Global Feed Markets - July August 2009

Digital Re-print - July | August 2009 Feature: Commodities Feature title: Global grain & feed markets Grain & Feed Milling Technology is published six times a year by Perendale Publishers Ltd of the United Kingdom. All data is published in good faith, based on information received, and while every care is taken to prevent inaccuracies, the publishers accept no liability for any errors or omissions or for the consequences of action taken on the basis of information published. ©Copyright 2009 Perendale Publishers Ltd. All rights reserved. No part of this publication may be reproduced in any form or by any means without prior permission of the copyright owner. Printed by Perendale Publishers Ltd. ISSN: 1466-3872

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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.

Feed raw material outlook improving?

World wheat prices have been on a roller-coaster ride since our last review. The bellwether Chicago futures market leapt from around $5/bushel (about $184/tonne) in late spring to a peak of $6.77 ($249), only to fall back recently to the low $5’s again

28 | July-august 2009

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ereal & oilmeal prices rose sharply in the second quarter of 2009 as speculative buyers bought futures amid concerns about weather risks to grain and oilseed crops in Europe and the Americas. Fortunately for consumers, most of these threats appear to have been over-played and conditions have recently turned very favourable in the US and most of the EU - if not for drought-ravaged Argentina. With adequate crops on the way and little in the way of new fundamental support, the speculators gambling on another bull ‘weather market’ in commodities have been in full retreat through the past month. This has forced prices of most cereal items sharply lower again, especially on futures markets, where the earlier rise was (as usual) more exaggerated than on physical markets. However, oilmeals have been slower to respond to better crop prospects amid an unusually tight close to the US marketing season, lower than expected supplies from South America and ongoing heavy demand for soya from the top importer China. Long term forecasts from some of the banks, investment houses and other non-trade bodies continue to point to possibilities for tighter cereal/ oilseed stocks ahead and opportunities to make money out of futures markets. However, the case for some of these claims looks weak, largely based on worst-case crop scenarios and frequently ignoring less supportive news on the demand side of the market – e.g. lower animal feed demand as a result of economic recession, not to mention continued doubts about the maize ethanol industry’s ability to expand at the pace it has in recent years at the cost of traditional food and feed users’ grain supplies. For wheat, the key issues in the weeks ahead centre on quality rather than quantity. World production this year is

down but supplies of wheat in total are certainly ample, if not excessive on many markets and already comfortable world surplus stocks could actually grow further next year. That said, a smaller US spring wheat area, some Canadian weather problems and the loss of Argentina’s export supply to drought, put more onus on other producers, including Europe, to come up with enough good grade milling wheat to keep expensive imports of the hard spring blending wheats down. The good news is that Australia, with a traditionally high proportion of top grade milling wheats, has sidestepped another possible drought and is expecting a big crop – perhaps enough to keep world quality wheat prices under control if North American supplies do disappoint. European millers will be watching the skies for a few more weeks yet, hoping for the right mix of sunshine and showers to finish promising crops off with good levels of protein and other bread-making qualities. However, for now, the adequacy of EU wheat supplies is underlined by lack of interest in trading ahead of the harvest and a large carryover into 2009/10 from last year’s bumper crop. Maize consumers will also welcome far more promising news on the supply side of the market in recent weeks. The all-important US crop has, as expected in our last review, been sown late for a second year running. However, in a complete upset for bullish traders, the official estimate of sown acreage has turned out far higher than anyone expected and with almost ideal weather recently, the possibility emerges of a much larger, rather than a smaller crop this year. Demand for maize in the US market itself is meanwhile uncertain - still apparently declining in the feed sector and growing more slowly than expected for ethanol use. This combination has resulted in heavy speculative selling on the Chicago maize futures markets into early July and a spectacular price drop of almost 25% from the May peaks. Europe’s own maize crop will be down this year by almost 10% or about 6m tonnes but so will demand for this grain while large stocks carried in from last year can be drawn on to supplement supplies. With

