MARKET SUMMARIES

Overview

The recent months saw commodity markets as a whole becoming more volatile with a steady upward trend in prices. In agricultural markets, some important food and feed commodities gained on supply tightness and stronger demand while in the energy complex and metals, the tighter supply and demand balance resulted in a steep increase in prices. Amid political uncertainties and surging energy prices, agricultural markets over the past year have also had to confront abnormal incidences of natural disasters, ranging from devastating hurricanes to fast spreading animal diseases.

Based on current indications, several agricultural commodities are likely to experience still more unstable months ahead and, in most instances, the fundamentals point to even further gains in prices. This eventuality seems strongest for cereals, as world cereal demand is forecast to surpass its supply in the new season and push down stocks to an uncomfortably low level. For sugar, while a further surge in prices from the current high levels could be considered as less probable, the main risk remains the continuing price volatility. For the oilseed complex, as well as meat and dairy, fundamentals at this point in time do not support a tightening in the markets and the near-term price prospects are more on the downside instead.

Against this background of mixed outlook but generally firm prices, FAO is forecasting an increase of over 2 percent in the world food import bill in 2006 compared to 2005. The increase is expected to be strongest for cereals and sugar but smallest for meat. Given their higher share as importers of food and feed, the developing countries’ bill is forecast to grow by 3.5 percent while that of the Low Income Food Deficit Countries is forecast to jump by nearly 7 percent.

 

Wheat

As the current 2005/06 trade season approaches its end, the very near-term markets continue to wrestle with uncertainties about next year’s outlook. International prices have rallied in recent months because of prospects for much lower world production and stocks and the underlying tightness in the world supply and demand balance. FAO is forecasting a 10 million tonne decrease in world wheat production this year with a strong demand outlook driving up world trade in 2006/07 to 110 million tonnes. The world balance sheet for 2006/07 is expected to show a sharp drop in ending stocks as well as a decline in the stocks-to-use ratio to a relatively uncomfortable level of 25 percent, the lowest in over three decades. Against this background and even barring any major or unexpected weather problems in the coming months, wheat prices are likely to remain generally high and volatile in the new season.

Coarse grains

The 2006/07 season opens with lower stocks and prospects for reduced production. International prices moved sideways during the first half of the 2005/06 season but have started to strengthen in recent months, supported by a robust demand from the ethanol sector, a potential recovery in feed use and tighter export supplies. World coarse grain production in 2006 is forecast to decline by 13 million tonnes but trade is tentatively forecast to remain unchanged in 2006/07, at around 105 million tonnes. On current production indications, the new season’s supply and demand balance will be tight. This is evidenced in a sharp anticipated fall in world stocks and a near-record low stocks-to-use ratio of around 15 percent.

Rice

Current prospects for paddy production in 2006 point to only a modest growth, reflecting concerns over rising production costs and falling profitability. However, the outlook will remain tentative at least until August when more will be known about the pattern of the monsoon rains in Asia. After reaching a record in 2005, trade in rice may contract somewhat in the current year, as imports to African countries, the main engine for trade growth in the past decade, are forecast to decline. The rebuilding of end of season rice inventories initiated in 2005 is likely to proceed in the current season, a process largely concentrated in China. Given the expectation of only limited production gains per caput rice availability as food may decline in 2006/07. International rice prices, which were particularly buoyant in the first quarter of 2006, are expected to remain firm in the coming months.

Oilseeds

Global 2005/06 oilcrop production is forecast to expand further though less than the previous season due to a slowdown in soybean production. As supplies are forecast to exceed oil and meal demand, oilseeds and products inventories are anticipated to rise and the higher stock-to-utilization ratio is suggesting a downward trend in oil and meal prices. Rising oil/fat consumption for non-food purposes is increasingly shaping the market and animal diseases still affect meal consumption. Trade in oilseeds and derived products is forecast to expand, with a growth slowdown likely for soybeans and palm oil, while firm prices and animal diseases have depressed meal trade growth. China’s seed, oil and meal imports are increasing further while oil imports by the EU are surging as more of the domestic crop is used for biofuels. South American soybean exports are also increasing, following lower United States shipments. In 2006/07, plantings in the northern hemisphere are expected to grow little which may give rise to a moderate output increase, if any, while steadily increasing demand for oilseed products could trigger a stocks drawdown. The new season’s outlook will increasingly influence the market and may attenuate the downward pressure on prices anticipated for the coming months.

Cassava

The outlook for global cassava production in 2006, while still subject to much uncertainty, could approach last year’s record level. The favourable prospects are underpinned by a return to normal growing conditions in Asia and measures to increase the crop’s commercialization in the largest producing countries. Global trade in cassava products in 2006 could expand considerably, reflecting an anticipated recovery in exportable supplies in Thailand, with China expected to remain the major cassava importing country. International quotations of cassava products have fallen from the high levels witnessed in 2005, but still remain firm. The outlook for prices will largely hinge on countries in Asia maintaining large international purchases.

Meat and meat products

After a brief recovery in 2005, global meat markets were again affected by animal disease concerns. Consumer responses to the increasing incidence of avian influenza (AI), as well as continuing bovine spongiform encephalopathy (BSE)-related bans on North American beef and foot-and-mouth disease (FMD)-affected South American red meat exports are shaping meat markets in 2006. Expectations of the lowest meat consumption gains in 25 years, uncertain price prospects and escalating trade restrictions in 2006 are expected to limit global meat output to 272 million tonnes. Meanwhile, trade is expected to reach 20.5 million tonnes, up only marginally, in response to sluggish global poultry import demand from major markets and the imposition of animal disease-related trade bans.

Dairy

World milk output is expected to grow by 2.6 percent again in 2006, largely as a result of over 5 percent growth in Asia. International prices of dairy products have subsided from the 15 year highs of autumn 2005, and will likely decline further in 2006. A key uncertainty is the extent to which production will recover in Oceania. However, firm demand in key developing country markets will help underpin prices, despite higher export supplies.

Sugar

World sugar prices reached their highest level in 25 years in February 2006, when raw sugar prices exceeded US¢19 per pound. The major factors underpinning these price levels were unprecedented rises in crude oil prices, as well as the continued supply deficit in the world sugar market for the third consecutive year. World sugar production in 2005/06 is likely to reach 149.7million tonnes with consumption at 149.9 million tonnes, developing countries accounting for most of the growth. The greatest demand expansion is expected among developing countries with strong economic performances, such as China and India. Consumption in developed countries is expected to remain stagnant, due to low population growth and dietary concerns. For the remainder of 2005/06, world sugar prices are expected to remain firm at present levels as the current supply and demand outlook does not support a further strengthening.