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Digital Re-print - November | December 2011 Global Feed Markets: November - December 2011

www.gfmt.co.uk

GLOBAL GRAIN & FEED MARKETS

Every issue GFMT’s market analyst John Buckley reviews world trading conditions which are impacting the full range of

commodities used in food and feed production. His observations will inf luence your decision-making.

At this early stage,

some pundits are

looking for modest

growth in next year’s

US soyabean plantings

and, given normal

weather a possible

larger crop. The

outlook for EU 2012

rapeseed output is

uncertain at this stage

with good weather

boosting winger

sowings in much of

western Europe but

too much rain delaying

and downsizing

plantings in Germany,

normally the top

producer, and too little

moisture threatening

prospects for some

southern/eastern

member states.

GROWING supplies and renewed fears of global economic recession cramping demand have slashed grain prices again in recent weeks. As we

go to press, market leaders wheat and maize are a good 25% below their 2012 peak prices, trading in some markets at their cheapest levels in well over a year – and there may be more downside to come.

Although the EU wheat market itself looks in fairly fine balance this season (i.e. a forecast marginal change in ending stocks), world wheat supplies have clearly been moving into a surplus position as 2011 crop estimates continued to grow, led mainly by the ‘Black Sea’ (CIS) countries.

What reaction should wheat prices offer to this ever loosening supply? Are they now cheap enough to reflect the known ‘fundamentals? ’ One might as well ask, did they ever really merit going as high as they did in February of this year (almost $9/bu, about $330/tonne) on the bellwether Chicago futures market. After all, while last year’s Russian crop failure and wet harvest/quality issues in Canada, Australia and Germany deservedly put a firework under the market, world wheat stocks fell by a mere 2.4% and remained at their fourth highest level of the past decade.

This inevitably again begs the question, what role did speculators really play in driving up wheat and maize prices in 2008 and 2011? Did they over-react to fundamentals and are they now doing the same now on the downside amid the ‘risk aversion’ generated by the bleak global economic outlook. (some of the selling of grain futures by ‘managed money’ is also thought to be a cash raising exercise to margin recent huge losses on US and other global stock-markets).

Many traders and analysts think wheat prices would even now be far lower than the recent $6/bushel (about $220/tonne) recently trading in Chicago, were it not for the high price of maize

which has maintained its highly unusual premium to wheat into latter 2012.

With wheat supplies far more abundant than maize and plenty of lower grade wheat from the milling quality problems mentioned above, feeding of wheat to livestock is already expected to rise by about 14m tonnes to 126.4m – almost a fifth of total world wheat consumption. If wheat prices dipped seriously on their own loose fundamentals, the rationale goes, feed demand would go even higher. Some of this feed gain for wheat is taking

place in the US, Europe and the former Soviet Union, some if it a straight switch from maize in importing countries in Asia and elsewhere.

Looking to the medium/longer term for wheat, f irst indications for 2012 crops suggest higher planted acreage as farmers continue to respond to relatively high prices in Europe, the USA, probably other regions too – so even more wheat.

Already some pundits are fretting about the price of wheat descending to levels that leave farmers little or no profit as it did two seasons ago (Chicago wheat collapsed to $4.50s/bushel - $165/tonne - as soon as December 2008 from a peak of $13 - $478/tonne in February of that year!). We have consistently maintained in this column, ever since the Russian crop failure that prices this time were more likely to come halfway rather than all the way back to those lows. One reason is that costs of production have risen – inputs, land etc all saw an above-inflationary jump when the base prices for grains doubled.

