Global cereal supply and demand brief

OVERVIEW

Strong recovery in world cereal supply, global cereal stocks to rise sharply in 2008/09

The main reason for the significant improvement in global cereal supply and demand balance in 2008/09 has been the sharp increase in world cereal production in 2008 which is estimated at a record 2 289 million tonnes, 2 million tonnes more than was reported in February and 7 percent higher than the previous high in 2007. As a result, the ratio of the world cereal stocks to utilization in 2008/09 is forecast to increase to 24.6 percent from 20.2 percent in the previous year. The recovery in the global supply situation is also confirmed by the slide in international prices of most cereals, most of which have fallen by more than 50 percent from their peaks in the first half of 2008. However, food prices remain at high levels in most developing countries.

Drop in 2009 world cereal production forecast but supply outlook still satisfactory

Based on early indications, and barring unfavourable weather during the current growing season in major producing regions, world cereal production in 2009 is forecast to be above average but to decline by 3 percent from the 2008 record. The impact of this on supplies in 2009/10 could largely be offset by the expected increase in carryover stocks from the current season, while much uncertainty remains over the likely level of utilization in the new (2009/10) marketing season, the current economic problems could weigh negatively on demand for cereals, for animal feed and biofuels in particular, thus resulting in larger excess supply and lower prices in world markets.

PRODUCTION

World cereal production set to decrease in 2009

FAO’s first forecast for world cereal production in 2009 stands at 2 217 million tonnes (including rice in milled terms), 3.1 percent down from last year’s global high but still the second largest crop on record. Reductions are forecast for wheat and coarse grains while the global rice crop may register another marginal increase. The smaller grain crops are expected partly as a result of a reduction in overall grain plantings (mostly wheat) after last year’s exceptional level. In several major producing countries, farmers have been discouraged by sharply lower grain prices compared to a year ago while input costs remain relatively high, as in the EU where an increase in the voluntary set-aside is expected, or a switch to oilseeds, which are relatively less expensive to produce, and could offer the possibility of better producer margins. At this early stage, the global output forecast also assumes a return to average or trend yields in many countries in 2009, after record levels last year.

Smaller wheat harvest expected in 2009

FAO’s first forecast of global wheat production in 2009 stands at 655 million tonnes, almost 5 percent down from last year’s record but still well above the average of the past five years. In North America, a decline of 7 percent in the winter wheat area in the United States and expected smaller plantings in Canada point to a significant decrease in production. In Europe, the wheat area is down in several major producing countries, particularly in the east of the region, and despite generally satisfactory growing conditions, production in the EU is tentatively forecast almost 7 percent down from 2008’s record output. In the CIS countries of Europe, output is forecast to decline from last year’s bumper level. In Asia, prospects for the winter wheat crop have improved following the arrival of rains in many of the drought-stricken areas of China. A sharp recovery is anticipated in the Near East subregion, which suffered drought in 2008. In North Africa, wheat crop prospects are favourable.

In the southern hemisphere, sowing starts in late April/early May in South America. Early indications point to a below-average level of plantings in the subregion, about 5 percent down from 2008, in response to lower prices and reduced access to credit due to the financial crisis. However, in Oceania, early indications suggest producers in Australia will aim to produce an output close to, if not larger than, last year’s good level.

Drought sharply reduces South America’s main 2009 maize crops but prospects remain satisfactory elsewhere

FAO tentatively forecasts 2009 global output of coarse grains at 1 100 million tonnes, 3.7 percent down from last year’s record level. In South America, harvesting of the main season crops is underway and output is expected to decrease sharply from last year’s record levels due to a combination of poor growing conditions and high input prices. In southern Africa, prospects for the main coarse grain crops are generally favourable despite some irregular rainfall and a significant decline in area planted in South Africa, the main producing country in the subregion.

In the northern hemisphere, the bulk of the major 2008 coarse grain crops are yet to be sown in the coming weeks and the areas planted are forecast to decrease in the main producing countries. Farmers’ planting decisions have been influenced by reduced producer price prospects while input prices remain relatively high.

The 2008 rice season harvests conclude favourably and early indications for 2009 point to a further marginal growth in global output

The FAO estimate of global paddy production from the 2008 season, which has just concluded, has been revised upwards to a bumper level of 687 million tonnes, 4.1 percent more than in 2007. As for the new 2009 season, FAO’s first forecast of world paddy production stands at 692 million tonnes (462 million tonnes in milled terms), which would be 0.7 percent above the 2008 level. However, this forecast is still very preliminary as in the northern hemisphere where the bulk of rice is grown, the 2009 crops will only start being planted around April/May. The expected growth in production this year is rather modest, reflecting expectations that the extremely high market prices that have prevailed since late 2007 will subside.

