Global cereal supply and demand brief

Cereal supply outlook for 2008/09 improves

With the global cereal harvest in 2008 hitting a new record, a significant improvement in the global supply and demand balance for cereals in the 2008/09 season is expected. After allowing for a forecast 3.4 percent increase in utilization, larger than the estimated increase in the previous season, a 10 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, which could more than double from the previous year’s low, while a notable growth in rice stocks is also forecast for the second year in succession, also mostly among the major exporters. Latest forecasts also point to a slight increase in global coarse grains stocks, although relatively much less than for wheat or rice. And in the case of the major exporters, a decline is envisaged and their inventories are seen to drop back down to close to the relatively low 2006/07 level. Against this background of generally improved supply prospects, and also reflecting falling crude oil prices and the current global economic crisis, international cereal prices have weakened significantly since their record high levels earlier this year, raising questions over the possible level of returns in the coming 2009/10 season. Farmers already burdened by the persisting high cost of inputs may be less willing to expand or even maintain production next year. Already, early indications for the first of the 2009 crops just sown in some major producing and exporting countries point to area reductions, such as for winter grains (mostly wheat) in Europe and the United States and for the main maize crops in South Africa and South America. By contrast, among the major producers in the LIFDC group, wheat areas look set to be maintained or increase: the Governments of India and Pakistan are supporting prices to encourage plantings, while in China early indications suggest that last year’s large area has been maintained and conditions are favourable.

PRODUCTION

Record global cereal production in 2008

With the bulk of the 2008 cereal harvests complete or nearing an end, latest information confirms a significant increase in world production, by 5.4 percent, to a record 2 245 million tonnes (including rice in milled terms). By cereal, the bulk of the increase by far is from wheat, although the global coarse grains and rice crops are also seen to increase significantly (Figure 2). Turning to the regional distribution of the increase, output has risen or is expected to rise throughout most parts of the globe, with the exception of the Near East and the neighbouring CIS countries in Asia, where the season was negatively affected by drought, and in North America, where production of maize in the United States retreated from an exceptionally high level in 2007. However, although increasing in most parts, the bulk of the increase is confined to the developed countries, which accounted in particular for the strong recovery in wheat production (Table 1 and Figure 3). While in developed countries the 2008 cereal output is estimated 11 percent higher than last year, in developing countries the expansion is only 1 percent. This mainly reflects a weak supply response in Asia, accounting for three-quarters of the developing countries’ production, where the aggregate cereal output remained virtually unchanged. Although some moderate growth was recorded in the main producing countries in the Far East, taking production there to new record levels, this was offset by reductions in the Near East.

Wheat production increases sharply in 2008

With the bulk of the world’s 2008 wheat harvests already gathered or nearing an end, the forecast for world wheat output in 2008 now stands at 682 million tonnes, a very substantial (11.7 percent) increase from the previous year. Accounting for a large part of this year’s strong growth have been the major producing countries in Europe, where latest estimates now point to a significant (26.1 percent) increase in production in 2008 following larger plantings and generally above-average yields. The gains compare with the previous year are particularly notable in eastern parts, after drought-reduced crops in 2007. However, also in North America, favourable weather led to better yields in the United States and Canada, and significantly larger outputs are estimated in both countries. By contrast, aggregate 2008 wheat output in Asia could slip back somewhat from last year’s record as persisting dry weather reduced yields, especially in the Near East subregion. Elsewhere in the northern hemisphere, aggregate output in North Africa recovered significantly from last year’s drought-reduced level, although it remained at a below-average level.

In the southern hemisphere, some of the major 2008 wheat crops are still being harvested. In South America, the impact of drought-reduced plantings and yields in Argentina will more than offset a good crop in prospect in Brazil, and overall, the subregion’s output is forecast well down from last year. In Oceania, prospects for the wheat crop in Australia deteriorated further in the past weeks because of continuing dry weather but, nevertheless, this year’s output is still set to recover sharply from last year’s severe drought-reduced level.

Favourable conditions for 2009 wheat crops but planted areas down in major producing countries

In many parts of the northern hemisphere the winter wheat crops for harvest in 2009 are already in the ground or planting is currently underway. Although planting conditions have been generally favourable, early indications point to smaller wheat areas in several of the main producing countries, largely in response to reduced price expectations and continuing high costs of inputs. In the United States, planting was complete by the end of November under generally favourable conditions, but the final area sown is tentatively estimated to be down by about 3 to 4 percent. In Europe, early forecasts point to a decline of about 2 percent in the European Union’s wheat area, even though compulsory land set-aside (which was set at 10 percent before its removal for the 2007/08 season) has not been reintroduced for 2008/09, and reduced areas are also reported in the Russian Federation and Ukraine, the major producers in the east of the region. However, winter wheat areas have been maintained, or may increase somewhat in the major producing countries in Asia, where weather conditions for planting have been favourable and, moreover, in India and Pakistan government support policies have been put in place to encourage plantings.

