Global cereal supply and demand brief

Recovery in world cereal supply leads to lower international prices and import bills

Following improved global crop prospects since the previous report in July, the FAO's forecast for world cereal production in 2009 has been raised by nearly 26 million tonnes. This puts this year's production only 2 percent below the record achieved in 2008. A combination of a good outlook for production and relatively high carryover stocks from the previous season lessen the concern regarding the overall supply situation at least for the current season. While world cereal utilization in 2009/10 is expected to grow faster than anticipated earlier, in part due to weaker prices, the expansion would still allow for a small increase in the level of world cereal inventories which, by the close of seasons ending in 2010, are forecast to reach an eight year high. The overall improvement in the global supply and demand balance is also reflected in the ratio of world cereal stocks to utilization, an important indicator for global food security, which is expected to remain nearly unchanged at the previous season's above-average level. Recent developments in export quotations confirm the return of cereal markets to a more normal situation, except for rice, with international prices so far this season averaging 30 percent below their values during the corresponding period last year. The decline in prices coupled with a sharp contraction in world trade from the previous season's record helps in lowering the global cost of imported cereals. In the LIFDCs, where total import volume in 2009/10 is forecast to decline by 13 percent because of bigger crops in many countries, the overall cereal import bill could fall by as much as 27 percent, or USD 8 billion.

PRODUCTION

World cereal production declines slightly in 2009 but remains the second highest on record

FAO's forecast for world cereal production in 2009 has been revised upward since the previous report in July, to 2 234 million tonnes (including rice in milled terms), confirming it as the second largest crop ever, and putting it just 2 percent below last year's record. The latest upward revision is mostly on account of the wheat crops turning out larger than earlier forecast in several countries in Asia, Africa and Europe and in the United States, while the forecast of coarse grains in the United States is also much higher than was expected at the time of the previous report, pushing up the world coarse grains total, despite a poorer outlook in Asia and Eastern Africa. The improved outlook for global production of grains more than offset a reduction in the forecast for the 2009 rice output, which reflects poor conditions for the main rice season in some major producing countries in Asia.

Regarding wheat, global output in 2009 is now forecast at 678 million tonnes, substantially up from the forecast in July, and almost equalling the bumper crop gathered last year. Of the wheat crops already harvested, in Asia, latest estimates now point to a significant (6 percent) increase in production following generally above average yields. In North Africa, harvests also turned out better than predicted in earlier forecasts and this year's crop is now estimated at double last year's reduced level. In North America, the 2009 wheat crop estimate in the United States grew as the season progressed and above-average yields materialized but the final output is nevertheless 11 percent short of last year's large crop. In Europe, better than expected crops in the Russian Federation and Ukraine contributed especially to a recent increase in the 2009 wheat output estimate, although the region's aggregate output would still fall well short of last year's bumper level. In the southern hemisphere, the bulk of the major 2009 wheat crops are yet to be harvested between now and the end of the year. In South America, production is expected to fall a further 4 percent from last year's already poor level, largely as a consequence of the prolonged drought that has affected Argentina since May. By contrast the outlook remains favourable in Brazil. In Oceania, prospects for the wheat crop in Australia remain favourable and the second largest crop since the 2005 record is expected.

In many parts of the northern hemisphere the winter wheat crops for harvest in 2010 are already in the early stages of development or are 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.

FAO's latest forecast for world production of coarse grains in 2009 has been revised upward by almost 15 million tonnes since July and now stands at 1 108 million tonnes, 3 percent down from last year's record, but still the second largest crop in history. The upward revision is virtually all attributed to improved yield prospects for the maize crop in the United States where generally favourable weather lasted throughout the growing season and this year's crop is now forecast well above last year's level and close to the 2007 record. However, the improvement may not be quite as large as expected if current harvest delays due to wet weather persist. Elsewhere in the world, latest information confirms mostly smaller coarse grain harvests than last year, the only exceptions being the Near East in Asia and North Africa, where production has recovered from the reduced level of last year.

