Global cereal supply and demand brief

Cereal markets remain tight in 2008/09

Higher cereal production in 2008 is expected to contribute to some improvement in the global supply and demand balance for cereals in the 2008/09 season. However, with total cereal supply (carry-in stocks plus production) just barely exceeding anticipated utilization, the recovery in world cereal reserves will be limited. As a confirmation of a continuing tight supply situation in the new season, the ratio of world cereal stocks to utilization is forecast at 19.7 percent, up just marginally from the low of 19.4 percent in 2007/08. Against this background, international cereal markets are likely to stay volatile and export prices for most cereals could remain historically high although below the peaks of 2007/08. Among major cereals, the maize situation remains a concern given the large drop in output expected in the United States, the world’s largest producer and exporter. In recent weeks, the combined impact of a sharp reduction in maize plantings and floods in major maize growing areas of the United States have pushed up maize prices to record levels, lending support to prices of other feed grains as well as wheat in international markets.

PRODUCTION

Cereal production prospects for 2008 remain favourable

FAO's latest forecast for world cereal production in 2008 stands at a record 2 180 million tonnes (including rice in milled terms), up 2.8 percent from 2007 but slightly lower than earlier anticipated. The bulk of the increase is expected in wheat, which is forecast at 658 million tonnes, representing a significant (8.3 percent) increase from 2007. In the northern hemisphere, where many of the wheat crops are being harvested or are already gathered, bigger harvests are expected in all regions with the exception of Asia, where although declining slightly, output will remain close to last year's record high.

In North America, harvesting of a significantly larger winter wheat area is already underway in southern parts of the United States and good yields are expected after generally favourable growing conditions. Together with larger spring wheat plantings, the country's aggregate wheat output in 2008 is foreseen to rise almost 18 percent to some 66 million tonnes, the largest crop since 1998. In Canada, a much larger wheat crop has been sown and if the season is normal, output could rise to almost 25 million tonnes, about 24 percent up from 2007.

In Europe, harvesting of wheat crops in some central and southern parts is already underway. Reflecting a larger area and better yield prospects, especially in some eastern parts of the region afflicted by drought in 2007, the aggregate output of the region is forecast to increase by some 14 percent to 215 million tonnes. Production in the EU-27 is forecast to reach 138 million tonnes, nearly 15 percent up from 2007's depressed output. In the European CIS countries, given an anticipated sharp recovery in Ukraine and another expected good crop in the Russian Federation, the aggregate output of the subregion in 2008 is set to rise to a bumper level in excess of 73 million tonnes.

In Asia, despite favourable prospects for this year's wheat crops in several major producing countries, the region's total output could slip back a little from last year's record level, because of dry conditions affecting some countries in the Asian CIS group and Near East subregion, to the east and south of the Caspian Sea. The most significant producing countries affected are the Islamic Republic of Iran, and Kazakhstan where outputs may fall by 20 percent and 15 percent respectively from last year's bumper crops, although their outputs would still be a comparatively good crop considering the past five year average. Production is also estimated to have declined 6 percent from last year’s record in Pakistan, because of a reduced use of inputs and shortages of irrigation water supplies, but nevertheless remain slightly above the average of the past five years. In India, where the harvest is already underway, the attainment of good yields has resulted in a more favourable outlook indicating that this year's crop could turn out to be a record, close to 78 million tonnes. In China (Mainland), despite drought in some eastern parts, increased plantings and higher yield expectations in areas not affected by dry conditions point to another increase this year, reaffirming the country's upward trend in wheat production.

In North Africa, wheat crop prospects are satisfactory in Egypt, the subregion's major wheat producer, and in Morocco, where the wheat crop is expected to recover from last year's severely drought-reduced level.

