Global cereal supply and demand brief

World cereal supply could improve in 2008/09

Assuming that the current forecast of an increase in cereal production in 2008 will materialize, the global cereal supply situation in 2008/09 is likely to improve, paving the way for a gradual recovery from prevailing tight market conditions. With most of the anticipated production expansion to occur in several major cereal exporting countries, exportable supplies are expected to recover significantly from their sharply reduced levels this season.

An improvement in the cereal supply/demand situation next season would be a welcome development for many Low-Income Food-Deficit Countries (LIFDCs). The very tight situation of the current 2007/08 season has led to a steady rise in world prices of all cereals, pushing up the food import bill of many importing countries and generating widespread sharp increases in domestic food prices.

The generally positive supply scenario for the new season must be considered with caution as the final outcome of harvests in 2008 still depends critically on weather during the remainder of the agricultural seasons. At this time last year, prospects for cereal production in 2007 were far better than the eventual outcome. Unfavourable climatic conditions devastated crops in Australia and reduced harvests in many other countries, particularly in Europe. But favourable climatic conditions will be even more critical for production in 2008 because world cereal reserves are depleted. Most countries are struggling with critically low stock levels and require improved world supplies in the new season. Any major shortfalls resulting from unfavourable weather, particularly in exporting countries, would prolong the current tight situation, contribute to more price rallies in world markets, and exasperate the economic hardship already facing many countries.

PRODUCTION

World cereal production to increase in 2008

FAO’s first forecast for world cereal production in 2008 stands at a record 2 164 million tonnes (including rice in milled terms), 2.6 percent up from last year’s crop, which was the previous global high. The bulk of the increase is expected in wheat, output of which is set to reach some 647 million tonnes, 6.8 percent up from 2007 and also a new record. In the northern hemisphere, where many crops are already well developed, significantly larger outputs are forecast in North America and Europe. In the United States, winter wheat plantings increased by 4 percent and latest indications also point to a large expansion of the spring-sown area. Thus, assuming normal yields, this year’s crop is forecast to turn out at about 60 million tonnes, well above last year and the recent average. The bulk of planting has yet to get underway in Canada but early indications point to a large area increase. In Europe, the winter wheat area has expanded in most major producing countries and crops continue to develop well throughout the region, pointing to better yields than last year’s below-average levels, especially in some eastern parts that were hit by severe drought in 2007. Production in the EU is tentatively forecast to reach about 137 million tonnes this year, 13 percent up from 2007’s reduced output. In the CIS countries of Europe, larger wheat areas in the Russian Federation and Ukraine, and an expected recovery in yields in the latter country after drought last year, should help to lift the subregion’s wheat output to a bumper level for 2008 over 70 million tonnes. In Asia, prospects for the winter wheat crops are generally favourable but aggregate output in the region looks likely to slip back somewhat from last year’s record level. A large part of the decline is expected in Kazakhstan in the CIS region where, despite increased plantings, a return to normal yields after bumper highs last year would result in a smaller harvest. A smaller harvest is also forecast in India, after a record crop last year. In China, the largest producer in the region, this year’s wheat output is expected to remain virtually unchanged from last year’s record level assuming an expected increase in the spring wheat crop offsets the impact of adverse weather on some of the winter wheat in northern parts. In North Africa, wheat crop prospects are satisfactory in Egypt, the subregion’s major wheat producer, and a recovery to average output in Morocco is forecast after a drought-reduced harvest last year. In the southern hemisphere, where most crops are still to be sown, early indications suggest some reduction in output in South America, but in Oceania, assuming a return to a normal season after last year’s drought, output should recover sharply in Australia.

With the first of the major 2008 coarse grain crops already being harvested or close to maturation in several countries around the world, FAO tentatively forecasts global output of coarse grains at 1 075 million tonnes, 0.6 percent up from last year’s record level. In South America, harvesting of the main season crops is underway and output is expected to increase to a new record level following area increases in Argentina and Brazil, the largest producers, in response to high international prices. In southern Africa, despite far from ideal weather conditions throughout the season, with late planting rains, followed by floods and a subsequent return to excessive dryness in parts, the overall outlook for the main coarse grain crops is judged to be favourable, particularly in South Africa affected by drought last year. In the northern hemisphere, the bulk of the major 2008 coarse grain crops are yet to be sown in the coming weeks. In the United States, the maize area is forecast to decline after last year’s exceptional plantings but, nonetheless, will likely remain at a very high level relative to recent history reflecting strong demand and high prices. In Europe, output of coarse grains is forecast to recover somewhat from last year’s reduced level, reflecting a combination of increased plantings in parts and expected yield recoveries in several countries affected by drought last year, such as Hungary and Romania, two important maize producers.