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demand from the big Asian feedmakers stable now rather than rising (apart from China, which tends to cater for expansion with its own growing crop), the premium being shown on forward maize futures markets might contract in coming months. Soya, as mentioned above has been a more troublesome sector, putting in some new price highs since our last review on both the US and EU markets. The strength in this sector was initially a legacy of two successive seasons of disappointing production – in North and South America – exacerbated by massive growth in 2007/08 of China’s imports (though these flattened off in 2008/09). Latterly, prices have been responding to a constantly shrinking crop estimate from Argentina (largest world soya meal exporter) and rain-delayed US planting. This diverted even more Chinese and other demand to the US and will see soyabean stocks there come to a razor tight close to the season. The good news is that larger US sowings have been achieved this year - later than usual but with crop conditions near perfect, good yields and a bumper harvest are still possible. The huge discounts being quoted on new crop soyabean and meal prices, especially the more forward deliveries, testify to the looser supply position if the US crop comes through. However, physical markets obviously want to see proof in the harvest before reflecting this. Further forward eyes are turning to the next Latin American crop with Argentina already tipped to sow a huge, record area to compensate for this year’s losses. That would certainly help ease

soya supply if the weather co-operates and could set world total oilseed supplies back on an expansionary track.

WHEAT – abundance, but will the quality be there?

However, in recent weeks, many ‘outside’ investors have had second thoughts – both about the strength and timing of any economic recovery and about wheat fundamentals. The latter remain broadly as described last month. On the supply smaller crops will be seen for most major suppliers - the EU, US, Canada, Argentina and former Soviet Union or ‘Black Sea’ cereal exporting countries. The latest report from the International Grains Council puts world output about 34m tonnes lower this year at 650m tonnes while the US

World wheat prices have been on a roller-coaster ride since our last review. The bellwether Chicago futures market leapt from around $5/bushel (about $184/tonne) in late spring to a peak of $6.77 ($249), only to fall back recently to the low $5’s again. However, most of the earlier strength, which rubbed off on European markets too, was less about wheat fundamentals of supply and demand, rather what was going on in other markets – maize, soya, crude oil, equities, currencies, etc. Despite its own abundant supply, wheat found itself caught up in this ‘m acro t re nd ,’ enhanced by talk of a general revival in commodity investment, hopes that the worst of the banking/ credit crisis The premier meeting point for the feed and food industry in 2010. Addressing common concerns and identifying opportunities. was over and with it an Join us in Cancun, Mexico!. For more information visit: emergence from the low point of Hosted jointly by in co-operation FAO & IFIF recession. with Conafab

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Department of Agriculture’s earlier estimate was 656m. Two more figures stand out in the latest data - the high level of carryover stocks from last season and the lack of growth in total

demand, thanks largely to an expected retreat in the use of wheat as animal feed. The IGC now estimates starting stocks around 160m tonnes, 46m more than at this time last year. This means total wheat supply will probably be larger than in 2008/09. However, even without those extra stocks, forecast demand of around 644m tonnes still falls short of new supplies by 8m tonnes – which can added to stocks at the end of the season. So overall, wheat supplies are not only abundant but appear to be getting looser still. In the EU itself total wheat output is currently forecast around 136m tonnes – down about 15m from last year, with losses mainly focused on the UK, Spain, Italy and some eastern member states where dry weather has been a problem. However, thanks to large carryover stocks here too, total EU supply will still be very comfortable with grain able to flow from surplus to any deficit areas. EU cereal prices have tended to weaken

recently with the approaching harvest and tracking the steep reversal in US futures markets. Many consumers have backed off waiting for the new crop flush to bring better bargains – although farmers have tended to dig their heels in too, claiming - not for the first time in the past year - that market prices fail to offer a profit over today’s much higher costs of production. A similar complaint is being made in the US wheat industry and probably in other supplying countries too.