The outlook for global rice production in 2009 has deteriorated considerably since July, following weather anomalies and natural disasters in several countries in Asia. Based on latest information, the 2009 global paddy production is forecast at 672 million tonnes (449 million tonnes, milled basis), which would represent a 2.3 percent contraction from the record 688 million tonnes (459 million tonnes, milled basis) harvested in 2008. Among the countries worst affected by adverse conditions is major rice producer, India, hit first by poor monsoon rains and then by floods. Elsewhere, earthquakes, cyclones, landslides or flooding have impaired crop development in the Chinese Province of Taiwan, Japan, Nepal, Pakistan and the Philippines. However some of these countries may recoup the losses by increasing the secondary crops just being planted. By contrast, the outlook remains generally favourable for Bangladesh, Cambodia, China, Malaysia, Myanmar, Thailand and Viet Nam.

Outside of Asia, Egypt may also face a significant drop in this year's rice crop, largely in response to government efforts to cut the area under rice as a water-saving measure. In Africa, although not all countries are expected to reproduce last season's excellent results, substantial gains are anticipated in Madagascar, Mali, Mozambique and Nigeria. In Latin America and the Caribbean, production estimates point to a 4 percent increase this season, sustained mainly by Argentina, Brazil, Colombia and Peru. In Europe, prospects are favourable for the EU and the Russian Federation. Although production in Australia also rose this season, drought continues to restrain it to a fraction of what it was at the beginning of the decade.

UTILIZATION

Improved supply and declining prices boost world cereal utilization

The forecast for world cereal utilization in 2009/10 has been raised by 8 million tonnes since the previous report in July, to 2 225 million tonnes. This puts the expected total utilization in 2009/10 at some 1.2 percent above the 10-year trend and 1.7 percent higher than the previous season. Improved global supply combined with generally lower prices in international markets are expected to contribute to stronger growth in world cereal utilization this season. World food consumption of cereals, representing almost 47 percent of total cereal utilization, is forecast to keep pace with the population growth and reach 1 044 million tonnes. Globally, this translates into 153kg consumption per person per year, up slightly from the previous season. In the Low-Income Food-Deficit Countries (LIFDCs), where consumption had declined markedly in 2007/08, the average anticipated per caput consumption of cereals in 2009/10 is forecast to rise, for a second year running, to over 156kg.

Following a contraction in 2008/09, world feed utilization of cereals in 2009/10 is expected to recuperate by 1 percent and approach the 2007/08 level of around 769 million tonnes. The strongest expansion is forecast for the developing countries but slightly higher feed usage is also forecast for the developed countries, mostly of wheat in the EU and the CIS countries. The usage of coarse grains for animal feed, which represents over 80 percent of total cereal feed use, is forecast to reach 631 million tonnes, nearly unchanged from the previous season with feed usage of major coarse grains in the developed countries remaining low after the 3.7 percent contraction witnessed in the previous season. Slack demand from the livestock sector driven by the weak global economy is the main contributing factor behind this development.

Among other uses, the industrial use of cereals (mostly for the production of starch, sweeteners and biofuels) is likely to register a relatively strong growth in 2009/10 but given the difficult global economic conditions, the expansion is expected to prove less striking than in recent years. The latest (September) forecast for 2009/10 from the International Grain Council pointed to roughly a 14 percent increase in the use of cereals for production of ethanol (including non-fuel uses) to 135.8 million tonnes. This compares to the 23 percent growth registered in the previous season and 33 percent expansion in 2007/08. Maize accounts for the bulk of the total cereals used for manufacturing of ethanol. According to the USDA, the use of maize for ethanol production in the United States is forecast to approach 107 million tonnes in 2009/10, up 14 percent, or 13 million tonnes, from 2008/09. In view of generally lower maize prices and firmer crude oil markets, demand from the ethanol sector has remained robust so far this season.

STOCKS

Global cereal stocks highest in seven years

Based on the latest estimates of cereal production in 2009 and the anticipated utilization in 2009/10, world cereal stocks by the close of seasons ending in 2010 is forecast to reach 509 million tonnes, the highest level since 2002. This forecast is around 4 million tonnes higher than in the previous season mostly on account of a continuing increase in wheat stocks. At the current forecast level, the ratio of world cereal stocks to utilization, an important indicator for global food security, is expected to approach 23 percent, nearly unchanged from the previous season's level and slightly higher than its 5-year average.