With southern hemisphere countries already engaged in harvesting their 2008 main rice crop, FAO’s first forecast for world rice production in 2008 stands at 441 million tonnes (milled terms), 1.8 percent up from the latest estimate of 2007 output. Although the increase of international rice prices in the past season did not benefit producers in all countries to the same extent, the profitability of growing rice appears to have improved substantially compared to previous years, even after taking into account cost inflation. This is expected to trigger an increase in planting and production in all regions. In Asia, significantly larger rice outputs are anticipated in all the major rice producing countries, partly reflecting government incentives to production. By contrast, paddy production may contract in Japan, one of the few countries where producer prices fell last year. The production outlook is also positive in Africa, where high world prices and mounting concerns over food import dependency may sustain growth, particularly in Egypt, Guinea, Nigeria and Sierra Leone. By contrast, Mozambique, where the crop is about to be harvested, may face a contraction, as above normal rainfall and cyclones have caused flooding and crop losses in rice growing areas. The impact of Cyclone Ivan on production in Madagascar is anticipated to be more limited, especially as the Government has launched a free seed distribution programme to encourage affected producers to replant their crops. Production is expected to increase significantly in South America, where prospects are favourable across the whole region, and harvesting is already underway in some southern parts.

World cereal production up 4.7 percent in 2007

FAO’s estimate of global cereal output in 2007 now stands at some 2 108 million tonnes (rice in milled terms), virtually unchanged since the previous report in February, and representing a 4.7 percent increase from 2006. World wheat output rose by 1.6 percent to some 606 million tonnes, but the bulk of the increase was in coarse grains, production of which rose to 1 068 million tonnes, 8.3 percent up from the previous year. Latest estimates put the 2007 rice output at 434 million tonnes (milled terms), 1 percent up from the 2006 level.

UTILIZATION

Growth in cereal utilization in 2007/08

In spite of the surge in world cereal prices in 2007/08, world cereal utilization is expected to demonstrate a relatively strong growth and reach 2 126 million tonnes, an expansion of almost 3 percent from the previous season, which is well above the average annual growth rates of below 2 percent in the past decade. Food consumption of cereals is forecast to reach 1 006 million tonnes, an increase of about 1 percent from 2006/07. Most of this anticipated rise is expected in the developing countries, driven by the increase in population growth. However, on a per caput basis, wheat and rice consumption levels decline marginally in the developing countries, mostly in favour of higher intakes of more value-added food, especially in China. Feed utilization is forecast to increase by 2 percent in 2007/08, to 756 million tonnes. This expansion mostly reflects higher use of coarse grains for feed which could reach a record 633 million tonnes, up 2.8 percent from 2006/07. The increase in feed usage of coarse grains is seen to more than offset a decline in feed use of wheat, supplies of which have been much tighter, especially in the EU, the region where wheat is the primary feed grain. Industrial usage of cereals demonstrates strong growth this season but the expansion mainly reflects the rapid rise in the use of grains as raw material for production of biofuels, which in 2007/08 is forecast to approach 100 million tonnes, of which maize accounts for at least 95 million tonnes. Maize is the main cereal used for the production of ethanol and the United States is the world leader of the maize-based ethanol sector. In 2007/08, the United States is expected to use at least 81 million tonnes of maize for production of ethanol, 37 percent more than in 2006/07.

 

STOCKS

Cereal stocks set to fall to 25-year low

Unchanged from the previous forecast in February, world cereal stocks by the close of the seasons ending in 2008 are expected to fall to 405 million tonnes, down 21 million tonnes, or 5 percent, from their already reduced level at the start of the season and the smallest in 25 years. At this level, the ratio of world cereal stocks to utilization falls to 18.8 percent, down 6 percent from the previous low in 2006/07.

World wheat stocks by the close of seasons in 2008 are forecast at 144 million tonnes, down 9 percent from their already reduced opening level. The sharp decline is even more notable in major exporting countries, with their combined wheat reserves falling by as much as 10 million tonnes. Strong demand in domestic and world markets has contributed to the depletion of stocks in major exporting countries where production in 2007 suffered from exceptionally poor yields. Even in the United States, where wheat output increased in 2007, stocks are expected to fall to 8 million tonnes, 4 million tonnes less than the already reduced level last season. Larger exports are mostly responsible for this reduction in stock in the United States. Inventories in the EU are forecast to drop to 9.5 million tonnes, more than 3 million tonnes below the previous season’s low, a reduction that is mainly caused by a sharp production shortfall in 2007.

Several importing countries are also expected to have their wheat stocks reduced this season, not only due to a decline in production, as in the case of Morocco, but also because of high prices in world markets which discourage imports and contributes to larger drawdown of domestic stocks, as in Bangladesh, Egypt and Kenya. The two largest countries, India and China, however, are expected to end this season with higher carryovers. In China, improved production in 2007 and tighter controls on exports could lead to an increase of 3 million tonnes in stocks. In India, the rise in production in 2007 coupled with large imports towards the end of the previous season could contribute to an increase of about 2 million tonnes in total wheat inventories, also helping to replenish government owned stocks.

