Short-medium term market prospects for cereals (Section I)
Andree Defois, Editor in Chief, Strategie Grains, France
SUMMARY
After a very tight 2003/04 crop year in the EU and at the world level, perspectives are for a large increase in production in the EU and the FSU, weather permitting. However, the world grain balance sheet in 2004/05 is going to remain quite tight because of very low carry-in stocks, and perspectives of crop reductions (in the USA for wheat, for example, and in China). EU prices will certainly have to drop slightly from current spot levels but their decrease in euros could remain moderated by world demand and by any recovery in the dollar rate against the euro.
On the medium term basis, prospects are for an increase in world grain trade and this should sustain prices, despite the export potential which is developing in Eastern Europe and the FSU.
Emergence of the FSU as an erratic but good exporting pole
Just to begin with and before thinking to the medium term prospects, it is highly instructive to go back to the last 3 crop years (2001/02, 2002/03 and the current one 2003/04).
In 2001/02, the volume of FSU crops was quite high, enabling large exports to the world market, of which nearly 4 Mt to the EU (compared to nothing in 2000/01). FSU crops were even greater in 2002/03, so exports increased again (7.1 Mt to the EU).
High levels of crops and exports from the FSU were not really a surprise (it had already happened in the past). However, the FSU wheat crop reached more than 90 Mt during these 2 consecutive years (against 60 Mt in 2000/01): the surprise was that the very good performance was repeated for 2 years.
The consequence of these very large supplies was very low prices ex-farm in the FSU because of a lack of storage space and deficient market organisation.
| Area | --Imports-- | --Exports-- | Domestic | Domestic | Ending | |||
|---|---|---|---|---|---|---|---|---|
| Harvested | Yield | Production | feed use | total use | stocks | |||
| FSU-12 TOTAL | ||||||||
| WHEAT | ||||||||
| 1997/98 | 48.2 | 1.7 | 80.6 | 6.7 | 6.3 | 24.5 | 72.1 | 17.2 |
| 1998/99 | 44.9 | 1.2 | 56.0 | 5.3 | 8.8 | 16.2 | 63.9 | 5.8 |
| 1999/00 | 41.8 | 1.5 | 64.7 | 9.5 | 9.3 | 17.0 | 64.9 | 5.8 |
| 2000/01 | 43.0 | 1.5 | 62.9 | 5.0 | 4.7 | 16.2 | 63.6 | 5.4 |
| 2001/02 | 45.7 | 2.0 | 91.3 | 3.6 | 13.8 | 20.5 | 69.3 | 17.1 |
| 2002/03 | 48.5 | 2.0 | 97.4 | 3.7 | 24.9 | 24.1 | 74.2 | 19.1 |
| 2003/04 | 40.0 | 1.5 | 61.9 | 7.3 | 10.2 | 17.3 | 66.0 | 12.1 |
| COARSE GRAINS | ||||||||
| 1997/98 | 38.5 | 1.8 | 68.5 | 0.4 | 3.0 | 37.2 | 56.9 | 12.3 |
| 1998/99 | 33.3 | 1.1 | 37.3 | 1.5 | 2.3 | 26.2 | 44.4 | 4.5 |
| 1999/00 | 31.8 | 1.3 | 40.5 | 2.8 | 2.0 | 26.9 | 42.2 | 3.6 |
| 2000/01 | 31.2 | 1.6 | 49.5 | 1.1 | 2.5 | 29.1 | 45.7 | 5.9 |
| 2001/02 | 32.7 | 1.9 | 62.3 | 1.0 | 6.6 | 33.7 | 51.4 | 11.3 |
| 2002/03 | 31.4 | 1.9 | 60.8 | 0.7 | 8.1 | 35.3 | 53.0 | 11.7 |
| 2003/04 | 33.1 | 1.7 | 56.6 | 1.4 | 6.1 | 40.1 | 58.4 | 5.1 |
Source: USDA
In 2003/04, the FSU story is completely different: the FSU wheat crop has reduced back down to 60 Mt and the exportable surplus has shrunk to 10 Mt against 25 Mt in 2002/03 (and of the 10 Mt, at least 3 Mt account for intra-FSU business).
