Global cereal supply and demand brief

Tight cereal supplies keep prices at high levels

FAO's latest forecast for world cereal production in 2007 has been revised downward further in the past few weeks and now stands at 2 101 million tonnes (including rice in milled terms), although still a record level and significantly (4.6 percent) up from the previous year. With the last of the 2007 wheat harvests underway in the southern hemisphere, the estimate of world wheat production for the year is more firm now and stands at about 1.3 percent above the previous year’s about-average level. Prospects at the start of the year had pointed to a much larger harvest but as the year progressed some of the world's main crops were severely compromised by drought, especially in eastern parts of Europe and Australia. While coarse grain crops in these drought-affected areas have also turned out less than early potential suggested, generally good to bumper crops have been confirmed elsewhere, particularly for maize in the United States, contributing to a better overall coarse grain harvest at the world level than was expected earlier in the year. Regarding rice, latest indications continue to point to an output close to the previous year’s level. World cereal utilization in 2007/08 is forecast to expand to 2 103 million tonnes, or nearly 2 percent above the previous season. Based on the latest forecasts for world production and utilization, global cereal stocks by the close of the seasons ending in 2008 are expected to fall to about 420 million tonnes, nearly 2 percent down from their already reduced opening level and still the lowest since 1983. World cereal trade in 2007/08 is currently forecast at around 252 million tonnes, about 1 percent, below the volume in 2006/07. However, at this level, world cereal trade in 2007/08 would still be the second highest after last season's record. International prices for all major cereals remain high and some registered considerable gains from the previous season. Tight supply amid strong demand is the underlying factor for the continuing strength in prices of most cereals. This is particularly the case for wheat, the price of which soared to record highs in September and October and remained high and volatile in November.

The 2007 wheat seasons approach conclusion with an output close to last year’s about-average level

FAO’s latest forecast puts aggregate world wheat production in 2007 at 602 million tonnes, significantly below expectations earlier in the season and representing an increase of just over 1 percent from 2006. Harvesting of the last of the 2007 wheat crops is well underway in the southern hemisphere with few surprises. South America’s main producers – Argentina and Brazil – are reaping larger crops than a year ago: a strong recovery in Brazil, after a reduced crop in 2006, was already predicted early in the season but the increase in Argentina materialized more recently with better than expected yield prospects emerging as the season progressed. In Australia, widespread rainfall in early November arrived too late to change the outlook for the drought-affected crops there, and as expected, wheat output this year will be about half of the normal level. Elsewhere, the past few weeks have seen mostly only minor adjustments to harvest estimates as they’ve been finalized. In North America, a downward revision has been made in the latest estimate of this year’s output in the United States but the harvest was still good and sharply up from the previous year. In Canada, as expected, the crop turned out well down on last year with hot and dry conditions compounding the impact of reduced area. In Europe, latest estimates point to a 2.3 percent decline in production, contrasting with the early season prospects for a sizeable increase. The worst losses were encountered in many eastern parts of the region where several weeks of exceptionally hot and dry weather severely compromised yields, in particular, in Romania, Bulgaria and Moldova. However, latest information indicates that the most easterly producing area - the Siberian region of the Russian Federation – escaped the drought and as the harvest progressed a larger crop was revealed there. Similarly, Kazakhstan, in the Asian CIS region to the south of Siberia also escaped the drought, and yields turned out much better than earlier expected. As a result, the aggregate estimate for Asia has been raised from earlier forecasts and now stands at almost 4 percent up compared to the 2006 crop and well above the average of the past five years. Elsewhere in the northern hemisphere, drought devastated this year’s wheat crop in Morocco, and despite about-average harvests elsewhere in North Africa, the subregion’s aggregate output is sharply down from last year as well as from the average of the past five years.

Favourable outlook for 2008 wheat crops

With the winter wheat sowing in the northern hemisphere virtually complete, the latest indications point to a significant increase in the world wheat area for 2008. In the United States, early tentative estimates put the winter wheat area up by about 3.5 to 4 percent from the previous year, in response to high prices. The spring wheat area may also increase if the price incentives for this crop at planting time next year remain relatively better than for competing spring-sown crops. In Canada the wheat is predominantly spring sown but early indications suggest plantings may increase by some 10 percent after a reduced area this year. The minor winter crop has already been sown and plantings are tentatively estimated to have increased by about 5 percent. Throughout Europe, conditions have been mostly favourable for winter wheat planting and early growth. The wheat area in the EU is seen to rise by some 6 percent following the removal of the 10 percent compulsory set-aside for 2008, combined with the current high price incentive to plant wheat. In the CIS region of Europe, the area sown to winter grains (mostly wheat) in the Russian Federation has increased by about 5 percent, to the highest level since 2001, while in Ukraine, an increase of at least 9 percent is expected. In North Africa, widespread rains in northern Algeria and eastern Morocco and have favoured winter wheat planting. However, precipitation has not been sufficient so far in southwestern parts of Morocco where, following the past season’s drought, conditions remain too dry for widespread sowing. Planting normally continues through December in the subregion so there is still time for crops to be sown should adequate precipitation arrive. In Asia, planting conditions are generally favourable in the main winter wheat producing areas. The wheat area in China is expected to match the previous year’s good level. In India, the previous year’s large area is expected to be repeated, with the incentive of a 17.6 percent rise in the wheat support price for 2008. In Pakistan conditions for planting are reported to be generally favourable with adequate soil moisture. In the Near East, planting conditions are favourable in Turkey but dry conditions prevail in the Islamic Republic of Iran.