World stocks of coarse grains at the close of seasons in 2008 are forecast to reach 157 million tonnes, 5 million tonnes less than their already reduced opening level. The main factor behind this decline is rising demand, which in 2007/08 is forecast to exceed total supply in spite of a significant 8 percent growth in world production. Strong domestic demand coupled with robust exports are likely to result in a relatively small increase in stocks in the United States, the world’s largest producer, an increase not sufficient to offset the sharp declines elsewhere, particularly among the countries which suffered from production shortfalls in 2007. Much smaller inventories are forecast, in particular for: Morocco, Nigeria, the Republic of South Africa, Turkey and Ukraine. In Brazil, where production is expected to be a record, stocks are not expected to increase as a result of higher exports, while in China, the world’s largest stock holder of coarse grains, total reserves are expected to remain stable, given the curb on exports this season.

Global paddy carryover stocks at the close of seasons ending in 2008 are forecast to diminish by about 1 million tonnes to 103.5 million tonnes, implying that world utilization would outpace production. The global contraction of stocks is expected to result from falling inventories in rice importing countries, in particular Bangladesh, Brazil, Nigeria and Senegal, while they may rise in Indonesia and the Philippines. Although reserves in major exporting countries are unlikely to change much from their opening levels as a whole, a mixed pattern may prevail at the country level: substantial increases are foreseen in India, on expectations of much lower exports in 2008, and in Myanmar, while all the other major exporters are expected to end the season with smaller inventories. The anticipated fall in global carryovers should result in a lower stock-to-use ratio for rice, estimated to fall from 24 percent in 2007 to 23.4 percent in 2008.

TRADE

World trade in cereals is forecast to reach 256 million tonnes in 2007/08, slightly more than in 2006/07. A sharp increase in imports of coarse grains is expected to more than offset declines in wheat and rice trade. At the current forecast level, the volume of cereal imports by the LIFDCs could reach 82 million tonnes, slightly down from the previous season.

World trade in wheat is forecast to decline to 106 million tonnes in 2007/08 (July/June), down 7 million tonnes from 2006/07. Smaller imports by India are largely responsible for this decline but several other countries, including Algeria, Brazil, Kenya, Indonesia, the Republic of Korea and Nigeria are also anticipated to significantly reduce their wheat purchases from world markets. In most cases, higher domestic production is the main reason for the anticipated decline in wheat imports, but soaring international prices are also discouraging wheat purchases. In countries with import tariff schemes in place, most have lowered or suspended their tariffs in order to dampen the impact of high world prices on domestic consumers (see box on policy measures). However, several countries are expected to increase their imports this season such as Morocco where a severe drought reduced wheat production last year, or in Pakistan where, in spite of higher production, large imports are needed due to significant cross-border exports earlier in the season.

In spite of the anticipated decline in world import demand, export supplies have proven to be exceptionally tight since the start of the season. Among the five major exporters, Australia, Canada and the EU all have less exportable availabilities this season, while shipments from Argentina continue to be restricted as policies to keep domestic prices under control remain in effect. Lower supplies in these exporters and the weak dollar have resulted in much larger exports from the United States, the only major exporter that also had an increased wheat harvest last year. Among other countries, exports from Ukraine are reduced because of a reduction in domestic supply which led the government to impose a strict quota system. However, exports from the Russian Federation already exceeded the previous season’s level prior to recent export restrictions. Similarly, in China, restrictions put in place recently are likely to prevent further export sales, but exports have already exceeded the previous season’s level. Several countries have now export ban policies in place, including India, Pakistan, Serbia and the Syrian Arab Republic.

World trade in coarse grains in 2007/08 is forecast to reach 121.5 million tonnes, 10 million tonnes, or 9 percent, more than in the previous season. The exceptionally higher imports of maize and sorghum by the EU are the main reason for the expansion in world trade this season. Reduced supplies of feed wheat both in its domestic market as well as in those of nearby suppliers in Black Sea region resulted in this surge in imports in the EU. Higher imports are also forecast for Morocco, Mexico and the Syrian Arab Republic but smaller imports are expected for Colombia, the Dominican Republic, Indonesia and the Republic of Korea.

The anticipated sharp increase in world import demand this season is to be largely met by higher sales from the United States and Brazil; the two countries benefiting from record harvests. Argentina and Canada are also forecast to export more this season but tighter domestic supplies and the imposition of export restrictions would cut exports from several countries, including China and Ukraine. A second consecutive season of poor production has prevented the Republic of South Africa from increasing exports this season.