In the southern hemisphere, the 2008 wheat season is underway. In South America, plantings have increased in Brazil in response to a favourable outlook for producer returns, and with the help of government incentives. By contrast, in Argentina, policy measures to increase taxes on exports have effectively reduced farmers' incentives to produce wheat, which combined with unfavourable dry weather, looks likely to result in a reduction of this year's wheat area and a return to an about-average crop after last year's bumper level. In Australia, despite delayed and/or below-normal rainfall in some main producing regions during the planting period, a sharply larger wheat area is expected this year, reflecting the incentive of strong prices. Assuming relatively normal weather for the remainder of the season, wheat output is forecast to recover sharply in 2008 to about 24 million tonnes.

FAO’sforecast for the global coarse grains output in 2008 has been revised downward slightly in the past few weeks, to 1 078 million tonnes, largely to reflect the impact of adverse weather during the maize planting season in the United States, the world’s largest producer. Nevertheless, at the forecast level, world production of coarse grains would be virtually unchanged from last year’s record high. In South America, harvesting of the main season crops is underway and output is expected to increase to a new record of some 99.5 million tonnes, following area increases in Argentina and Brazil, the region's largest producers, in response to high international prices. In southern Africa, despite far from ideal weather conditions throughout the season, with late planting rains, followed by floods and a subsequent return to excessive dryness in parts, the overall outturn for the main coarse grain crops is judged to have been favourable, particularly in South Africa which was affected by drought last year.

In the northern hemisphere, the bulk of the 2008 coarse grains have now been sown. In the United States, the recently completed maize plantings declined sharply after last year’s exceptional high level and difficulties endured during planting due to excessive rains and flooding could lead to a lower planting/harvested ratio than normal, and most likely lower yields in the affected areas. Based on indications in late June, the country’s maize output is forecast at about 293 million tonnes, down nearly 40 million tonnes from last year, but still a relatively high level compared to recent history.

In Europe, coarse grains output is forecast to recover sharply from last year's reduced level when drought affected crops in some of the main producing countries in eastern parts of the region such as Hungary, Romania and Ukraine. This year's coarse grains crop in Asia is forecast to remain virtually unchanged from last year's good level. Production in China, by far the biggest producer in the region, is expected to remain well above the average of the past five years.

The 2008 paddy season has reached a critical stage, as, by now, planting of the main paddy crops in all the major producing countries is underway or already completed. Barring major shocks in the coming few months, global paddy production may rise by 1.4 percent to 666 million tonnes, (444 million tonnes in milled rice equivalent), 9 million tonnes above the excellent 2007 season results. Unlike in 2007, when much of the gain was concentrated in Asia, in 2008, producers in all regions have responded to high market prices in the first half of the year by increasing rice cultivation.

In Asia, significant to strong production increases are anticipated in several countries, as producers have also benefited from intensified government support to increase production. The main exceptions are likely to be China, where only a marginal rise in output is expected in 2008, partly reflecting the impact of the devastating earthquake in Sichuan Province, where 7 percent of national output is produced, and Myanmar, where, output may fall in 2008, due to the passage of cyclone Nargis through the most important rice producing area at the beginning of May. Against the backdrop of soaring world rice prices, several governments in Africa have renewed their commitments to achieve rice self-sufficiency in the next few years. However, regarding the current season, more remunerative rice prices and reduced competition from imports are encouraging local producers to expand the area under rice in all rice producing parts of the region. As a result, widespread increases in output are currently foreseen in 2008, although the final outcome will hinge on the weather patterns in the coming months, in particular the timing and distribution of precipitation in the western part of the region. In Latin America and the Caribbean, rice production is set to expand vigorously in 2008, sustained by favourable growing conditions in all the major producing countries of South America. In Central America and the Caribbean, where the season is less advanced, a recovery in Mexico and Nicaragua should sustain a 4 percent expansion in the subregion. In the rest of the world, rice output in 2008 is expected to change little in the United States. Drought resulted in lower plantings in Spain, which, together with some shift of Italian producers from rice to wheat cultivation, is expected to cut production in the European Union by almost 5 percent. By contrast, government assistance to the sector should boost production in the Russian Federation.