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At this stage, the still flaccid state of the world wheat market suggests buyers might have the edge for the time being although we still have a few more weeks of crucial weather in the run-up to harvest when good dry, sunny days will be needed to build food wheat quality. Markets are also watching the progress of overseas wheat crops, especially in North America, Australia and East Europe/FSU. US spring wheat area was initially expected to drop by up to 2m acres this year due to bad planting weather. However, farmers appear to have done a remarkable job catching up in the dry spells and the latest official estimate is now down by only 470,000 acres. Also, now that the weather has improved, these crops are in far better shape than last year, so yields could be high enough to offset much of the acreage loss. However, the crop does need to accelerate now to avoid weather problems in maturation and harvest. The improvement in US supply prospects has been enough to bring down export prices of the popular Dark Northern Spring breadwheats from $353/tonne to just $291 recently – its cheapest since December last year and quite a contrast from the $500/600 we saw in second quarter 2009. Canada’s spring wheat area is also seen similar to last year’s after early forecasts of a decline but the Wheat Board there has been warning of a possible yield/quality hit from delayed sowing and other weather problems affecting the young, developing crop. These continue as we go to press, including too much rain in the east, too little in west and a delayed rise in temperatures needed to get crops growing well. However, there is enough of the growing season ahead not to rule out a reasonable harvest yet and like US hard wheat, the benchmark Canadian Western Red Spring grades have also come well off their highs with prices frequently undercutting comparable grades from the US. The other major quality milling wheat exporter, Australia, meanwhile expects a bumper crop, possibly its largest ever, at some 22/23m tonnes. Last year’s Australian crop was also good at 21.4m tonnes after two terrible drought-ravaged harvests in 2006 and 2007. Although a heavy export campaign has reduced Australian old crop stocks recently, a crop of this size would enable an active shipping programme again in 2009/10, helping to keep quality wheat costs down. The only niggling worry at this stage is talk of an emerging ‘El Nino’ climatic event that could lead to dry weather problems further into the crop development period. This might be another false alarm but needs watching.

Argentina, in contrast, faces its worst crop on record after prolonged drought and will be out of the export market next season. It normally ships 8m to 12m tonnes overseas, so it absence will be felt, not only in its main market, Brazil (which will turn to the US, Canada and others for unusually large quantities) but by other customers too. Argentina does not figure significantly as a supplier to the EU but its crop shortfall does influence world wheat value which the EU must nowadays shadow to a considerable extent. Russian and Ukrainian wheat production soared in recent years and their strong exports and competitive offers have been a pivotal factor holding down prices of ordinary grade milling and lower grade feedwheats on both world and European markets. This year’s crops from the region will be smaller, especially in the Ukraine which will be only partly offset by a bigger harvest in Kazakhstan (often a better

quality wheat exporter). Recently, FSU/Black Sea prices have firmed up for both milling and feed grades to reflect the anticipated tightening in supply. Even so, stocks carried over from last year’s crop in the region as a whole are large and, depending on what the authorities want to do with these, they could remain formidable export competitors to North American and European suppliers in the year ahead.

MAIZE – crop shortfall threat lifting CHICAGO maize futures collapsed to their cheapest level in 15 months in early July after the USDA shocked the trade with a far higher than expected forecast for US planted acreage. Most analysts had been braced for a fairly sizeable cut from its March planting intentions estimate of about 85m acres. In the event, USDA calculated over 87m acres – about 1m more than last year. Although the next two months’ weather will determine the final outcome, current conditions are extremely good – plenty of water from the earlier rains that delayed planting – and, now that summer is warming up, very high crop condition ratings (better than last year, when yields hit record levels despite a similar late start to planting).