Another reason is the other factor behind

Lowest grain costs in over a year

Grain&feed millinG technoloGy36 | november - december 2011

GFMT11.06.indd 36 30/11/2011 17:29

COMMODITIES

the two grain price booms of recent years – bio-fuels. Is bio-ethanol - after a period of relatively f lat growth – about to start mopping up any surpluses as grain costs fall ? US corn ethanol production has already been looking with the slide in maize prices (although the scheduled ending of blending subsidies in 2012 might also be encouraging a ‘make hay while the sun shines’ push in this sector). It’s interesting to note that the main growth in US corn ethanol production now is in exports rather than domestic consumption – so US feed corn users, traditionally the main outlet for maize, are still paying relatively high prices, not just to wean US drivers off dependence on foreign oil but to help fill car vehicle fuel tanks in Brazil and Europe. Although the UK/European grain ethanol industry has had its well-publicised problems, one might expect lower grain costs to have an impact here too. The same applies to a host of countries who had been thinking about using more grain as a renewable fuel source before rising grain costs spoiled things

Will broader feed demand in China and other emerging economies maintain the rapid pace of recent years in the current uncertain economic climate? China has been the biggest single factor driving up feedgrain demand in recent years, raising its consumption by 43% or 44m tonnes in the past decade to account for 56% of world growth in this sector. Recent Chinese official forecasts suggest 4-5%

per annum growth will continue in its feed demand for the next f ive years. That will need 6/7m tonnes more grain fed in 2012/13

and each year after that to 2015/16 . Will China’s domestic crops keep pace? Official figures suggest they have so far but western

Grain&feed millinG technoloGy november - december 2011 | 37

GFMT11.06.indd 37 30/11/2011 17:30

from its September highs of �209. It’s hard to believe that this market was trading �281 in February when ‘skies the limit’ pundits talked of an assault on �300. UK feed wheat has also dropped to about £143 from February highs of £214/tonne.

Despite drought threats to the US hard red winter crop, export prices for this grade dropped to $284/tonne in mid-November compared with $310 at the time of oir last review. Quality spring wheats had been the firmest sector after the USDA revised down its US crop estimate in November, pushing fob value up from $390 to $409/tonne. However, these too appear to be easing on lack of domestic and export demand a these levels and reports of much better quality from this year’s Canadian crop.

Most of the credit for cheaper wheat goes to the ‘Black Sea’ former Soviet producers who have raised their combined wheat output by 31.5m tonnes, 13m more than most pundits expected back in the summer. Relentless, aggressive sales by Russia and latterly both Ukraine and Kazakhstan have virtually dominated the world import markets, undercutting US and European grain by as much as $30/50 per tonne, depending on types and grades. Top importers like Egypt and other Middle Easterm/North African countries have been only too pleased to reap this bonanza, shunning the US, Europe and other countries that baled out FSU shortages during last season’s Russian export bans and Ukrainian quotas, duties etc.

Along with gradually descending maize prices (to which wheat has pinned its fortunes this year), this intense export competition has been the biggest factor driving down Chicago and European grain futures markets.

Wheat output is also up this year by more than expected in Europe and China (about 2m tonnes each), India (+5m), Canada (1m). Even a 5.7m tonne crop decline for the leading exporter, the USA, has been overwhelmed by the staggering 40m tonnes added to output elsewhere. As a result, world wheat output is currently expected to finish 2011/12 at about 683m tonnes but it would not be surprising to see that creep up over 685m when all the Black Sea crops have been fully counted. That’s about 20/25m more than predicted in July. Wheat consumption on the other hand is seen rising this season by about 23m tonnes. That’s above the long term trend, thanks to the boom in wheat feeding, but it will still lag production by enough to add at least 6m, maybe 10m or more (when all the CIS crops are in) to global ending stocks by mid-2012. These are already forecast at a 10-year high of around 203m tonnes, a stock/use ratio of 30% about 15.6 weeks supply.

Early forecasts from the International

analysts think this has been at the expense of running down reserve stocks and that imports, especially of maize, will play a far larger part from next year onwards. However, China has a habit of springing surprises on the market. While it has been buying far more foreign maize this year, it has not yet lived up to the bullish import forecasts of the US Grains Council and others. There is also the possibility that its own economy may slow, putting the brakes on its expanding meat consumption.