 

UTILIZATION

World cereal utilization will grow at a slower pace in 2008/09 on reduced feed use

World cereal utilization in 2008/09 is forecast to rise to 2 167 million tonnes. Growth in food consumption and industrial usage are among the main factors for the rise in total cereal utilization but high prices are expected to cut into feed use and slow down the overall expansion in total cereal utilization to 1.9 percent, well below the 3 percent growth observed in 2007/08. Given the expected sharp increase in wheat production, expansion in wheat utilization is forecast to be the most significant, rising by almost 3 percent from the previous season, to 635 million tonnes. Most of this growth would be in feed use because of the anticipated lower availabilities of maize. After a contraction of around 8 percent in 2007/08, total feed utilization of wheat is likely to rebound to 118 million tonnes in 2008/09, up 14 percent from the 2007/08 reduced level. The strongest expansions are expected in the EU and in the United States. World wheat use for human consumption is forecast to reach 455 million tonnes, 1.6 percent more than in 2007/08, which would be sufficient to maintain a steady consumption level of roughly 68 kg per caput on a global basis. By contrast, the growth in world coarse grains utilization is forecast to slow down in the new season as tighter supplies would boost usage of wheat and non-grain alternatives for animal feed. Total coarse grains utilization is forecast to rise to 1 087 million tonnes in 2008/09, up 1.6 percent from 2007/08. This compares to a strong growth of over 5 percent in the previous year. The forecast expansion in the overall use of coarse grains in 2008/09 will be driven primarily by a steady rise in the use of maize for ethanol production in the United States. Total utilization of maize for production of ethanol in the United States is put at about 102 million tonnes, up some 23 million tonnes from the estimated use in 2007/08 and almost twice as much as in 2006/07. World feed use of coarse grains is forecast to drop to 624 million tonnes in 2008/09, down 17 million tonnes from the previous season. Most of this decline is expected to occur in the EU and North America. Global consumption of rice, including food and non-food uses, is forecast in the order of 445 million tonnes in 2009, up from a 439 million tonnes in 2008. Since rice is mainly used as a food commodity, the bulk of it, or 385 million tonnes would be destined for direct human consumption. This would mean 57.4 kg of rice per caput, per year, as food, little changed from 2008. Per caput rice availability may increase somewhat in Asia, to some 83.3 kg, and in Latin America and the Caribbean, to 29.6 kg, mainly sustained by production gains in those regions, while it may remain in the order of 22.4 kg and 5.1 kg in Africa and Europe respectively.

STOCKS

Larger wheat supplies help cereal stocks to increase marginally

For the first time in three seasons, world cereal production is forecast to slightly exceed total utilization, allowing for a small recovery in global stock levels. World cereal stocks by the end of crop seasons ending in 2009 are forecast to reach 425 million tonnes, up 5 million tonnes from their low levels at the start of the season. This recovery in the level of world cereal stocks in 2009 may appear less marked than reported earlier but this follows a major upward revision to FAO’s previous forecast for global cereal stocks ending in 2008, from nearly 409 million tonnes reported in May 2008, to 421 million tonnes, rather than a significant change in the 2008/09 outlook. The recent adjustment to the previous year’s closing inventories was primarily driven by the latest upward revisions to 2007 cereal production estimates in China which, in turn, resulted in a significant upward revision of ending stocks in that country. Based on the current forecasts, the ratio of world cereal stocks to world utilization could increase to 19.7 percent from 19.4 in the previous season.

