Global cereal supply and demand brief

Improvement in global cereal supplies forecast in 2007/08 but supply and demand will remain closely balanced

The prospect of a strong recovery in global cereal production in 2007 is a positive development for the world cereal supply/demand balance in the new 2007/08 marketing year. The forecast improvement in supplies is much needed after a significant tightening of the global balance in the preceding 2006/07 season, when a significant reduction in global cereal production in 2006, for the second consecutive year, coupled with a strong increase in demand, resulted in a sharp drop in the level of world cereal stocks and a surge in their international prices. However, with carry-in stocks forecast at their lowest level since the early 80s, even with the improvement in production expected, total supplies in the new season would still be barely adequate to meet the anticipated demand, which is forecast to increase not only from the traditional food and feed sectors but in particular from the fast-growing biofuels industry. As a result, international prices for most cereals are likely to remain high in 2007/08. Markets are also expected to remain volatile, as total stocks held in major exporting countries, the principal buffer against any sudden drops in production or rise in demand, will remain low.

Record world cereal output forecast in 2007 but some major crops still to be planted

FAO’s latest forecast for world cereal production in 2007 continues to point to a record output, now put at almost 2 095 million tonnes (including rice in milled terms), 4.8 percent up from 2006. Expectations for the world wheat harvest have deteriorated slightly since the previous report in April, and the crop is now forecast at just below 621 million tonnes. However, this would still be a significant 4 percent above the previous year’s level, and well above the average of the past five years. The downward adjustment since the last report concerns mostly North America, where a sudden return to harsh winter conditions in the United States in early April, caused varying degrees of damage to the well-developed crops over a large part of the main producing winter wheat plains, making the earlier predictions of a bumper crop less likely. Also for Canada, where planting is just underway, latest information points to a slightly larger reduction in wheat output this year than had been earlier predicted. The wheat crop is generally progressing well in Europe, and recent indications still point to larger crops in most major producing countries. In Asia, wheat output in 2007 is seen to remain close to last year’s good level. A reduction in China’s production will likely be offset by increased outputs in both India and Pakistan, where bumper to record crops are approaching harvest. In North Africa, however, prospects for the wheat crop have deteriorated further because of prevailing dry conditions. In the southern hemisphere, planting of the major wheat crops is just underway or coming up in the next few weeks. Early indications point to a smaller crop in South America, where planting is about to begin, with a forecast reduction in Argentina more than offsetting a likely recovery in Brazil from last year’s reduced harvest. In Oceania, the outlook for Australia remains very uncertain pending the weather conditions in the May/June planting period. Should sufficient rainfall arrive in time, wheat producers remain poised to plant a large area, allowing the possibility for a sharp recovery from last year’s drought-reduced harvest.

Table 1. Cereal Production¹ ( million tonnes)

FAO’s forecast for coarse grains production in 2007 has been revised upward since the last report to some 1 051 million tonnes, 7.1 percent up from last year and a record high. The bulk of the increase is expected in maize, which accounts for about 70 percent of the total. In the southern hemisphere the main 2007 harvests are already underway or already complete in some countries. In South America, a record main crop harvest is being gathered and the secondary crop in Brazil looks set to increase also. In Southern Africa, however, prospects are less favourable and aggregate output is forecast slightly lower than last year‘s below-average crop. In the northern hemisphere, the bulk of the coarse grain crops have now been sown throughout Europe, but much of maize crop in United States, the world’s largest producer, has yet to be planted. Planting progress is behind normal but if weather conditions in the next few weeks are clement, survey data indicates that producers intend to plant the largest area since 1944, mostly in response to exceptionally strong domestic demand for maize-based ethanol production.

FAO’s early and very tentative forecast for world rice production in 2007 points to a slightly larger crop at some 422 million tonnes, which would match the 2005 record. The increase is expected entirely among the developing countries, and mostly those in Asia, since production in the developed countries is anticipated to fall for the third consecutive year, bringing their contribution to the world total down to less than 4 percent. Expectations of growth reflect favourable price outlooks, renewed institutional support to the sector, and also assume a return to average growing conditions among the countries concerned.

