Digital Re-print - July | August 2010

Globalfeed markets - July | August 2010

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 COMMODITIES
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 influence your decision-making.

Cheap cereal offers dry up

or, at best, lower specific weights. meal-rich soya will more than make
Some eastern European and former up for disappointing Canadian and
Two key factors Soviet countries which (despite their EU rapeseed crop prospects and a

caused a shift of amid FSU/EU crop concerns emphasis on the middling milling and
feed grade wheats), often have some
good quality too, may also take a hit from dry For oilseed crops, the picture remains
probable flattening out in production
of some other oilseeds including
sunflowers. Provided the crush incentive
emphasis in the

W
weather/heat in terms of volume if not quality. much brighter. Record Latin American soya is there, there is ample if not excessive
orld prices of cereals, reckoning. And even if this year’s world wheat However, these crops are not yet in and it crops have been confirmed and, while a bit oilseed raw material to keep meal buyers
maize market as measured on the crop (details below) does fall, say, 10m or 15m is quite possible that some of the countries slower than expected coming to market, well supplied.
benchmark Chicago tonnes below the previously assumed level, the getting a bit too much of the sunny dry weather these will eventually fill the coffers to Meanwhile, for European grain and feed
during the last futures market – were carryover into 2011/12 season will still be ample, will also see some bonuses in terms of higher overflowing, resulting in stock buildups to customers, much of the benefit of cheaper
getting incredibly cheap during June – though probably no longer larger than this year’s. proteins – so it is maybe it bit early to worry record high levels during 2010/11. The US has international prices has been denied by the
month. One was maize edging towards three and wheat Maize, as the main constituent of global coarse/ about constant big hikes in price premiums meanwhile expanded its soyabean plantings chronic weakness of the euro. Thanks to the
to four-year lows under pressure from feed grain supply, is hardly in a squeeze either. demanded for top grade milling wheats. to a record level too. The massive influx of almost daily drip of worrying news about Euro-
an official update excessive stocks, uncertain forward Although US ethanol demand for this grain is still
demand for feed and expected large expanding, the growth rate has definitely slowed.
of US planted area world crops. But the picture has Demand for maize from the animal feed sector,

which came in
changed radically in the last few weeks
as those optimistic world wheat crop
estimates have started to slide on
well below trade unexpected weather problems – first
in Canada, then Europe itself and
expectations. The latterly in the former Soviet Union,
where coarse grain output could take
other was a lower an even bigger hit from droughts and
heat-waves.
than expected US At the same time the US has not only found itself
with less old crop maize stocks than it expected
quarterly stock (a legacy forewarned in earlier GFMT’s amid last
year’s poor quality/lower energy value crop) but
estimate at June a much smaller than expected increase in planted
area – though the latter could be offset by ideal
1, the result of weather promising bumper yields.
Stocks of wheat, as our regular readers will
feeders and ethanol be well aware, are still huge by any traditional
consumers having
to use more of last
year’s lower quality
crop to get the
same end result.
while apparently higher than expected in the US Eco Dry – The new
Generation of Cereal Dryers
itself, is also subject to some caveats going forward
amid still slack conditions in livestock markets
there. Export demand for US maize, especially
from some of the key Asian importers is also
looking less than stellar as the global economic
recession threatens a ‘double-dip’ and many
buyers show increasing interest in an abundance
of discounted feed grade wheat.
That said, the radical turn downwards in wheat
crop estimates is a caution to the bears, at the
least, a warning that markets may have become
complacent about excessive supply bringing ever
cheaper prices. There is also the possibility that the
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than expected proteins and vomitoxin Contact
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situation seems to be improving as
we go to press. In Europe, French
traders have been concerned about
heatwaves and a prolonged drought Schmidt-Seeger
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36 | July - august 2010 Grain &feed millinG technoloGy Grain &feed millinG technoloGy PREVIOUS PAGE NEXT PAGE July - august 2010 | 37