Record coarse grains production in spite of smaller crop in the United States

FAO’s latest forecast for world production of coarse grains in 2008 now stands at an all-time high of about 1 112 million tonnes, 3.1 percent above the record of last year. The increase is attributed mostly to a strong recovery in Europe’s production after drought in 2007 in eastern parts. However, the main southern hemisphere coarse grain crops also performed well in 2008. Record high crops were gathered in South America, where plantings increased and ideal weather conditions favoured above-average yields. In Southern Africa, the subregion’s aggregate output reached a new record. However, the high production level was mostly attributed to a large crop in the major producing country of South Africa, as aggregate output in most other parts of the subregion fell. In Oceania, output of coarse grains in Australia is set to recover from the previous year’s drought-reduced level. Elsewhere, in North America, coarse grains output (mostly maize) fell sharply in the United States, where plantings retracted from the exceptional high level last year, and declined somewhat in Canada. In Asia, output of coarse grains is also estimated down slightly, mostly in the Near East subregion because of drought. Output in Central America is estimated similar to last year’s good level.

Favourable prospects for the main 2008 rice harvests

Harvesting of the main 2008 rice crops is underway and prospects are favourable, reflecting generally good weather throughout the season in most main producing regions. Global paddy production in 2008 is now forecast at more than 675 million tonnes (451 million tonnes in milled terms), 2.5 percent or 16.5 million tonnes above the already excellent 2007 output. With the exception of Oceania and Europe, all the other regions are set to harvest larger crops in 2008, with part of the increase attributed to an improved access to seeds and fertilizers. In general however producers were encouraged to expand the area under rice by the exceptionally high prices that prevailed in the first half of the year. Overall, the increase in global output would be the result of a 1.6 percent increase in plantings to an estimated 158 million hectares, and a 1 percent gain in productivity to 4.3 tonnes per hectare.

In 2008, production in Asia is set to expand by 2 percent to 612 million tonnes. Much of the region’s increase is likely to be concentrated in the largest producing countries, in particular China (mainland), India, Indonesia, Bangladesh and Viet Nam, which all launched measures to boost rice cultivation in the wake of the soaring prices in the first half of the year. Large output gains are also expected in Pakistan, Sri Lanka and Thailand, which benefited from excellent growing conditions this season. By contrast, production in Myanmar is set to shrink by 8 percent, reflecting the destruction of infrastructure by cyclone Nargis earlier this year. A contraction is also anticipated in Afghanistan, Iraq and the Islamic Republic of Iran, which have been affected by extended drought, and in the Democratic Republic of Korea, where, despite favourable weather, severe shortages of fertilizers led to poor yields. Expectations of record harvests in Africa have also been largely confirmed in recent months. The region’s production is forecast to rise by almost 8 percent to a record 24.7 million tonnes, sustained by larger crops in Egypt, Madagascar, Nigeria and Senegal. Generally high price expectations, abundant and well distributed precipitation in major rice producing areas and improved access to fertilizers are largely behind the expansion in plantings and yields. In Latin America and the Caribbean, most of the major producing countries situated in the southern part of the continent concluded a very positive 2008 season in the first half of the year and are now planting the 2009 main paddy crops. These countries were largely behind an estimated 7 percent production increase in the region’s output in 2008, as production stagnated in Central America and the Caribbean, partly constrained by the passage of hurricanes but also by the very high input prices that have prevailed this year. In the rest of the world, production is reported to have risen by 3 percent in the United States, despite the passage of cyclones Gustav and Ike, and in the Russian Federation, where government support and favourable weather boosted production by 6 percent.

PRICES

International cereal prices continue to decline

International wheat prices have decline further in the past months. The main fundamental behind the weakening of prices since March is the record level of world wheat production that has been achieved this year, but further to this, also a significant rise in the amount of exportable supplies that are available, facts that have become firmer as the year progressed and more of major crops were gathered around the globe. However, also adding to downward price pressure in the past few months has been the firmer US dollar, significant weakening of crude oil prices and the world financial crisis. The US wheat (No.2 Hard Red Winter, f.o.b. Gulf) averaged USD 227 in the first two weeks of December, USD 20 per tonne below the November average and 40 percent down from the December average last year.

International maize prices have also been on the decline in the past months, starting to fall since June, when favourable global crop prospects and indications of a likely abundance of feed wheat in world markets started to pressure markets downward. As for wheat, apart from the fundamental supply pressure, maize markets have been influenced by the stronger US dollar in the past months, continuing drops in crude oil prices and the likely implications of a global recession, such as significantly lower feed demand. The US maize (No. 2 Yellow, Gulf) averaged USD 143 per tonne in the first two weeks of December, USD 23 per tonne below the November average and about 20 percent below the December average last year.

Expectations of record 2008 paddy crops in the northern hemisphere and subdued world demand, are keeping downward pressure on rice export prices. The price of the benchmark Thai white rice 100% B averaged USD 580 per tonne in the first two weeks of December, USD 11 per tonne down from the November average, although still well above (54 percent) the price at the same time last year. However, the Thai export quotations may have fallen further had it not been that they remain sustained by the Thai Government’s procurement programme, to which producers are selling heavily, as prices paid under the scheme are currently above market levels. Continuing export restrictions in some major exporting countries in particular Egypt and India, have also prevented prices from falling more heavily. In all the other major sources, in particular Viet Nam, Pakistan and the United States, export prices have been under stronger downward pressure, with some now approaching the levels observed in December 2007.