Table 2. Basic facts of the world cereal situation ( million tonnes)

 

World cereal utilization to remain above trend in 2007/08 despite a strong price outlook

World cereal utilization in 2007/08 is tentatively forecast to rise by 1.3 percent to a record 2 097 million tonnes, remaining above the projected trend value. Most of the increase is expected to come from higher utilization of coarse grains, maize in particular. Global coarse grains utilization is forecast to expand by 2.3 percent, largely due to a continuing fast growth in demand for maize-based ethanol production, which is expected to boost total industrial use of coarse grains in 2007/08 by 9 percent. The bulk of this growth is expected in the United States where, in spite of rising maize prices and a decline in the price of crude oil, ethanol production is on its way to having another record season as more plants become operational. By contrast, the amount of coarse grains used for feed which normally accounts for the bulk of its total use (or about 60 percent) is forecast to rise only marginally; namely in Argentina, Brazil and Mexico. Total world wheat utilization is forecast to remain barely unchanged at around 628 million tonnes, of which food consumption continues to account for over 70 percent. In 2007/08, world wheat use for food is forecast to reach 450 million tonnes, nearly 1 percent more than in 2006/07, which would just be sufficient to maintain per caput consumption close to the previous year’s level of 68Kg. Feed use of wheat is forecast to grow more rapidly in the new season, by about 2 percent. Improved supplies in the EU and a number of CIS countries are expected to encourage higher utilization of wheat for feed and more than offset a small decline anticipated in North America. Although still tentative, the early outlook for rice utilization points to a marginal (0.5 percent) increase in 2007/08, to 423 million tonnes. As food consumption accounts for 89 percent of total world rice utilization, gradual declines in per caput food intake of rice in a number of important rice consuming countries, such as China, have slowed down growth in total utilization over the past 5 years, a trend likely to continue in 2007/08.

World cereal stocks to remain low

In spite of the record level of production forecast in 2007, global end-of-season cereal stocks for crop years closing in 2008 are forecast to remain virtually unchanged from their low opening level, at just 401 million tonnes. Lack of any recovery in the size of world stocks, despite good production prospects, stems from the fact that the bulk of the growth in production would be in coarse grains, for which a significant increase in utilization is also expected.

Total wheat inventories by the close of the crop seasons in 2008 are currently forecast at 142.5 million tonnes, down 6 million tonnes from their already low opening level. Total wheat stocks held by the major exporters¹ are forecast to reach 40.5 million tonnes, up slightly from their low opening level. However, the expected increase counts mostly on materialization of the forecast strong recovery in production in Australia after a drought-reduced crop last year, which remains uncertain pending the arrival of good planting rains in the next two months. Ending wheat inventories in the United States and the EU are expected to change little from their low levels at the start of the season while in Canada, lower output is expected to cause a drawdown of stocks also in the new season. Among other countries, significant drawdowns are likely in China, Egypt and Morocco as a result of the forecast decline in their domestic production but closing inventories are likely to recover in India due to imports and the anticipated increase in production.

World coarse grains carryovers by the close of seasons in 2008 could increase slightly from their sharply reduced level at the start of the season to 155 million tonnes. Among the major producers in the southern hemisphere, where this year’s crops are mostly harvested, the expected bumper maize crops in Argentina and Brazil are likely to result in a significant build-up of stocks in both countries. However, inventories in Southern Africa are expected to diminish following reduced crops, with the exception of Malawi, where a record crop will likely cause stocks to rise, and Angola. Among northern hemisphere countries, coarse grains inventories in China are set to increase if this year’s anticipated record maize production materializes. By contrast in the United States, where maize production is also forecast to be a record this year, the rising domestic utilization could keep the end-of-season stocks low; close to their reduced opening level. Similarly, in the EU, the expected recovery in barley and maize production may not be sufficient for rebuilding inventories because of strong domestic demand and increase in exports. World rice stocks by the close of seasons in 2008 are forecast at about 103 million tonnes, virtually unchanged from their forecast level at the close of the 2007 seasons. However, this forecast is highly tentative as the bulk of the world’s 2007 rice crop has yet to be planted later this year.