International trade in rice in 2008 is currently foreseen at 28.7 million tonnes, 1.6 million tonnes below earlier forecasts and down from the revised estimate of 34.7 million tonnes for 2007. The recent downward revision for trade in 2008 mostly reflects a lower volume of imports than previously anticipated especially to Bangladesh and Indonesia, compensating for a higher level to Brazil, South Africa and the Philippines. As for exports, the revision was mainly on account of lower-than-previously thought deliveries from Brazil, Cambodia, India and Viet Nam, often related to a recent tightening of restrictions on external sales, while exports from Argentina, China, Thailand and Uruguay were raised somewhat.

The sizeable contraction in world trade in 2008 compared to the previous year is consistent with the very tight supply situation prevailing in key exporting countries and high world prices. Among importers, Asian countries are foreseen to take delivery of 12.7 million tonnes of rice overall, 12 percent less than in 2007. The drop reflects prospects of lower shipments to Bangladesh, Indonesia and the Islamic Republic of Iran, as the supply and demand situation in those countries may ease somewhat compared with last year. By contrast, deliveries to China, Iraq, the Democratic People’s Republic of Korea, the Philippines and Sri Lanka are forecast to rise. In particular, the Philippines, which just secured the guarantee of a 1.5 million tonnes supply from Viet Nam, is anticipated to emerge in 2008 as the most important destination of rice trade. In Africa, rice imports are set to hover around 9.2 million tonnes, 6 percent down from last year, reflecting widespread declines all across the region. Imports to countries in Latin America and the Caribbean are foreseen to remain about 3.5 million tonnes, with some increases expected for Brazil, Chile, El Salvador and Panama, offsetting a drop of shipments to Colombia, Costa Rica and Nicaragua. In the rest of the world, Australia, the EU and the United States are foreseen to purchase more rice in 2008, unlike the Russian Federation, where tariffs and shipping restrictions may further depress rice deliveries to the country.

The very tight supply situations that most exporting countries may face until the last quarter of the year and associated restrictions on exports lie behind the anticipated drop of rice trade in 2008. Currently, China, India, Egypt, Viet Nam, four among the traditional rice exporting countries, as well as Cambodia, have either imposed minimum export prices, export taxes or export quotas/bans. Unlike recent years, smaller availability of rice in public stocks is likely to prevent Thailand from fully filling competitor’s gaps, although exports from the country are forecast to increase. Increased shipments from Argentina, Myanmar, Pakistan, the United States and Uruguay are also anticipated. Japan may also step up deliveries in the form of food aid.

PRICES

International prices for all major cereals continued their rise in February and March, largely driven by persistent supply tightness and the imposition of new export restrictions. The weak US dollar and strong import demand also provided support. In March, the United States’ hard wheat (HRW, No. 2, f.o.b.) averaged USD 481 per tonne, up USD 100 per tonne from the start of the year and nearly 130 percent above the same period last year. In the futures markets, prices remained firm but volatile; reacting to news about further export restrictions, developments in energy markets and the deteriorating prospects in financial markets. The nearby May wheat futures at Chicago Board of Trade (CBOT) stood at over USD 390 per tonne in late March, down nearly USD 50 per tonne since late February but still more than 130 percent over the corresponding period last year. In spite of the expectation of a significant increase in world wheat production in 2008, even September futures, which provide a better indication of the current market sentiment for the new season, were only slightly below the May values and as much as 120 percent above the corresponding period last year.

Export prices of coarse grains also made strong gains since the start of the year. The United States’ maize (No. 2 yellow) averaged USD 234 per tonne in March, 38 percent more than in March 2007. Shortages of feed wheat combined with generally tight market conditions for all cereals and the weak US dollar continued to provide support to maize prices. By late March, the CBOT nearby May contract was quoted at around USD 214 per tonne, up 20 percent from the corresponding period last year. While fear of a general economic slow-down and the arrival of new crop supplies from Brazil and Argentina put some downward pressure on prices, the tightening of supplies in the United States and uncertainties regarding the size of plantings this year prevented prices from weakening as evidenced in December futures which stood at about USD 60 per tonne more than in the corresponding period last season.

International rice prices have engaged on a steep upward trend since the beginning of 2008, after recording relatively moderate increases of 9 percent in 2006 and 17 percent in 2007. Since January 2008, the FAO All Rice Price Index (1998-2000=100) has gathered further strength, gaining 12 percent to 184 in February 2008 and another 17 percent in March 2008 when the index reached 216. The hike evidences growing tightness on the market, after several of the major exporters imposed more stringent restrictions on external sales, combined with strong purchases by countries such as Bangladesh, Iraq, Nigeria or the Philippines. For instance, In March 2008 the high quality Thai 100% B was quoted at USD 567 per tonne, up 22 percent on the previous month and 74 percent higher than in March 2007. The pressure on prices to rise was general, affecting all rice qualities and origins.