World wheat stocks by the close of the crop seasons in 2009 are forecast to approach 169 million tonnes, up 17 million tonnes, or 11.5 percent, from their low opening levels. The strong anticipated increase in global wheat production in 2008 is helping with this recovery in world inventories. At the current forecast levels, the world wheat stocks-to-use ratio for the new season is forecast at 26.6 percent, up 3 percent from the previous season. Strong demand for wheat, especially for feed use as a result of tighter supplies of coarse grains, is expected to prevent a more pronounced expansion of wheat stocks, therefore also limiting the recovery in the stocks-to-use ratio. In major exporting countries, the anticipated rebound in output this year is likely to lead to a major recovery in stocks, to 35 million tonnes, up 10 million tonnes, or 41 percent, from their low opening levels. At this level, the ratio of the major exporters' stocks-to-disappearance (defined as their anticipated exports plus domestic consumption) is expected to recover from a historical low of only 10 percent in 2007/08 to 13.2 percent in 2008/09. Wheat inventories in all major exporting countries are expected to rise, in particular in the United States and the EU. Wheat inventories in China are also forecast to rise sharply, in view of this year’s expected bumper harvest. Similarly, driven by good production prospects, stocks in India are heading for a substantial recovery, particularly those held by the Government, which are likely to fulfil the requirement for the Public Distribution System.

By contrast, world coarse grain stocks by the close of seasons in 2009 could fall by as much as 8 percent, or 13 million tonnes, to 151 million tonnes. Most of the anticipated reduction reflects the situation in the United States where this year’s production (mainly maize) is forecast to fall by nearly 40 million tonnes. Total coarse grains stocks in the United States are forecast to fall to around 18 million tonnes, down 22 million tonnes from their opening level and the smallest level since the mid-1990s when they were at just over 14 million tonnes. At the current forecast level, the world stocks-to-use ratio for coarse grains is expected to fall to roughly 14 percent, down 1 percent from the previous season. Because most of the anticipated reduction in world stocks of coarse grains is forecast to occur in the United States, the world’s largest exporter, the ratio of closing stocks to major exporter’s total disappearance (i.e. domestic consumption plus exports) would fall to under 9 percent from nearly 12 percent in 2007/08 and well below the 15 percent during the early years of this decade. Elsewhere, favourable crop prospects in China, the EU, Brazil, South Africa and Ukraine are expected to boost stock levels in those countries.

Despite expectations of a larger global rice crop in 2008, the forecast output would not be sufficient to cover the anticipated world consumption, which would require a slight drawdown in global rice reserves. As a result, based on current forecasts, global rice inventories at the close of marketing years ending in 2009 may decline marginally to 105.7 million tonnes, down from an opening level of 106.0 million tonnes. The reduction would be concentrated in the developed countries, where inventories are forecast to fall by 11 percent to their lowest level in the decade, while virtually no change is anticipated for the developing countries. China, which is estimated to hold 56.9 million tonnes, or more than half of world total reserves, may cut inventories slightly in 2009, while India, which has the second largest rice inventory, is forecast to end the season with larger stocks, mainly because of government actions to restrict exports. From a trade status perspective, importing countries, as a whole, are anticipated to draw from their stocks for the third consecutive season, while little change is foreseen among exporters. Based on the expected levels of stocks and utilization, the stock-to-utilization ratio would be in the order of 23.9 percent in 2009, down from 23.8 in 2008.

TRADE

International trade contracts in 2008/09 mostly on reduced imports by the EU

World trade in cereals in 2008/09 is forecast to fall to close to 255 million tonnes in 2008/09. This represents a sharp decline of almost 12 million tonnes, or 4 percent, from the record in 2007/08. Lower trade in maize, mainly driven by the anticipated cut in imports from the EU is the main reason behind this decline. World trade of wheat and rice are in fact forecast to increase in 2008/09 but their combined expansion may not be sufficient to offset the sharp expected decline in trade of coarse grains.