Impact
- The world market knows now that there is a great production potential in that region. Of course, this region’s production potential is subject to weather conditions, which have a larger impact on crops than in the EU (harsher climate).
- The world market has learned about the quality of Ukrainian, Russian and Kazakh grains.
- Russian and Ukrainian market organisation has improved. For example, storage capacities have been built and internal transport infrastructures have been improved. To prevent new big price dips in case of renewed high crop levels, these countries have tried to set up intervention authorities.
Difficult now to speak of ONE world wheat price
Another consequence of the large FSU supplies is that it was impossible to speak of ONE world wheat price during the 2002/03 crop year. Usually, when there is a price gap for one commodity between different geographical locations, the job of the market is to narrow the gap through increases in demand or exports from the cheap areas and reductions in demand or increases in imports in deficit areas.
Fig. 1: World wheat prices
Source: Tallage
It did not work last year: FSU wheat remains really cheap all the crop year long (from 70 $/t Fob at the beginning to about 100 $/t at the end of the crop year). US SRW prices went up from 110 $/t Fob to 170 $/t before declining in the last part of the crop year. In the meantime, EU prices remained quite low at about 110 $/t Fob. EU prices were kept in check by wheat and barley imports from the FSU, while prices increased in the US because of very low crop levels in three of the biggest wheat exporting countries, i.e. the US, Australia and Canada. While imports from Russia or Ukraine should have been attractive in the US market and thus reduce the US internal prices, the US market protected itself from cheap FSU wheat through sanitary rules.
Following the very large imports from the FSU, the EU has changed its importing rules so that imports of barley and medium and low quality wheat are now limited by import quotas.
2003/04: THE TIGHTEST CEREAL CROP YEAR IN THE EU OVER THE LAST 15 YEARS
The current crop year is characterized by very low crop levels in the EU, the FSU and in Eastern European countries.
The story is thus completely different from last year: despite a sharp reduction in animal feed demand to the benefit of tapioca, feed peas and oilmeals, the EU still needs to import quite large amounts of cereals.
| EU 15 | 2002/03 | 2003/04 | |||
|---|---|---|---|---|---|
| Consumption in industrial feeds | |||||
| inc. | inc. | ||||
| % | Mt | % | Mt | ||
| Cereals | 59.2% | 68.2 | 55.6% | 66.4 | |
| of which wheat | 25.9% | 29.8 | 21.1% | 24.0 | |
| maize | 18.0% | 20.8 | 15.9% | 19.0 | |
| barley | 10.6% | 12.2 | 11.8% | 14.6 | |
| rye | 1.2% | 1.4 | 2.6% | 3.0 | |
| sorghum | 0.4% | 0.5 | 1.4% | 1.6 | |
| Feed peas | 1.6% | 1.9 | 2.5% | 2.7 | |
| Sunflower and rape seeds | 1.0% | 1.2 | 1.1% | 1.3 | |
| Oilmeals and CGF | 32.3% | 37.2 | 34.6% | 39.9 | |
| of which soymeal | 15.5% | 17.9 | 17.4% | 20.6 | |
| Tapioca | 1.1% | 1.2 | 2.4% | 2.8 | |
| Distillers | 0.6% | 0.7 | 0.7% | 0.8 | |
| Citrus pulp | 1.1% | 1.2 | 1.1% | 1.2 | |
| Other raw materials | 3.1% | 3.7 | 2.1% | 1.1 | |
| Pig, cattle, poultry compound feed production | 100.0% | 115.3 | 100.0% | 116.2 | |
| On-farm consumption | |||||
| Soymeal | 12.2 | 11.6 | |||
| Cereals | 57.0 | 53.7 | |||
| Total consumption | |||||
| Soymeal | 30.2 | 32.1 | |||
| Cereals | 125.2 | 120.1 | |||
Source: Strategie Grains
While the EU would need to import FSU grains if available, it can not because imports have been capped and because FSU supplies do not allow for it now.
The EU has to import North and South American wheat instead and large quantities of Brazilian maize to compensate for its grain deficit.
Fig. 2: EU grain stocks at a very low level
Source: Tallage
This situation sent EU grain prices sky-rocketing during the first part of the crop year and the exploding level of freight costs did not do anything at all to help.