Given the expectation of a near record wheat production, global wheat inventories are forecast to reach 183 million tonnes, 6 percent above their already high opening levels and the largest since 2003. Most of the anticipated increase in wheat stocks is expected in China, Kazakhstan, Ukraine and the United States. Total inventories held by the major exporters are forecast to reach 52 million tonnes, up 10 percent, or 5 million tonnes, from the previous season and the highest since 2006. As a result, closing stocks of major exporters as a percentage of their total disappearance (defined as domestic utilization plus exports), another important indicator for global food security, are expected to rise to 20.4 percent, nearly 3 percent more than in the previous season and the highest in four years. This ratio hit the near historical low of less than 12 percent in the soaring price season of 2007/08.

On the basis of latest forecasts for production and utilization, global inventories of coarse grains for crop years ending in 2010 are forecast to reach 205 million tonnes, down 1.8 percent from their high opening levels and still the second largest since 2001. In spite of a sharp decline in world production of coarse grains, the anticipated slower growth in total utilization is seen to limit larger drawdowns of inventories. For major exporters, ending stocks are forecast to reach 78 million tonnes, down 2 million tonnes from their opening levels but carryovers in the United States are likely to remain unchanged at around 47 million tonnes. The lower anticipated inventories in major exporters are partly offset by increases in North Africa and several Asian countries. At the current forecast level, the ratio of major exporters' stocks to their total disappearance, could decline slightly, to 13.8 percent, which would, however, be almost 2 percent points higher than its low in 2007/08.

Given the anticipated decline in 2009 production, world rice reserves in 2010 are anticipated to contract to 121 million tonnes, 2 percent below their opening levels. This would still be a comfortable level equivalent to 27 percent of utilization in 2010, slightly below this year. However, because much of the stock decline is anticipated to be concentrated in the five major exporting countries, the stocks-to-disappearance ratio of this group of countries may severely deteriorate, falling from 20 percent in 2009 to some 14 percent in 2010, which would be the lowest witnessed since 2005.

TRADE

Sharp downturn in world cereal trade in 2009/10

World cereal trade in 2009/10 is forecast to reach 258 million tonnes, down 9 percent, or 25 million tonnes, from the record 283 million tonnes (revised) in 2008/09.

The anticipated sharp contraction in world cereal trade in 2009/10 is largely due to the expected fall in wheat trade following bumper crops in North Africa and good production also in several wheat importing countries of Asia. Global wheat trade is forecast at 115.5 million tonnes, down 17 percent, or 23.6 million tonnes, from the previous season's record. In Asia, the largest decline in imports is expected in the Islamic Republic of Iran where, as a result of a partial recovery from last year's severe drought, imports in 2009/10 are forecast to fall by over 60 percent although they will still exceed the average of the past 5 years. Wheat imports by Pakistan are forecast to be halved as a result of a record crop this year. Sharply lower wheat imports are also anticipated for Bangladesh and Turkey. In Africa, imports by Morocco are forecast to be halved thanks to a record crop. Smaller imports are also envisaged for Algeria, Egypt, and Tunisia. Imports by most countries in Latin America and the Caribbean are expected to remain unchanged from the previous season but in Europe purchases by the EU are expected to decline. Reflecting the fall in world import demand, total wheat exports from the five major exporters are forecast to decline by almost 17 million tonnes. Exports from the EU are expected to drop significantly, by almost 7 million tonnes, in part due to the strong Euro, which lowers its export competitiveness, but also lower world demand in general. Wheat shipments from Argentina are forecast to decline by at least 6 million tonnes. In view of a continuing tight domestic market situation, exports from Argentina will be limited and subject to government approval. Total exports from the CIS countries could reach 30 million tonnes, down almost 20 percent from the previous season's peak. Sharp decreases in shipments from Ukraine and, to lesser extent, the Russian Federation, are likely to more than offset a small increase in exports expected from Kazakhstan.