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Using USDA’s trendline yield forecast of 153.4 bushels per acre, the coming US crop would be around 312m tonnes against the June forecast of 303.2m and last year’s 307.4m tonnes. The biggest ever US crop was 2007’s 331.2m tonnes when planted area was 93.5m acres and yields averaged 150.7bpa. US maize prices were also pushed down by another USDA report estimating US maize stocks on June 1 at far higher levels than the markets expected. Traders blame poor profit margins and slack feed demand from US cattle, pig and poultry producers which indicate US consumption of maize ran about 4m to 5m tonnes under the official forecast in the last quarter. Bearish traders also note that the US government’s energy monitering body EIA calculated use of maize in the ethanol sector was running below levels required to meet official targets (95m tonnes for 2008/09 and 104m for 2009/10). Some analysts believe the slump in maize costs and oil prices recently advancing to 8-month highs of over $70 recently may reverse this trend but this remains to be seen. In combination, the higher than expected US crop/stock figures above imply domestic carryover for 2009/10 could be far more comfortable now, maybe up to 40m tonnes against 27m forecast earlier this month. Some analysts say this could drive prices below $3/ bu before 2009 is out – levels not seen since the autumn of 2006. At the least, these figures cast doubt on the sustainability of premiums displayed by distant new crop maize futures. Not surprisingly, this news has had speculators on the run from the maize market, another factor that should help keep costs of this grain under control. For the EU itself, maize supplies will decline in 2009/10 as the crop here falls with lower sown acreage and yields ease from last year’s higher than normal levels. The IGC recently estimated this would cut EU output by about 8%, to 57.8m tonnes with higher opening stocks only partly compensating. Despite some rain in May and June, severe drought earlier in the season has affected maize crops in Eastern Europe, especially Hungary and Romania while too much rain hampered planting in Italy. However top EU producer France has had good weather and expects another bumper, well-above-average, harvest. Among other major suppliers that influence world/EU maize costs, Argentina’s droughtreduced 2009 crop (12.5m tonnes), is seen reducing exports in 2008/09 from 15.7m to just 7m tonnes. However, if the weather there normalises, output could rebound to 18m in early 2010, allowing shipments to recover somewhat in the second half of 2009/10 season. Brazil, which also had a below par crop last

32 | July-august 2009

spring (down from 2008’s 58.7m to 49.9m tonnes) also hopes to improve performance in 2010 to 53m tonnes. So far Brazil has remained a vigorous exporter, shipping a bumper 10m tonnes this season and filling the Argentine export gap. With large stocks and slower growth in its large domestic livestock/feed industry, Brazil should manage to export at least as much again in 2009/10, remaining the world’s second largest maize supplier. Lower maize production is meanwhile expected this year from the former Soviet Union, especially the Ukraine, which should trim exports from the region back significantly from the past season’s high level. With the main outlets for EU maize in industrial and livestock feed use expected to contract in the season ahead, supply should be adequate to meet demand without depleting fairly comfortable stocks or having to expand imports from nonEU countries from the past year’s relatively low level. The longer-term, overall price trend will depend heavily, as always, on the final outcome for the US crop. If this comes through with normal weather – and demand from bio-fuel and feed sectors remains flat, world maize prices are unlikely to rise in the months ahead and may even have further to fall.

Soya supply looking up USDA’s keenly awaited update of US 2009 planted area for soyabeans at the end of June slightly disappointed consumers. At 77.48m acres this was 2% or 1.8m acres higher than last year’s but about 1m below the average trade estimate. Still, the record large area is expected to produce a crop of at least 89m tonnes and it could even move ahead of 90m tonnes if yields are strong. That is possible, given the current excellent condition of the crop, but not guaranteed since it was sown later than usual, so is more exposed to weather risks later in the season. If the crop does reach the target level, US exports of soyabeans and meal could rise appreciably but it may be some time before the global market moves into a better supply position than that of the past year, when tight availability pushed prices of beans and meal to record highs. The US normally supplies about 35-40% of world soyabean production, the rest coming mainly from Latin America (for export) and Asia (largely for home consumption and heavily dependent on imports). A jump in US production of perhaps 9m or 10m tonnes this autumn is offset by two factors. One is the record low level of US carryover stocks from 2008/09 -down 2m to 3m from last