World wheat trade (exports) in 2008/09 marketing season (July/June) is forecast to reach 112 million tonnes in 2008/09, up 2 million tonnes from 2007/08. Among the different regions, only Asia is expected to import more than in the previous years. Most of the anticipated increase in wheat imports in Asia is likely to be driven by a significant increase in imports required by several countries where domestic production has been affected by drought, in particular the Islamic Republic of Iran, Iraq and the Syrian Arab Republic. In Africa, total imports are forecast to decline slightly, mainly reflecting reduced requirements in Morocco following an expected partial recovery from last year’s severe drought. In Latin America and the Caribbean, Brazil is forecast to import less because of higher production. In Europe, a sharp decline in wheat imports is anticipated in the EU as a result of the expected recovery in output. In June the EU agreed to extend the suspension of import tariffs on all cereals (with the exception of oats) to the 2008/09 marketing season.

Export supplies of wheat in the 2008/09 marketing season are expected to be more abundant than in 2007/08 due primarily to the anticipated strong recovery in production in Australia, the EU and Ukraine. Exports from the United States are forecast to fall sharply because of the strong domestic demand and tighter competition. In Argentina, the anticipated decrease in production may further hamper sales which are already affected by the ongoing farm dispute over export taxes. The Russian Federation will have large supplies for exports this season and is expected to eliminate its export taxes in July (at least 105 euros per tonne). While Kazakhstan is expected to export less in 2008/09 compared to the previous season, the country has announced that it will not extend the ban on wheat exports beyond September 2008. Among smaller exporters, China is expected to increase its wheat sales this season if current production prospects materialize, but much smaller shipments are expected from Pakistan, due to lower production and strong domestic demand.

World trade in coarse grains in 2008/09 marketing season (July/June) is likely to fall to 113 million tonnes from nearly 127 million tonnes (record) in 2007/08. This expected sharp decline is mainly due to lower requirements in the EU given this year’s prospects for a strong rebound in domestic supplies of feed grains. Total coarse grains imports (mostly maize and sorghum) by the EU climbed to 20.5 million tonnes in 2007/08, representing a three-fold jump from the previous season, but the group’s imports in 2008/09 are likely to revert to more normal levels, that is below 6 million tonnes. Also in Latin America and the Caribbean, total imports are forecast to be cut significantly, by nearly 2 million tonnes, mostly due to smaller imports by Brazil and Mexico because of larger crops. By contrast, larger imports are expected in Asia where several countries are expected to increase foreign purchases of coarse grains due to shortfalls in production and strong demand from their domestic feed sectors. Imports (mainly barley and maize) by the Islamic Republic of Iran and the Syrian Arab Republic are forecast to rise to 4 million tonnes each, up by at least 1 million tonnes in each case. Larger purchases are also forecast for Saudi Arabia (maize and barley) and the Republic of Korea (maize). Total imports (mostly maize) in Africa are expected to be slightly smaller than in the previous season as a result of generally more favourable crop prospects. Lower coarse grains purchases are forecast for Egypt (maize), Morocco (barley) and the Republic of South Africa (maize).

Regarding coarse grains exports in 2008/09 marketing season, a sharp contraction in exportable supplies in the United States, the world’s largest exporter, coincides with a large contraction in world import demand. As a result the overall export supplies are likely to prove sufficient. Among the other major exporters, smaller exports are also anticipated from Canada and the EU, but Argentina and Australia are expected to export more than in the previous season. Among other countries, smaller maize sales are forecast for Brazil and India but much larger exports are expected from the Republic of South Africa (maize), the Russian Federation (barley) and Ukraine (barley and maize) reflecting this year’s improvement in supplies. China (Mainland) is also likely to export more maize than in the previous season in view of anticipated record production this year.

