Global cereal supply and demand brief

Cereal supply outlook for 2008/09 improves

With the global cereal harvest in 2008 now set to turn out considerably larger than earlier forecast, a significant improvement in the global supply and demand balance for cereals in the 2008/09 season can be expected. Even allowing for a larger increase in utilization than was predicted in July, an 8 percent increase in world cereal stocks could now be possible. The bulk of the increase is expected in the wheat stocks of the major exporting countries, while a notable growth in rice stocks is also forecast for the second year in succession. While, at the global level, coarse grain reserves are seen to remain virtually unchanged from the previous year, as growth in utilization keeps pace with production gains, the inventories of the major exporters will drop back down to the relatively low 2006/07 level. Against this background of generally improved supply prospects, international cereal prices have weakened significantly since their record high levels earlier this year.

PRODUCTION

The 2008 global cereal harvest turns out better than earlier predicted

FAO’s forecast for world cereal production in 2008 has been revised upward since the previous report in July, to 2 232 million tonnes (including rice in milled terms), 4.9 percent up from last year and a new record. The forecast has been increased mostly on account of better than expected harvest results for grains throughout Europe, for maize in particular in the United States and also for coarse grains and rice in Far East Asia.

Regarding wheat, global output in 2008 is now forecast at 677 million tonnes, a very substantial (11 percent) increase from the previous year and well above the average of the past five years. Of the wheat crops already harvested, the largest revisions compared to earlier expectations have been in Europe, where latest estimates now point to a significant (25 percent) increase in production following generally above average yields and a much better than expected recovery in several countries, especially in eastern parts, from drought-reduced crops in 2007. In North America, where output was already seen at a good level, upward revisions have also been made to the latest estimate of this year’s output in the United States, and to the forecast for Canada, where the harvest has yet to be completed. Favourable weather has resulted in better average yields than earlier predicted. By contrast, the latest estimate of the aggregate 2008 wheat output in Asia has been reduced slightly, although it remains at a good level. The most significant downward revisions were for Turkey and the Islamic Republic of Iran in the Near East subregion where persisting dry weather reduced yields. Elsewhere in the northern hemisphere, aggregate output in North Africa recovered significantly from last year’s drought-reduced level following production recoveries in the main producing countries. In the southern hemisphere, the bulk of the major 2008 wheat crops are yet to be harvested between now and the end of the year. In South America, unfavourable weather conditions continue to plague some major producing areas of Argentina after plantings were already reduced by drought. As a result, the country’s wheat crop is now forecast at some 25 percent below last year’s good level. By contrast the outlook remains favourable in Brazil. In Oceania, prospects for the wheat crop in Australia have deteriorated somewhat over the past two months because of dry weather in some parts. Nevertheless, this year’s output is still set to recover sharply from last year’s drought-reduced level.

In many parts of the northern hemisphere the winter wheat crops for harvest in 2009 are already being planted. Although planting conditions are generally favourable, early indications point to reduced wheat areas in both Europe and the United States, reflecting reduced price expectations compared to the outlook last year at this time, combined with the increasing cost of inputs.

FAO’s latest forecast for world production of coarse grains in 2008 has been revised upward by almost 30 million tonnes since July and now stands at a new record level of 1 106 million tonnes, 2.6 percent above the previous record set last year. The increase over the past two months is mostly attributed to improved yield prospects for the maize crop in the United States as generally favourable weather lasted throughout the season, as well as better results from the coarse grain harvests throughout Europe. Record high crops have already been gathered in South America, where planting areas increased again for this year’s crop and ideal weather conditions favoured above-average yields. In southern Africa, where the 2008 coarse grains crops have also been already gathered, the subregion’s aggregate output has also reached a new record level. However, the high production level is largely attributed to a large crop in the main producing country South Africa, as aggregate output of the other countries in the subregion has fallen. In the northern hemisphere, in North America, the maize harvest is slow to get underway this year in the United States following cool and wet conditions which have hampered crop maturation. However, this weather has been favourable for yields and output is now expected to be well up from earlier expectations, although still a bit below last year’s exceptionally high level. In Central America, reflecting large plantings, good weather and increased use of improved imports, the coarse grain output is expected to reach a new record level in 2008. In Europe, as predicted, with much of the crop already harvested, the coarse grains output is turning out well up from last year's drought-reduced level. In Asia, this year's coarse grains crop is forecast to remain virtually unchanged from last year's good level. Production in China, by far the biggest producer in the region, is estimated well above the average of the past five years.

