Short-Medium term market prospects for cereals (Section II)

What is the perspective for the end of the current crop year?

The mechanisms for eliminating the grain deficit in the EU are now in place and therefore cereal prices should no longer be subject to a new additional bullish pressure. In the short term, wheat and maize prices could actually ease. Nevertheless, the situation is extremely precarious: the European internal market must continue to draw in maize and wheat from third countries and rye from intervention. This will keep any large potential decrease pressure in check. The precarious situation on the European market is heightened by the fact that the world wheat and maize balances are also exceptionally tight. Any increase in the price of imported wheat (i.e. through an increase in dollar prices or an appreciation of the dollar against the euro) would automatically reduce the volume of imports to the EU. In the case of maize, any increase in the world price would be partially compensated for by a reduction in the rate of import duty on entry to the EU (assuming the increase did not exceed the actual rate of duty). Any factor which delayed the arrival of third country maize into the EU – such as a reduction in Brazilian maize availability or a worsening of the current scarcity of transatlantic shipping – would immediately cause the EU maize balance to tighten again. The uncertainty surrounding weather conditions over the next six months is another contributor to the precarious atmosphere: the level of stock we forecast at the end of the crop year in the EU will be adequate only if the 2004 harvest registers a significant increase on the 2003 harvest.

Malting barley is the only grain which is not concerned by the tight situation. The EU malting

barley production has increased by 1 Mt from the 2002/03 level, following yield improvement in the northern part of the EU and a switch from winter to spring areas because of the very harsh climate conditions during the winter. In the meantime, Canadian and Australian crops have recovered to normal levels after large reductions in 2002/03. Also, while still on a long term increasing trend, world malting barley demand has been quite sluggish recently because of high freight rates, a reduction in beer sales in Brazil and Japan and a downturn in South American economies. In the EU, malting barley usage has been reduced in Germany following the new rules about beer cans.

Malting barley prices have thus come down from last year’s level in a first stage. Then they recovered slightly because the very low premiums on feed barley prices led to the usage of malting barley in animal feeds.

The surge in feed barley prices has thus pushed up malting barley prices. Any further increase potential seems limited now, however, because European barley is expensive compared to competitor origins on the world market. Also, despite the fact that EU malting barley export availability has been reduced to the benefit of animal feeds, it remains sufficient to meet export demand for malting barley addressed to the EU (currently estimated at between 1 to 1.3 Mt).

… and for 2004/05?

MEDIUM-TERM PROSPECTS: IMPROVEMENT IN WORLD GRAIN TRADE

According to the EU Commission’s summary of the main medium-term outlook forecasts made by institutes like FAPRI and OECD, a slow but continuous recovery of agricultural markets may be expected. The medium-term prospects for agricultural markets would be mainly driven by an improved macro-economic environment with more broadly based, robust and sustainable growth. Combined with higher population, urbanisation and changes in dietary pattern, particularly in many emerging economies, these prospects for stronger economic growth would support a steady increase in food demand.

Fig. 4: Cumulative population growth 2001-2011 (%)

Source: USDA-FAPRI- EU Commission

Fig. 5: Outlook for GDP growth in % per region (cumulative) 2001-2011

Source: USDA-FAPRI- EU Commission

World trade in agricultural commodities would demonstrate strong growth, as demand for food products would outpace production in many developing countries. Despite a big production increase potential in some regions (like the FSU and Eastern Europe), the tightening of the stock-to-use ratio would in turn sustain commodity prices over the medium term.

Most of the growth would come from the non-OECD regions, which would constitute the main driving force behind these relatively favourable perspectives.

Table 7: Outlook for imports in cereals – 2001-2009 – Mt

	2001			2009			Change in trade
	USDA	FAPRI		USDA	FAPRI		USDA	FAPRI
Wheat	106.7	85.1		128.1	108.9		21.4	23.8
Coarse grains	101.9	84.0		120.1	107.3		18.2	23.4
Maize	74.2	60.8		87.0	80.3		12.8	19.5
Barley	16.8	15.2		20.5	18.2		3.7	2.9
Total cereals	208.6	169.1		248.2	216.2		39.6	47.1

USDA figures include intra-FSU trade. FAPRI: net trade

Source: FAPRI- USDA – EU Commission

Table 8: Outlook for wheat net imports for major importing countries – 2001-2009 – Mt

	2001			2009			Change in trade
	USDA	FAPRI		USDA	FAPRI		USDA	FAPRI
Total Asia	15.8	22.2		25.9	36.1		10.1	13.9
China	1.0	0.5		8.0	5.1		7.0	4.6
Indonesia	4.2	-		5.2	-		1.0	-
Japan	5.8	5.2		5.8	5.3		0.0	0.1
Africa & M. East	42.9	41.2		44.7	46.9		1.8	5.7
North Africa*	13.8	14.6		13.8	17.6		0.0	3.0

* Morocco, Algeria, Tunisia, Egypt Source: FAPRI- USDA – EU Commission

Table 9: Outlook for coarse grains net imports for major importing countries – 2001-2009 – Mt

	2001			2009			Change in trade
	USDA	FAPRI		USDA	FAPRI		USDA	FAPRI
Total Asia	34.6	36.2		41.2	52.0		6.6	15.8
China	2.8	0.5		8.9	11.4		6.1	10.9
Indonesia	1.5	1.4		2.1	1.7		0.6	0.3
Japan	19.6	19.2		19.0	19.3		-0.6	0.1
Mexico	10.8	11.0		12.5	12.5		1.7	1.5
Other Lat. America*	10.5	7.2		13.2	8.8		2.7	1.6
Africa & M. East	26.0	24.9		32.9	27.7		6.9	2.8
North Afr.**& M. East	24.5	20.2		30.9	22.6		6.4	2.4

* excluding Argentina

**only Algeria and Egypt in FAPRI Source: FAPRI- USDA - EU Commission

Notwithstanding the relative improvement in the market fundamentals of most agricultural sectors that is projected over the medium term, a prudent interpretation of these favourable perspectives is deemed necessary. These projections remain subject to many uncertainties that can be expected to moderate the positive pattern forecast for future trade and price growth. The most important include the future course of agricultural policy in many regions (notably the US Farm Security and Rural Investment Act), the new round of multilateral trade negotiations, the future macro-economic perspectives and the scope for further productivity growth in some regions. In the EU however, decoupling could limit slightly (but not stop) the increase in grain production and this could contribute to this overall tightening trend.

In the world cereal markets, higher demand would outpace domestic supply in many developing countries, including China, North Africa and Latin America, and trigger a sustained expansion in global cereal trade. Total cereal trade would increase by between 40 and 47 M t by 2009/10, i.e. at a much quicker pace than in the 1980s and 1990s.

Global trade in wheat would strengthen, with annual growth averaging about 2.3% - 3.1%, whereas coarse grain trade would exhibit a similar pattern with an annual average ranging between 2.0% and 3.1% over the 2001/02-2009/10 period.

After having bottomed out at the turn of the century, world prices are projected to display a slow and moderate recovery over the medium term as supply adjusts and global demand strengthens.

The crop years 2002/03 and 2003/04 have provided a good illustration for this price recovery. However, these 2 years have been characterized by severe output reductions in some of the main exporting countries. This may not be repeated every year. So, even if the coming price trend is on the upside compared to the average of the 90s, it does not mean that prices will remain as high as they are now.