zone indebtedness, the common currency
recently sank to its lowest level in almost four
years versus the US dollar – in which most
commodities are traded internationally. Since
the start of this year, whatever has gone on in
the international cereal, oilseed and product
markets, this has added almost 15% onto Euro-
quoted prices - although the effect has been
ameliorated in recent weeks by a partial rally in
the common currency and a downturn for the
dollar amid a massive EU debt rescue package
and renewed US economic gloom..
If there is a plus side to these economic
worries it is the quelling of speculators’
enthusiasm to invest in perceived riskier
assets – a group in which commodities like
grains figure prominently. This is likely to
remain the case while Euro-zone anxiety
persists, especially with the US economy still
showing signs of faltering and the Chinese,
seen as the engine of global economic
recovery, trying to rein in their own growth.
None of this news is bullish for industrial or
food demand for raw materials.
The price of crude oil is often a pretty good
indicator of the way the economic wind is
blowing as well as directly affecting commodity
prices. Not only is it, along with gold and some
other leading commodities, a favourite of
investors, crude is also directly linked to the
value of cereals and oilseeds. Crude’s price, after
all, influences profitability and demand for bio-
ethanol which takes up a third of the US maize
crop. Since April, crude has come back from
its highs in the mid-$80s to just over $70 per
barrel before rallying recently to the mid-70’s.
38 | July - august 2010
While cereal markets had probably become
oversold – and farmers certainly needed some
respite from the endless decline in crop values
– current supply/demand balances offer no
justification for a return to the bull markets
for cereals, let alone oilseed
products. Lower than expected
wheat and coarse grain crops will
probably mean firmer prices in
the season ahead than would have
been expected a month or two
ago. But, barring a late weather
upset in the USA, supplies remain
large enough to keep this rally
in check.
Commodity highlights -
World wheat crop still over-rated?
Recent weather problems in Canada,
Europe and the FSU have resulted in the
US Department of Agriculture lopping 7.5m
tonnes off its world wheat crop estimate and
recent reports from the countries concerned
suggest there may be more ‘downside’ before
all the crop numbers are counted. However,
with world wheat stocks still riding at 8-year
highs – and likely to stay loose well beyond
the end of the new season, there is nothing in
the overall wheat balance to explain the still
huge premium or ‘contango’ quoted on the
forward futures markets. Chicago May 2011,
for example was recently asking 65c/bushel
or about 11% more than the spot month after
reaching a high of 80c ($29/tonne or 16%) at
one point. On the one hand, the US soft red
winter wheat crop (the basis of the Chicago
market) is well down this year on unusually
small planted area. However, carryover
stocks of this grade from last year
are large and the total supply will
still comfortably exceed both US
domestic and export demand. That
hasn’t stopped the US cash market
rising too with the export price for
SRW rising from $182 in early Jun
to $234/tonne (fob) in July. This
seems slightly bizarre amid the
USA’s poor export performance
for this grade which, even before
the firm dollar is taken into account, is out-
priced by all the other main origins. Prior to
the recent run-up in euro-terms, the French
soft wheat price was undercutting the US
(in dollars) by about $20/tonne. However,
the European wheat market is influenced
by what goes on in Chicago and has added
the latter’s strength to the list of reasons
(weak euro, better export demand, lower
than expected domestic crop) why EU prices
should have a pre-harvest rally. The firm EU
export price, of course, spills over into the
value of domestic grain too.
At the lower end of the scale, the ‘Black
Sea’ exporters had been offering much
cheaper wheat with milling (grade 4) recently
down to just $160, about $15 cheaper than
the EU, and feed grades as cheap as $138.
However, in recent weeks that has all
changed amid worrying reports coming out
of the former Soviet Union about heat and
drought affecting production on this year’s
smaller sown areas. The Russian crop is now
seen about 49/51m tonnes compared with
57/60m earlier and last year’s 61.7m while
Ukraine’s could be down from 20m to 18.5m
tonnes. Kazakhstan, often a useful source