As the 2008 rice season advances, prospects for crops have further improved from the previous outlook. Global paddy output is now forecast at a record 672 million tonnes (449 million tonnes in milled terms), which is about 2 percent above the already excellent results achieved in 2007. The increase reflects favourable weather conditions, as well as attractive market prices and government incentives, which are anticipated to boost planted areas and yields.

Asian countries are likely to account for much of the global expansion, as 609 million tonnes are set to be harvested in the region, 10 million tonnes more than last year. Large increases are anticipated in all the leading producing countries, especially Bangladesh, Mainland China, India, Indonesia and Viet Nam, but sizeable increases are also expected in Cambodia, Pakistan, the Philippines, Sri Lanka and Thailand. By contrast, Japan is running programmes to cut excess supply and may therefore face a decline. Smaller crops are also expected to be gathered in Afghanistan, Iraq, the Islamic Republic of Iran and Turkey, reflecting extensive and lingering drought problems, while the destruction and disruption of agricultural activities caused by the landfall of cyclone Nargis last May are foreseen to cut production in Myanmar by more than 2 million tonnes. With favourable growing conditions prevailing so far in Africa, production in the region is forecast to expand by 7 percent to a new record of 24.5 million tonnes, driven largely by gains in Egypt, Madagascar, Mali and Nigeria. However, increases are expected to be widespread across the region, a sign that producers do respond positively to attractive market conditions and government incentives. In addition, various endeavours to sustain rice production in the region have been launched at the national and international levels, including an Emergency Rice Initiative for Africa, in June 2008. Production in Latin America and the Caribbean is also forecast to increase, by a remarkable level of 7 percent, much of which concentrated in Argentina, Brazil, Colombia, Peru and Uruguay, a reflection of favourable growing conditions and high prices. By contrast, the various hurricanes that have battered Central America and the Caribbean in August and September may depress output in Cuba and Haiti. Although hurricanes also hit some rice growing areas in the United States, the official outlook still points to a 4 percent gain this season. In the rest of the world, a decline is foreseen in Australia and the European Union.

PRICES

International cereal prices on the decline

International wheat prices have fallen considerably in the past two months, continuing the decline which started after their peak in March this year, when prospects of record world production in 2008 and large exportable supplies began to put pressure on markets. Subsequently, seasonal harvest pressure in the northern hemisphere countries, falling crude oil prices and financial turmoil in world economies have also contributed to the further decline in wheat prices. The US wheat (No.2 Hard Red Winter, f.o.b. Gulf) averaged USD 308 in September, and fell to USD 264 in the first week of October, about 45 percent below its peak in March, and 25 percent down from the October average last year.

International maize prices fell further in the past two months, continuing the decline that started in June when favourable global crop prospects started to point to another good crop in 2008 as well as a likely abundance of feed wheat in world markets. After stabilizing somewhat in early September, towards the end of the month, a sharp drop in crude oil prices, global financial turmoil and the latest upward revision to estimates for this season's ending stocks in the United States (mainly because of lower feed use and reductions in domestic ethanol production) brought renewed downward pressure to prices. The US maize (No. 2 Yellow, Gulf) averaged USD 229 per tonne during September, and fell to USD 184 in the first week of October, 35 percent below their peak in June, but still 13 percent above the October average last year.

Expectations of record 2008 paddy crops in the northern hemisphere, are keeping downward pressure on rice export prices. The price of the benchmark Thai white rice 100% B averaged USD 764 per tonne in September, about 3 percent down from August, and fell to USD 734 in the first week of October. The drop in Thai prices over the past few months would likely have been more pronounced had it not been for the country’s official procurement programme launched on 15 June 2008, which has contained the magnitude of the drop to 12 percent between June 2008 (when prices were at their peaks) and September 2008. Indeed, in other export markets the slide has been much more pronounced, with quotations for similar qualities over the same period down 35 percent in Viet Nam and Pakistan and 16 percent in the United States. However, prices are still well above their values of September 2007 (+130 percent in Thailand, +92 percent in the United States, +74 percent in Viet Nam and +53 percent in Pakistan).