UTILIZATION

Recovery of cereal feed and fuel utilization growth in 2008/09

World cereal utilization is forecast to reach 2 202 million tonnes in 2008/09, up almost 4 percent from 2007/08 and slightly more than was reported in February. Total feed utilization is forecast 3.8 percent up from the previous season and food consumption is forecast to grow by about 1.5 percent, allowing the global per caput consumption of cereals to remain stable at around 153 kg per person. The amount of cereals used for biofuels is forecast to increase the sharpest in relative terms, jumping by 23 percent from the previous season to at least 120 million tonnes in 2008/09, thus accounting for more than one-half of total industrial use of cereals.

World utilization of wheat is forecast to increase by 4.6 percent, or 28 million tonnes, in 2008/09. Most of the increase is expected to be driven by a sharp expansion in the feed use which is forecast to jump by 20 percent from the previous season and that mainly in the EU. World food utilization of wheat is expected to expand by 1.2 percent overall, with faster growth in developing countries where food use is forecast to increase by about 1.6 percent.

Total utilization of coarse grains is forecast to reach 1 107 million tonnes in 2008/09, up 3.9 percent from the previous season. World feed use of coarse grains is forecast 1.2 percent up from 2007/08, a considerably slower growth than in the previous year. Larger availability of wheat supply this season is the main reason for this deceleration. The total coarse grains use for production of ethanol in 2008/09 is forecast to approach 115 million tonnes, up 22 percent from the previous season. Maize accounts for the bulk of this usage and also its anticipated expansion this season. Food consumption of coarse grains is forecast to increase to 191 million tonnes, up 2 percent from the previous season, with most of the growth in Africa.

World rice utilization (mainly food consumption) in 2009 is forecast to expand by a relatively fast 2.5 percent to reach 449 million tonnes. Although consumer rice prices in most countries have failed to return to pre-2007 levels, per caput rice consumption is estimated to increase from 56.9 kg in 2008 to 57.1 kg in 2009, sustained by large public distribution programmes at subsidized prices, but also reflecting a shift from more expensive livestock products.

STOCKS

World cereal stocks to recover significantly more than anticipated earlier

World end-of-season cereal stocks for crop years closing in 2009 are currently forecast at 531.5 million tonnes, 35 million tonnes more than was reported in February and 19 percent above the level in 2008. Two factors have contributed to these exceptionally large upward revisions: the upward adjustments to historical production estimates in several countries, the most significant of which for China from 2006 and the downward adjustments to FAO's estimates for total cereal utilization, mainly stemming from the impact of rising prices on demand starting in 2006/07. The ratio of world cereal stocks by the close of the seasons ending in 2009 to total utilization in 2009/10 is expected to reach 24.6 percent, up sharply from 20.2 percent in the previous season and slightly above its 5-year average (2001/02-2005/06).

Wheat inventories are forecast to increase the most, reaching almost 194 million tonnes, up 28 percent from their opening level. Total wheat inventories in major exporters are forecast to reach a 3-year high of 51 million tonnes. Stocks in Australia, the EU and the United States are forecast to more than double in size due to higher production in 2008. As a result, the ratio of the major exporters' ending stocks to their total disappearance (domestic utilization plus exports) in 2008/09 is forecast to increase sharply from last season’s low of about 11 percent to 19.5 percent. Larger wheat inventories are also anticipated in many other countries, especially in China.

World inventories of coarse grains are also forecast to rise sharply in 2008/09, increasing by 19 percent from their opening level to 219 million tonnes, with most of the increase in major exporting countries. The ratio of the major exporters' ending stocks to their total disappearance is forecast to rise to 16.8 percent. Stocks of coarse grains are also forecast to increase sharply in China.

Regarding rice, the better 2008 production outcomes than earlier anticipated have resulted in an upward revision of global inventories compared with the previous forecast. As a result, global rice reserves at the close of countries’ marketing years ending in 2009 would rise to some 119 million tonnes, the highest volume since 2001. The principal countries responsible for the build-up are Bangladesh, China, Egypt, India, Indonesia, the Republic of Korea, Thailand and Viet Nam. The increase in closing inventories would raise the global rice stocks-to-utilization ratio from 24.3 percent in 2008 to 27 percent in 2009.