of harder/quality breadwheats is meanwhile
expected to produce only 11m tonnes this
year against earlier hopes it would repeat
last year’s 17m tonne crop. All of these
figures are well down on USDA forecasts,
suggesting that at least 8.5m tonnes more has
to come off the world wheat crop forecast.
Fortunately for consumers, the Black Sea
Region is going into 2010/11 with fairly large
stocks for the second year running (about
19m tonnes) which should be be used to
supplement exports. Readers may recollect
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it was only a few months ago that Russia and
its neighbours were publicising ambitious
Seven Steps to Success
plans to massively expand their exports into
‘non-traditional’ wheat markets in Asia and
other regions. The ‘Black Sea’ exporters
are aware that a ‘reliable supplier’ image is
not to be discarded lightly so, despite some
probable caution in for the early weeks of
the new season, many analysts expect them
to service all the export business they can
once crop sizes are known (unless, of course,
damage from heatwaves, drought etc turns
out even greater than expected). That said,
these usually highly competitive suppliers will
probably not be undercutting the market to
anything like the same extent we have seen
in the last couple of years.
Concern is also focusing on the extent
to which Canada will be able to perform its
usual function of leading quality hard wheat
supplier. Weeks of incessant rain have cut the
planted area drastically, almost certainly by far
more than the 200,000 ha (to 9.2m) recently
estimated by Canadian officials who took their
survey too early in the month to count all the
Grain &feed millinG technoloGy
COMMODITIES
abandoned acres. With some trade estimates conditions that were producing some possible Canadian, Black Sea or European
ranging down to as little as 7.3m ha (versus worryingly low proteins. These seem to losses not yet factored in, this would not
last year’s 9.9m), there is talk of a total wheat have improved somewhat since the harvest make much of a dent in the huge 2010/11
crop as low as 18.5m compared with recent moved north under clearer skies. The US surplus stock which the IGC estimated over
hopes of 24.5m and last year’s 26.5m tonnes. soft red winter harvest was also challenged 200m tonnes in late June. Overall, then, wheat
As always with Canada, the proportion of by showers causing quality problems including
top grade bread wheats in the total harvest greater incidence of vomitoxin in some states.
will depend on weather in the run up to crop Among other key milling wheat producers,
maturity and harvest. However, on current Australia still seems to be on course for its
pointers, supply from this source does look third large crop in a row with a developing
likely to fall and this has already driven export La Nina climate phase expected to bring
prices of CWRS sharply higher. adequate rains. Argentina sowed a lot more
Offsetting that slightly, the USDA did wheat for its next crop and could expand
keep its US spring wheat sowing forecast output to about 12/14m tonnes from last
at a surprisingly high 5.63m ha against trade year’s unsually poor 9.6m. If the growing
ideas it would lop this figure. This crop is in season goes well, this important breadwheat supplies should be more than adequate to
the best condition seen for many years and, supplier could have twice as much for export meet demand – though some questions about
if the weather continues to co-operate, it as last year’s measly 4.5m. quality remain to be answered by harvests in
should yield well in terms of both quantity and Turning briefly to demand, world wheat some key producing countries.
quality. However, the US hard breadwheat consumption is expected by the International
export benchmark (DNS) is still rising to Grains Council to rise from 649m to 658m Less maize supply than
reflect the threat to Canada’s crop, reaching tonnes, largely in the feed sector and
a 19-week high of $296/tonne in mid-July. especially in Asia. That should be easily thought
US hard red winter bread wheat – the accommodated if the crop reached the IGC’s Two key factors caused a shift of emphasis in
largest component of US wheat exports – projected 664m tonnes. Even if we knock the maize market during the last month. One
had a shaky start to harvest under damp off, say, 10m to 15m tonnes to account for was an official update of US planted area which
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Grain &feed millinG technoloGy PREVIOUS PAGE NEXT PAGE July - august 2010 | 39