Based on current production prospects, which are still provisional, international trade in rice may increase slightly in 2009, after being constrained by export restraints in 2008. According to FAO’s first 2009 forecast, trade in rice may reach 30.0 million tonnes, 1 percent higher than the current estimate of 29.7 million tonnes in 2008. Rice deliveries to African countries may rebound in 2009, notwithstanding efforts to boost production, reflecting a sustained expansion in domestic demand. Imports by countries in Latin America and the Caribbean are not anticipated to change much compared with 2008, with some decline in Brazil and Ecuador compensated by increases in Colombia, Mexico and Nicaragua. In the other regions, imports by the United States and the EU are forecast to rise, partly to compensate for stagnating or falling production in 2008, while a recovery in Australia would result in falling deliveries to the country. However, lower imports are expected by Bangladesh and the Philippines, given positive expectations over production in 2008, much of which will be traded and consumed in 2009. On the other hand, the Islamic Republic of Iran, Iraq, Saudi Arabia and the United Arab Emirates are likely to step up imports, to meet consumption needs and to reconstitute food reserves.

From an export perspective, the recovery would be mainly driven by larger shipments by India, largely on the expectation that, by next year, the government would have partly relaxed the provisions limiting non-basmati rice exports. Pakistan and Viet Nam may also be in a position to sell more abroad. Egypt recently announced an extension of its export ban till April 2009. If, by then, exports are allowed to resume, they may rebound compared to the depressed level expected in 2007. By contrast, Cambodia, China and, especially, Thailand may cut their sales below the high volumes they are anticipated to ship in 2008. Low rice inventories and expectation of no output growth in 2008 may also reduce sales by the United States next year. Overall, exports in South America are unlikely to differ much from levels currently foreseen for 2008, although lower expected prices in 2009 may depress sales by Argentina and Brazil. Assuming at least a partial recovery of production in 2009, exports from Australia could rebound next year.

PRICES

Tight maize supply in the United States continues to underpin international prices of major cereals

International maize prices have continued to move upward in recent weeks, climbing to record high levels. The main driving factor for the surge has been the devastating impact of recent floods on this year’s maize crops in the United States, the world’s largest producer and exporter. In the first two weeks of July, US maize (No. 2 Yellow, Gulf) averaged USD 292 per tonne, USD 11 per tonne up from the June average and double the average in July 2007. The weaker US dollar and rising crude oil prices have also contributed to the increase in maize prices. On the futures market, prices in early July were volatile. September maize futures on the Chicago Board of Trade (CBOT) fell sharply at the start of the month in reaction to news of higher ending stocks and larger plantings than earlier forecast in the United States but, shortly after, had regained most of the loss, climbing back to USD 298 per tonne.

International wheat prices weakened modestly in early July with seasonal harvest pressure from good crops being gathered in the northern hemisphere starting to influence markets, as well as improved prospects in Argentina, a major southern hemisphere producer where recent rains were beneficial for developing crops. In addition, the reopening of Argentina’s export registry also contributed to the decline in prices. In the first two weeks of July, US wheat (No.2 Hard Red Winter, f.o.b. Gulf) averaged USD 349 per tonne, down USD 9 per tonne from the June average. However, this level is USD 99 per tonne up from the July 2007 price, with wheat prices remaining strongly underpinned by the maize market. Strong early season demand for feed wheat, driven by the high cost of coarse grains is providing support to wheat markets. Partly influenced by the maize market, wheat futures have also been volatile in the past few weeks. A sharp drop at the start of July cancelled a large part of the overall gain made in June.

After reaching a peak in May, rice prices fell in June and early July, reflecting greater export availabilities in countries such as Thailand and Viet Nam and a relatively weak import demand. The Thai white rice 100% B quotation, the world’s benchmark grade for rice, was USD 849 per tonne in the first week of July, down 12 percent from the exceptionally high May average. Until the end of September 2008, Thailand will be operating a new government rice procurement programme at exceptionally high purchase price levels of around USD 425 per tonne for paddy rice, corresponding to some USD 650 per tonne on a milled basis. This measure is expected to sustain world prices in the next few months. Likewise, although Viet Nam has announced it would allow private contract sales to resume in July, the imposition of a minimum export price of USD 780 per tonne (lowered from a previous USD 800 per tonne) should also keep world prices from dropping much below those levels.