TRADE

Declining world trade in 2008/09 driven by reduced import demand for coarse grains

World cereal trade is forecast to reach 261 million tonnes, over 4 percent below the estimated trade in 2007/08. A sharp drop in imports of coarse grains is expected while wheat and rice trade are forecast to expand in 2008/09. As a group, developing countries account for all the increase in world purchases of cereals this season. By contrast, total cereal imports by the developed countries are forecast down, reflecting a significant drop in grain purchases by the EU, of maize and sorghum in particular.

World trade in wheat in 2008/09 (July/June) is forecast up 6.5 percent, mostly reflecting much higher imports by several countries in Asia, in response to lower international prices compared to the previous season and production shortfalls in several traditional importing countries.

International trade in coarse grains in 2008/09 is forecast down 15 percent, from the record volume in 2007/08 primarily driven by reductions in imports by the EU following the recovery in domestic supply; feed wheat in particular. Given ample aggregate export supplies in major exporters, but also from Ukraine and the Russia Federation, the competition for market share is intensifying which is putting downward pressure on prices.

FAO’s forecast of world rice trade in calendar year 2008 stands at 30.7 million tonnes, slightly up from 2007. The volume of exchanges continue to be constrained by the restrictive policies of several of the major exporting countries, in particular Egypt, India, Thailand and Viet Nam, but large crops in 2008 have also diminished pressure to import, especially as prices have yet to return to 2007 levels. Problems in obtaining credit to finance the transactions have also been reported. Under the high price policy in Thailand, exports from the country are expected to decline substantially, but Cambodia, the United States and Brazil are also foreseen to cut their shipments. By contrast, exports from the other major suppliers, including China, India, Myanmar, Pakistan and Viet Nam, are anticipated to rise.

PRICES

International wheat and rice prices weakened since March but those for maize strengthened

International wheat prices that strengthened somewhat in March, averaged marginally lower in the first two weeks of April compared to the past month. The market was influenced by ample wheat supplies and generally good prospects for the 2009 crop, in particular by an improvement of growing conditions in main producing countries of Asia and Near East. This was partially offset by a US Department of Agriculture (USDA) report at the end of March which expected a 7 percent decline in total wheat plantings in the United States; however, this decline was slightly lower than previously anticipated. The US wheat (No.2 Hard Red Winter, f.o.b. Gulf) averaged USD 242 per tonne, one-third of its level of a year earlier and one-half the level of the March 2008 peak. In the futures market, price movements continued to be influenced by repeated upward revisions to this year’s global ending stock levels, particularly in several major producing/exporting countries, as well as by developments in outside markets. As a result, wheat futures remained subdued and close to their March volume.

In the first half of April, world export prices of maize remained higher than the previous month’s average although price movements exhibited strong variability. Maize markets received support from drought conditions in South America, potential planting delays in the United States because of continuing wet conditions, and the spillover from surging soybean prices due to tight supplies and strong demand from China. However, ample supplies of feed wheat put some downward pressure on export prices. The price of US maize (No. 2 Yellow, Gulf) averaged USD 171 per tonne, 3.6 percent above the March average. At this level, maize prices were 31 percent lower than in April last year and 39 percent below the peak level of June 2008. In Chicago, movements in CBOT maize futures for July delivery were volatile throughout March and first half of April, reflecting sharp swings in equity markets, unstable exchange rate developments and mixed signals with respect to prospects for crude oil prices. The latest USDA report indicated a possible decline of 1 percent from 2008 in area planted to maize in the United States because of lower maize prices and still high input costs. In April the Chicago July futures averaged 4 percent, higher than in March but down 34 percent from the corresponding period in 2008.

International rice prices, as represented by the FAO All Rice Food Price Index (2002-2004=100), have remained stable since January 2009, despite relatively weak import demand and large export availabilities, with the index value steady at 270. The resilience of prices reflects the numerous interventions of governments in several of the key exporting countries. For instance, the Thai white rice 100% B rice was quoted USD 607 per tonne in April 2009 (two weeks), some 5 percent lower than in March but only marginally down from USD 611 per tonne in January 2009. At its current level, however, the international rice price is 30 percent below the quotation of USD 873 in April 2008 when prices were approaching their peaks of May (USD 962.60). Much of the recent market softening was reported to have been caused by continued sluggish import demand for rice and the announcement that the Thai government were to release rice from public stocks in mid-April. Prices in the other major export locations remained steady, despite the arrival of a large spring crop in Viet Nam. The market is turning its attention towards India, where the period of the general elections is approaching, as this may be followed by a relaxation of the restrictions that still hinder rice exports from the country. The various government interventions have also had the effect of altering the relative countries’ competitive edges, with prices in the United States, for example, averaging 17 percent lower than their counterpart in Thailand.