 

World cereal trade to contract in 2007/08

Following a small increase in world cereal trade in 2006/07, FAO’s first forecast for the new 2007/08 season, points to a contraction of about 2.6 percent, to 242 million tonnes. This anticipated decrease would be on account of lower wheat and coarse grains exports in 2007/08, while world trade in rice may decline only slightly.

Early indications for world trade in wheat in 2007/08 (July/June), point to a sharp decline of nearly 3.5 million tonnes, to 106 million tonnes. Overall, smaller wheat purchases by Brazil, the EU and India from international markets would more than offset increased imports expected by China, Bangladesh, Morocco and South Africa. India’s imports are forecast to reach 2 million tonnes in 2007/08, down 4.5 million tonnes from the previous season as production in 2007 is expected to increase and local procurement by the Government is likely to rise compared to last year, following the announced 30 percent rise in the wheat procurement price. In contrast, the production shortfalls in Bangladesh and Morocco are expected to lead to much larger imports by those countries. In Bangladesh, because of the likely decline in wheat output this year, the Government decided in March to waive the 5 percent duty on imports. Similarly in Morocco, where prolonged dry conditions may halve production this year, the Government has recently lowered tariffs for soft wheat imports in an effort to put a break on the rise in domestic prices.

Table 3. World wheat trade (million tonnes)

The expected reduction in world imports could be regarded as a welcome development given the likelihood for overall export availabilities in major exporting countries to again remain tight in 2007/08. Argentina and Canada in particular are expected to export less in 2007/08 due to a likely decline in their supplies. Argentina suspended wheat exports beginning in early March in order to contain domestic price increases. This interruption is seen to negatively affect plantings and, therefore, production this year. Slightly higher exports are forecast from the EU and the United States as well as a number of non-traditional exporters; namely, the Russian Federation, Ukraine and this season also Pakistan where the Government has lifted the ban on exports in December 2006 and since then allowed 800 000 tonnes of exports.

Making trade forecasts for coarse grains for next season is subject to more uncertainty than is the case for wheat. This is because at this time of the year, key harvests in the northern hemisphere producing countries are still months away and final results will depend on actual plantings and weather developments, especially during the critical summer period. Based on the current forecasts for production and utilization in the new season, world trade in coarse grains is forecast to reach 106.5 million tonnes, down nearly 3 million tonnes from the current estimate for the 2006/07 marketing season. International trade in maize is likely to fall most, by 6 percent to about 80 million tonnes. The decline in maize is expected to be partly offset by a strong rebound in barley, sorghum and oats markets.

Table 4. World coarse grain trade (million tonnes)

A record maize crop potential in Brazil, an expected bumper harvest in Indonesia and a likely strong production rebound in the EU are among the main factors for the anticipated decline in imports in 2007/08. However, several countries are forecast to increase their purchases from world markets. A number of countries in Africa are confronted with unfavourable weather conditions, hampering their production and raising their import requirements. Barley imports by Morocco are forecast to double in 2007/08 while South Africa, normally a net maize exporter, is forecast to become a net importer.

The overall maize exportable supply prospect for 2007/08 is favourable. Among the major exporters, Argentina and Canada in particular are set to sharply increase their shipments because of improved supplies. However, sales from the United States, the world largest exporter, are forecast to decline in spite of an anticipated record production. Strong domestic demand and low carry-in stocks would mean another tight supply situation in the United States. Aside from the five major exporters, sales from China may decline slightly but Brazil and Ukraine are likely to export more because of improved supplies.