came in well below trade expectations. The
other was a lower than expected US quarterly
stock estimate at June 1, the result of feeders
and ethanol consumers having to use more of
last year’s lower quality crop to get the same
end result. With yield prospects still bright,
the US corn crop is now seen just 3.3m tonnes
lower than in June at 336.4m tonnes. With the
above reduction in starting stocks (still bigger
than last year’s), total availability will be about
6.4m tonnes under earlier forecasts but only
about 1.5m below the 2009/10 supply. This in
itself is not statistically significant enough to
move prices. Neither is the anticipated rise of
5m tonnes in next season’s US ethanol usage
of maize which will be neatly offset by lower
feed/residual demand. US exports are also
seen unchanged in 2010/11, so stocks carried
into 2011/12 will be less than 3m tonnes below
those brought into this season.
A third factor pushing up maize value
recently has been the steep rise in wheat prices
which maize has been obliged to follow as a
competing feed ingredient. However, whereas
Chicago wheat has risen by as much as $1.73/
bu ($63/tonne) or 40%, maize has only gained
57c ($22/tonne) or about 17%. This seems
to underline the US trade’s fairly sanguine
appraisal of the domestic balance – that
supplies will be adequate to meet demand.
Maize prices have also been anchored
by a sense of anti-climax after all the hoo-
hah two months ago about China emerging
as a mega-buyer of US corn. In the event,
China’s own crop appears to be doing much
better than thought earlier, when cold and
dryness threatened a potentially poor result.
Although USDA’s forecast looks a bit high
at 166m (and last year’s Chinese crop may
well have been 10m below the official 155m
figure), this second largest world consumer of
maize is showing no sign of concern about the
adequacy of supply. So far it has bought about
2m tonnes from the US, probably as insurance
when the crop was looking vulnerable. Ideas
that it might take another 5m or 6m over the
next six months are being played down, leaving
40 | July - august 2010
COMMODITIES
forecasts for world total import demand for
this grain only about 3.5m tonnes higher for
2010/11 than in the past season.
Overall, world corn production in 2010/11
is expected to grow from last season;s
809m to about 832m tonnes, slightly ahead
of consumption needs of 831m. About 10m
tonnes of that is expected in China so if anything
major does go wrong with that crop, analysts
will have to make some big changes to this
world balance. At this stage that looks
unlikely, especially after recent good
rains. A snapshot of other major maize
suppliers shows some mixed trends.
Europe’s own crop is now seen at just
under 57m tonnes versus last year’s
55.8m but it has recently been exposed
to some potentially damaging heatwaves
and dryness so a downward revision
would not be surprising. USDA was
recently forecasting the FSU countries would
hoist output from 17.9m to 21.4m tonnes but
that too looks less likely now after the extreme
heat in Russia in the past month. Ukraine
managed to export over 5m tonnes in each
of the past two seasons and has become an
important subsidiary supplier. In the southern
hemisphere, Argentina and Brazil both expect
slightly smaller crops but current thinking is that
both will keep exports up at last year’s good
levels, Brazil maybe even exporting more as it
draws down large carryover stocks too.
Among the other coarse grains, world
barley production prospects have been
marked down sharply in recent weeks to
account for potential crop losses in Europe
and the former Soviet Union. Total output
is seen around 135m tonnes compared with
142.5m earlier, last year’s 149m and 2008/9’s
155m tonnes. World barley producers are
carrying about 5m tonnes more stock into
2010/11 than they managed the previous
year but with world consumption expected
to exceed output by about 9m tonnes, the
stock figure will shrink by almost 6m tonnes
in 2010/11 to a three-year low of about 27m.
Apart from these tighter supply balances,
barley prices will also be forced to rise with
the trend in EU and world wheat prices.
Oilmeals/proteins
WORLD OILSEED supplies will show no
growth in the new season ending August 2011
as smaller South American soyabean crops
and disappointing Canadian and EU rapeseed
production more than offset higher output
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grains has just as long a tradition. Buhler has mastered the entire process from
of cottonseed, peanuts, palm kernels and
the kernel to the flake, and from oats, millet, barley, and spelt to corn and soy. Talk to
sunflowerseed, new USDA forecasts indicate. us – we’ve developed equipment and methods that are highly effective at every
While the US is heading for another big, possib
ly record soyabean crop this year, Argentina is stage of the process, with high yields, unparalleled cleanliness and outstanding
expected to reduce sowings this autumn (for
harvest spring 2011) while both the major Latin product quality. We owe all this to the inventor of the breakfast cereal. And to muesli
American producers are expected to see their
yields retreat somewhat from this year’s high lovers all over the planet.
levels. The result could be a world soya crop
of around 251m tonnes – about 8.5m less than
the current season’s record level. As far as soya
users are concerned this need not present any
problems as this season’s supply was in record
surplus. USDA estimates about 65.4m tonnes Bühler AG, Grain Milling, CH-9240 Uzwil, Switzerland, T +41 71 955 11 11, F +41 71 955 66 11
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with just 43.7m last year – so the total soya
supply will actually be even larger. That means
that, as long as the crush incentives are there,
adequate raw materials will be available for all
the meal production the market needs. At this
stage, USDA estimates world meal demand will
grow from 159m to 168m tonnes. Even then,
stocks of the raw soyabeans at the close of the
new season could still be record large.
Where soya supply and prices go, the rest of
the oilseed/meal complex must follow. Most of
the other oilseeds are forecast in larger supply
in 2010/11, the main exception being rapeseed.
Canada’s crop, earlier thought capable of
reaching 12m tonnes has been planted late on
smaller than expected area after incessant rains
and could be lucky now to scrape 10m. The
EU harvest, planted on a larger area is also
seeing stress from droughts and heatwaves
and too much rain in some eastern member
states with the current forecast of 20.6m (v last
year’s 21.5m) seen open to further reduction.
However, by drawing on stocks and importing
more whole rapeseed, the EU is expected to
keep crush and meal production close to the
past season;s high levels.
This year’s record South American soyabean
production has helped to keep prices down
in Europe in recent months. Since May, meal
in Hamburg has declined from about $292/
tonne for nearby deliveries to $282 and as
low as $273 at one point. Euro-quotes have
been also fallen but at a slower pace during the
period of extreme euro weakness. Cheaper
meal in Europe has contrasted with a stronger
US market, where tight old season soyabean
supplies and strong Chinese demand have forced
crushing well below year-ago levels. Under
current conditions of good supply, meal prices
are expected to stay fairly stable until the
autumn when Latin American producers reveal
their sowing plans.
The solution behind the solution.
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