International trade in coarse grains in 2009/10 is forecast to reach 112 million tonnes, down slightly (1.5 percent) from the estimated trade level in 2008/09 but well bellow the record of nearly 131 million tonnes in 2007/08. Lower world production is expected to keep imports close to previous season's level with limited potential for higher imports given the above-average harvests in several importing countries as well as the difficult economic conditions weighing on livestock demand which consequently slows down feed usage in some cases.

Based on the current trade prospects for 2009/10, among the major exporters, only shipments from the United States are forecast to increase significantly while exports from Australia, Canada and the EU are likely to remain steady at the previous season's level. Sales from Argentina could drop sharply because of supply shortfalls caused by production setback. Lower exports are also anticipated in the Russia Federation (for barley) and Ukraine (for maize), mostly due to smaller crops this year.

Early forecast for rice trade in 2010, at 30.6 million tonnes, point to a slight increase from the current estimate for 2009. Exports may rebound in China and Thailand, amid abundant supplies, largely at the expense of India, which is expected to keep its tight restrictions on external sales, as well as Pakistan and Viet Nam. Shipments from Egypt, Brazil and Uruguay could also fall. As for world imports, the anticipated increase is expected to stem from larger deliveries to Nepal, the Philippines and to countries in the Near East, which would more than compensate for a cut in imports by Bangladesh, Indonesia, but also by Thailand and Viet Nam, which, in recent years, have been taking much rice from neighbouring Cambodia. Imports by the other major rice importers are anticipated to change little.

Cereal import bills decline for the second consecutive season

Based on the latest cereal import forecasts and international price and freight developments, the world cereal import bill is expected to reach USD 64 billion in 2009/10, down 24 percent from the previous season. The total cereal import bill of the LIFDCs, as a group, is expected to decline sharply for the second consecutive season, to roughly USD 22 billion, down 27 percent or USD 8 billion from the previous season and as much as 42 percent below its all-time high in 2007/08. This season's anticipated decline reflects a reduction in the volume of imports coupled with lower international prices. In terms of volume, total cereal imports by LIFDCs in 2009/10 are forecast at 82 million tonnes, down 13 percent from the previous season. The decline in international prices is the major factor behind the expected reduction in cereal imports bills of the LIFDCs. The FAO cereal price index averaged 225 points in 2007/08 but fell to 196 points in 2008/09 and 163 points so far (July-October average) in 2009/10, down 17 percent from 2008/09 and 30 percent from the 2007/08 high price season.

International prices relatively lower in spite of some increases in October

International wheat prices rose in October following declines for four consecutive months. The increase in October was mostly driven by outside market developments, including a weakening US dollar and increases in maize prices. Weather concerns and the latest Crop Progress report from the United States pointing to below-average winter wheat planting also provided some support. The US wheat price (No.2 Hard Red Winter) averaged USD 212 per tonne in October, up 6 percent from the previous month but down 9 percent from the beginning of the season in July. Wheat export prices have fallen by 56 percent from their peaks in March 2008.

International maize prices have also declined sharply this season, reflecting a generally good supply outlook amid weaker demand for feed and industrial usage. In October, prices rose sharply in part reflecting unfavourable weather conditions hampering harvesting in the United States. The strong rally in oil prices and continued slide in the US dollar also provided support. The US maize price (No. 2 Yellow, Gulf) averaged USD 168 per tonne, representing a gain of 11 percent from September. However, maize prices are down 40 percent from their peaks in June 2008.

World rice prices have been weakening for the last six months, a tendency that was reflected in the FAO All Rice Price Index (2002-2004=100), which average 230 over the first three weeks of October, down from 251 in July and August and 232 in September. Since July 2009, prices fell by 8 percent on average, with a more pronounced fall of 15 percent witnessed on the Japonica rice market. However, prices remain high if compared with the pre-2008 crisis levels: for instance, the benchmark Thai white rice 100%B was quoted USD 530 per tonne in October 2009, 22 percent less than in October 2008, but still 57 percent above its October 2007 level.