Another question is whether US demand for feedgrains - running 10/12% lower for the past two seasons – will perk up next year under these economic conditions? Mixed messages have been coming from the livestock sectors, more encouraging for cattle and pigs than for poultry. European grain feeding is also down about 7% still from its 2008/9 level. Will that pick up in 2012?

For oilmeals, led by soyabeans, the prospect is largely encouraging. The US did have a smaller than expected soya crop this year, considerably under last year’s, but lower crush and exports will keep stocks from getting too tight before season’s end. Latin American soya crops have meanwhile gone in quickly and are getting good weather, promising earlier than usual, possible record harvests next spring. US soya exports are already down amid Latin American competition from the region’s huge 2011 crops which left record stocks to dispose of this autumn at a time when the US usually has the market to itself. This, along with the drop in grain prices and the macro-economic gloom has brought soya costs down sharply too and, if all goes well with the Latin American crops in the next few months, further price cuts might not be ruled out.

Main commodity highlights since our last review

Wheat – further price cuts possible European markets in recent weeks

have taken much of their lead from the US markets, especially the Chicago futures, where nearby wheat deliveries during November were trading at some of their lowest levels since July 2010.

The Paris futures market fell to a new low of �179/tonne on the front month

Grain&feed millinG technoloGy38 | november - december 2011

GFMT11.06.indd 38 30/11/2011 17:30

COMMODITIEStonnes. However the global out-turn will, as usual, depend more on weather and yields than acreage changes. Yields, for example, fell 3.3% in 2010 but recovered by almost 7% this year, achieving a record average 3.1 tonnes/ha. That’s all the more remarkable when one considers the challenges faced by late sowing in Canada, droughts and heatwaves in Western Europe and other weather issues.

considerably and current projections are for a bigger crop than last year’s. EU sowings are also seen up amid generally favourable weather in northern member states but some dryness issues in the south/east. Driven by this year’s good crops and successful exports (at still relatively high prices), Russia is expected to sow about 5% more. First tentative estimates for 2012 output have been around 690/695m

Grains Council suggest world plantings for 2012 will increase by 1.6% top 224.6m ha, the biggest rises in North America and the CIS. Although total US area could be as much as 7% higher, questions linger over the impact of dry planting conditions affecting about 30% of the key hard red winter crop, the biggest component in US exports and domestic breadwheat use. Recent rains have helped

Grain&feed millinG technoloGy november - december 2011 | 39

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NEXT PAGEPREVIOUS PAGE

• How much maize will the US sow next spring? Probably more than this year

• Will Ukraine sow even more maize next spring on land vacated by failed/unplanted winter wheat and bartley crops?

• Global economic problems continue to erode consumer conf idence, negative for meat/feed demand and a continuing restraint on grain & oilseed prices

• Speculators’ interest in commodities – likely to be more evident in maize due to the tight forecast US/world ending stocks for 2011/12 – spring planting time could see them return as buyers if the weather plays up

• Ethanol competition for maize supplies – could resurge if maize costs continue to fall – helping prices find a bottom

Oilmeals cheaper tooSince our last review, soya meal prices have

come down by about 15% on the US market, putting them about 26% below their August highs and at their cheapest level since June last year. Meal prices have fallen as soyabean supply prospects have improved – the lifting of a threat of tight US end-season stocks and a far better outlook than expected for the coming Latin American crops.

crop), world output is up by 30m tonnes this season against a consumption rise of 22m. As in the USA, this will still leave world 2011/12 ending stocks (next September) about 7m-8m tonnes down and very low in relation to consumption needs. This is more encouraging for die-hard maize bulls and demands a larger world maize crop next year. Currently, pundits are predicting the US will sow more maize next spring but, as always, area will depend on relative corn prices versus soyabeans and on the weather, which can cause huge shifts in acreage to soyabeans if maize planting

gets delayed. Until these uncer tainties are

resolved, in second quarter 2012, there is always the possibility of another bull run on maize prices and where maize goes, wheat must follow. For the moment, however, the competition from South American and the former Soviet Union is setting a low world import price, considerably below US fob and Chicago futures levels. So is

the abundance of feed wheat mentioned above.

