reduced domestic production. In contrast, good crops in most countries in Asia and southern Africa are expected to limit imports there, while prospects for improved supply conditions may even lead to higher exportable availabilities.
In China, given the prospect for a record maize crop, exports are likely to remain large in spite of strong domestic demand. Among major exporters, shipments from the EU and the United States are forecast to increase, largely offsetting declines from Canada and Argentina. However, large exports from the United States will result in a sharp reduction in its ending stocks in view of the anticipated decline in country’s domestic production and a continuing strong growth in domestic demand for industrial use.

The first FAO forecast of rice trade in calendar 2007 points to small decline to 28.1 million tonnes, reflecting a weakening of import demand in Asia, where several countries just gathered larger paddy crops. In the other regions, imports are expected to change little. As for rice exports, large supplies should enable Thailand and Cambodia to sell more next year, while shipments from China, India, Pakistan and Viet Nam may fall somewhat. Exports from the United States and Australia are also likely to shrink reflecting supply constraints.

Lower export supplies raise international prices

Prospects for smaller production and lower ending stocks continue to provide support to cereal markets, lifting both old and new-crop values. Following a short-lived downtrend in international wheat prices in early August, export prices resumed their upward movement, mostly in response to the stronger pace in export sales, tighter supplies from the Black Sea, a further reduction of the EU’s estimated 2006 cereal output and unfavourable crop prospects in Australia and Argentina. In September, the United States hard wheat export prices averaged US$208 per tonne, up by about US$40, or 24 percent, from the same period last year. In the futures markets, the new crop prices have also risen sharply this season, supported by strong demand and anticipation of lower production in the southern hemisphere. The soft red winter wheat futures for delivery in December at the Chicago Board of Trade (CBOT), the leading wheat futures exchange, averaged US$147 per tonne in September, up US$29 from the corresponding period last year. Wheat prices also benefited from spillover gains in maize and soybeans futures as well as large speculative acquisitions by hedge funds.
Coarse grains prices have also risen sharply in recent months in view of a much tighter supply and demand balance. For maize, the largest traded coarse grain, stronger export prices reflect the growing demand for feed and industrial use. Reduced old-crop supplies in the southern hemisphere coupled with prospects for a smaller harvest this year in the United States, the world’s leading maize producer and exporter, have also been fuelling price increases in world markets. In September, the United States yellow maize export price averaged US$117 per tonne, up US$20 from a year ago.
Old-crop Argentine prices also rose to US$113 per tonne in September, up US$4 from the previous year. The maize futures market in Chicago has experienced a similar upward trend, driven by strong demand and lower production prospects in the United States. In September, December maize contracts averaged US$93 per tonne, up US$13 from the corresponding period last year. International rice prices have also been increasing.
The strength that has dominated the international rice market since January persisted from July through September, as reflected in the FAO All Rice Price Index, which gained a point a month, passing from 108 in June to 111 in September. Much of the continued firmness reflects limited supplies in the leading exporting countries and the deterioration of crop prospects in China and the United States. In addition, the market gained further strength from the announcement, in August, that Indonesia will lift the import ban and purchase some 200 000 tonnes over the last quarter of the year.

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