International trade in rice in 2008 may fall somewhat below the forecast for the current year. However, as for coarse grains, this forecast is very tentative because major harvests are still many months away and the 2007 calendar trade year is still 8 months from completion. FAO’s latest forecast for world trade in rice for 2007 stands at 29.8 million tonnes, up 1.2 million tonne from 2006 and very near the record in 2005. The anticipated rise in trade in 2007 reflects greater supply needs by importing countries facing production shortfalls. Much of the expected increase would be on account of larger deliveries to Asian countries, especially Bangladesh, Indonesia, Nepal, the Philippines and Viet Nam, while African countries could cut imports reflecting their relatively good 2006 paddy production. Imports by countries in Latin America and the Caribbean are set to rise, sustained by larger purchases by Brazil, Colombia and Peru, which would compensate for smaller shipments to Mexico and Cuba. In the rest of the world, the United States and the EU are poised to import more in 2007, while an increase in border protection could depress purchases by the Russian Federation.

Among exporters, only Thailand and Cambodia appear to be in a position to respond to the growing import demand by substantially stepping up deliveries. Attractive world prices may also foster a small increase of exports from India and Egypt, but most of the other major suppliers, including Australia, Pakistan, the United States and Viet Nam are now foreseen to cut theirs.

International cereal prices remain high

International prices of all cereals increased sharply during the course of the 2006/07 season. The decline in the 2006 production on one hand and the rise in utilization on the other, contributed to the strengthening of prices in nearly all markets. However, the increase in maize prices has been more pronounced, and the strong prices of maize, mostly driven by a surge in its use for production of ethanol in the United States, continued to influence the prices of other cereals, wheat in particular.

While the report of an intended sharp increase in maize plantings in the United States and likely improvements of exportable supplies in Argentina and Brazil contributed to a significant decline in maize prices in recent weeks, export prices remain high compared to the previous season. The US No. 2 maize (Gulf) averaged US$150 per tonne in April, down sharply (US$20) from March but still up nearly 40 percent from the corresponding period last year. Strong regional demand has been supportive to South African prices, especially for white maize, the supply of which is limited this season. Looking ahead, in spite of the anticipated large production entering world markets later in the year, rising demand is likely to keep maize prices high. By late April, the Chicago Board of Trade (CBOT) December maize futures stood at US$147, US$42 above the same time in the previous year.

Table 5. Cereal export prices* (US$ per tonne)

International wheat prices have also risen in 2006/07 due to declines in 2006 production in a number of major producing regions, export restrictions imposed by several exporters and spill over from surging maize markets. The US wheat No. 2 (HRW, fob) averaged US$206 per tonne in April, down slightly from March but up US$19 per tonne or 10 percent from April 2006. Generally improved supply prospects in the new season, recent reductions in maize values and the nearing of the major harvesting period are likely to put more downward pressure on wheat prices in the coming months. However, the outlook could change significantly, should planting conditions prove unfavourable in Australia, the only major exporter yet to plant the bulk of its 2007 crop, and where the outcome will depend wholly on good rains in May/June. By late April, wheat futures for September delivery at the CBOT were quoted at US$186 per tonne, still up nearly US$50 from the corresponding period last year.

Since December last year, export prices of rice from all origins have remained on a steady upward trend, as indicated by the FAO All Rice Price Index (1998-2000=100) that passed from 115 in December 2006 to 120 in March 2007. The strength concerned most quotations, in particular fragrant rice varieties and rice from Pakistan. As April and May coincide with the harvesting of the main 2007 crops in the southern hemisphere and of the secondary 2006 crops in the northern hemisphere, the tendency for prices to rise may be dampened until June by the arrival of new supplies to the market. However, rice prices in the next few months are unlikely to weaken much, given expectations of continued strong import demand, while governments in Thailand, Viet Nam and now Cambodia are also adamant about keeping them at remunerative levels. The general price outlook therefore points to continued gains for the months to come.