US maize exports are falling behind official forecasts amid the competition and while these only make up about 12% of US maize disposals (the rest split mainly between feed and ethanol), this has been weighing on prices.

For the EU itself, maize supplies have been boosted by a record crop around 64.7 tonnes compared with last year’s 55.8m. Demand is expected to expand by about 2m tonnes, using up all the extra supplies but imports will drop away sharply from the past season’s unusually large 7m, probably to about half that level.

FACTORS IN THE MONTHS AHEAD• China’s maize ‘deficit’ remains a live issue.

If maize prices fall further it may take a lot more imported maize after all – bullish for prices

FACTORS IN THE MONTHS AHEAD• Big Ukrainian and Kazakhstan crops are

stepping up their 2011/12 exports, willing and able to fill the ‘cheap wheat’ vacuum once Russia starts to wind down its own aggressive 2011/12 campaign.

• But can landlocked Kazakhstan get the grain out fast enough through Russia (clogged with its own record grain traffic) or Ukraine (heading the same way as it markets record maize versus wheat exports). And how much quality milling will Ukraine actually have as opposed to lower/feed grades?

• Will the Ukraine and the USA yet pull reasonable 2012 crops out of a challenging dry autumn/early winter period?

• Will the US plant a lot more spring wheat in 2012 to make up for this year’s shortfalls?

Coarse grains – Unlike wheat, maize is still a fairly tight

market on paper. The US crop has turned out smaller than expected, lower than last year’s by 3.5m tonnes and about 8m under estimated domestic and export needs. The tighter ending stocks resulting, their lowest for decades in terms of consumption, are keeping some of the speculative money on board in the Chicago futures market (although much of it jumped ship on the most recent price drop in November).

Another restraint on maize prices is the relatively looser foreign supply. Thanks to record crops in the former Soviet Union and expected big harvests in South America next year (not to mention the EU’s own record

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NEXT PAGEPREVIOUS PAGE

COMMODITIES• Relative soya/maize prices & weather when

the US plants next spring• EU winter rapeseed plantings - up or down

for 2012?

their meal production up amid the smaller 2012 crop.

At this early stage, some pundits are looking for modest growth in next year’s US soyabean plantings and, given normal weather a possible larger crop. The outlook for EU 2012 rapeseed o u t p u t i s uncertain at this stage with good weather boosting winger sowings i n m u ch o f western Europe but too much r a in de lay ing and downsizing p l a n t i n g s i n Germany, normally the top producer, and too li t t le moisture threatening prospec ts for some southern/eastern member states.

FACTORS IN THE MONTHS AHEAD • Latin American

soyabean crop weather

• Chinese consumption and timing of imports

Although USDA is currently predicting world soyabean production about 5m tonnes lower for 2011/12, the gap may shrink if the South American crops exceed current forecasts for a mere 2m tonne increase in this region.

Based on high bean prices and good weather at planting time – and plenty of moisture since – it would not be surprising to see more than this coming out of Latin America.

Either way, world soyabean crush will still rise by about 10m tonnes, boosting meal supplies by about 8m or so. About half of that increase is expected to be consumed within China, 1m tonnes or so within the EU, 500,000 in Brazil, the rest spread over a number of smaller users.

Higher EU soya meal usage is replacing rapeseed meal after a smaller European canola crop cut domestic rapemeal production. The EU’s large 2011 sunflower crop will also expand use of this meal by about 600,000 tonnes but soya will retain its usual dominant 6 0 % ma r ke t share of the prote in mea l sector.

Globally there is no shor tage of meal supply, to which soya will contribute about 70%. This is thanks to a record wor ld sunf lower crop (Russ ian and Ukrainian output a lso soared) , a big leap in cottonseed/meal production and rapeseed crushers drawing down carryover stocks to keep

Grain&feed millinG technoloGy42 | november - december 2011

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In this issue:

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November - December 2011

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