Downward revisions for some 2007 coarse grain harvests but still record crop

Despite some recent slight downward revision, FAO’s latest estimate of world coarse grains production in 2007, at 1 069 million tonnes, would still represent an increase of 8.5 percent from last year and a record high crop. Most of the recent revision has been on account of adjustments for the United States, where the maize harvest has recently concluded with slightly lower output than earlier predicted. However, the United States crop is still estimated at its highest ever level, in response to high prices and strong demand from the biofuel industry and the huge increase in this crop accounts for the bulk of the increase in the global coarse grains harvest this year. Bumper crops have also been harvested in South America, reflecting increased plantings and favourable growing conditions that led to exceptional high yields. The secondary crop just gathered in Brazil was estimated at 25 percent above last year’s already good level. A record crop is also expected in Central America, where plantings expanded in Mexico, the major producer. Elsewhere, the 2007 coarse grain crops are seen to remain relatively unchanged in Asia and Africa, while unfavourable dry and hot conditions compromised the crops in Europe and Australia, reducing 2007 production in these parts. With regard to the first of the major 2008 maize crops, planting of the important summer crop is already underway in South America. Early indications point to a continued expansion in area because of the incentive of attractive returns relative to other crops.

Global rice production to change little in 2007, remaining close to last year’s above average output

According to the latest FAO estimates, global rice production (milled terms) is set to reach about 430 million tonnes, only marginally above the latest estimate for 2006. Generally, the 2007 outlook is positive in Asia, where production is expected to increase by 3.7 million tonnes, to about 585 million tonnes driven by sizeable gains in China and Indonesia, two of the leading rice producing countries. Large increases are expected in India and Myanmar as well, although the final outturn of the season in these countries is still uncertain, as it will much depend on the secondary winter crops, which are just being planted. The season is anticipated to end positively also in the Islamic Republic of Iran, Japan, Lao People’s Democratic Republic, Malaysia, Nepal and Thailand. By contrast, crop prospects have deteriorated in Bangladesh and Cambodia, which are now expected to harvest a much smaller crop than last season, reflecting in the first case large losses incurred to floods and, in the second, pest and diseases which depressed yields.

Most of the other producers in the region are anticipated to face a drop in production. Although still subject to some uncertainty, the outlook in Africa points to a slight overall contraction of production, largely reflecting expectations of poor crops in Côte d’Ivoire, Mali and Nigeria, more than offsetting positive crop prospects in Guinea and Madagascar. Indeed, although precipitation over the continent was particularly abundant this season, the rainfall was ill-distributed over time, depressing rice yields and eroding prior expectations of production gains. By contrast, the early season outlook for reduced output in the United States has been reversed in the light of record yields that are forecast to boost production by 2 percent this year. Elsewhere, paddy production is likely to change little in Europe, while it is set to fall in Latin America and the Caribbean and in Oceania.

Prices of cereals remain high and volatile

International wheat export prices that have been increasing since June remain at high levels. In November, the United States wheat No 2 (HRW, fob) averaged US$332 per tonne, a slight decline from its peak in October, but still US$113 per tonne, or 52 percent, above the price a year earlier. Firmer estimates for 2007 production, and less possibility of any major changes regarding the remainder of the crops that are now being harvested, coupled with indications of a larger 2008 wheat area planted, prompted the downward movement of prices in November. However, the tight supply/demand situation following a second consecutive reduced global wheat crop, particularly in exporter countries, and the very low levels of stocks, have kept wheat prices at historically elevated levels. High wheat prices and soaring freight rates have resulted in sharp increases in retail prices of bread and other basic food in large number of importing countries all over the world, particularly affecting low-income sections of the population.

Export prices of maize that have remained volatile since February, when they reached a ten-year high of US$177 per tonne, have risen in the past two months. The United States yellow maize No 2 (Gulf, f.o.b) averaged US$171 per tonne in November, US$5 per tonne more than in the same period a year ago. Prices of maize reacted to recent downward revisions of the 2007 world coarse grains output, following completion of the maize harvest in the United States, which however is still a record crop. Despite this high level of production, the market remains tight mainly reflecting the continuing expansion of demand from the bio-fuel industry in the United States. Strong maize prices, combined with shortages of feed wheat, have pushed up the values of most other feed grains.

Consistent with the general trend that has dominated since the beginning of the year, international rice price have strengthen in the past two months, notwithstanding the arrival in the markets of the bulk of the 2007 season paddy crop since November. Sustained by limited supply availability in major exporting countries and strong import demand around the world, the firmness of prices was generalized, affecting rice of all qualities and from all origins. Since August, the imposition of export restrictions by Egypt, India and Viet Nam injected further strength to the market, which was already buoyed by the weakening of the US dollar.