year. The other is the 21m tonne decline in last spring’s Latin American output caused by drought (only slightly offset by fairly large Latin American starting stocks). The net effect of these and other factors in the past season was to cut world soyabean production by over 10m tonnes. This was the main factor keeping world oilseed production flat, despite big crops of rapeseed, sunflowerseed and groundnuts. However, world output of oilseeds in total should show a healthy increase in the season ahead if the US achieves a big crop, especially if the Latin American countries, as expected, plant more soyabeans too. Current projections have combined output for the latter region rising by 24m tonnes and overall, the increase in soyabean production in the Americas – north and south – is equal to about 27.2m tonnes more soyabean meal – though not all of the extra beans would be crushed in the 2009/10 (Oct/Sep) season. The expected bigger soyabean crops will be offset slightly in the new season by forecast declines in rapeseed (Canada and Europe) and sunflowerseed crops (Ukraine, Russia, the EU, partly offset by more from Argentina). However world oilseed output will still rise by 27m tonnes and currently USDA expects an extra 9m tonnes of world protein meal supplies. At the moment, of course, all this additional supply is on paper only and its materialisation at the behest of the weather in the Americas and Europe in the next two months or so. In the meantime, soyabean supplies are getting very tight, especially in the US itself, where exports have remained strong to China and other countries seeking alternative suppliers to drought-ridden Argentina. China has also been building a huge stockpile of oilseeds, having been spooked by last year’s global shortages and record costs of commodities to return to its traditional policy of holding strategic security reserves. During early June, these factors combined with a burst of optimism about an early end to global recession to drive soya meal prices to 10½ month highs and many consumers were reported to be responding by cutting back demand or turning to substitutes for oil meals like dried distillers grains, the by-product of corn ethanol production (though this has tended to drive prices of DDG up too). However, the expectation of looser supplies from the US and South America and more recent, gloomier, reappraisal of the prospects for economic recovery have since seen costs backtrack again. Provided these soyabean crop increases come through, soyameal prices should be a lot cheaper by this time next year. On the US futures markets, for example, January 2010 is already showing a discount of almost a third off the spot price.

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soya supply if the weather co-operates and could set world total oilseed supplies back on an expansionary track.

WHEAT – abundance, but will the quality be there?

However, in recent weeks, many ‘outside’ investors have had second thoughts – both about the strength and timing of any economic recovery and about wheat fundamentals. The latter remain broadly as described last month. On the supply smaller crops will be seen for most major suppliers - the EU, US, Canada, Argentina and former Soviet Union or ‘Black Sea’ cereal exporting countries. The latest report from the International Grains Council puts world output about 34m tonnes lower this year at 650m tonnes while the US

World wheat prices have been on a roller-coaster ride since our last review. The bellwether Chicago futures market leapt from around $5/bushel (about $184/tonne) in late spring to a peak of $6.77 ($249), only to fall back recently to the low $5’s again. However, most of the earlier strength, which rubbed off on European markets too, was less about wheat fundamentals of supply and demand, rather what was going on in other markets – maize, soya, crude oil, equities, currencies, etc. Despite its own abundant supply, wheat found itself caught up in this ‘m acro t re nd ,’ enhanced by talk of a general revival in commodity investment, hopes that the worst of the banking/ credit crisis The premier meeting point for the feed and food industry in 2010. Addressing common concerns and identifying opportunities. was over and with it an Join us in Cancun, Mexico!. For more information visit: emergence from the low point of Hosted jointly by in co-operation FAO & IFIF recession. with Conafab

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Now in its 18th edition, the IMD brings you specific country profiles, A-Z listings of product and services essential to the milling industry, a fully verified list of contacts and much, much more. Pre-order your printed copy now by calling +44 1242 267703, or visit our secure online ordering service at

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om the big Asian feedmakers stable r than rising (apart from China, which cater for expansion with its own rop), the premium being shown on maize futures markets might contract months. mentioned above has been a more me sector, putting in some new price e our last review on both the US and ts. The strength in this sector was egacy of two successive seasons of ing production – in North and South – exacerbated by massive growth 8 of China’s imports (though these off in 2008/09). Latterly, prices have onding to a constantly shrinking crop rom Argentina (largest world soya orter) and rain-delayed US planting. ted even more Chinese and other o the US and will see soyabean stocks e to a razor tight close to the season. news is that larger US sowings have eved this year - later than usual but conditions near perfect, good yields per harvest are still possible. The huge being quoted on new crop soyabean prices, especially the more forward testify to the looser supply position if op comes through. However, physical obviously want to see proof in the fore reflecting this. Further forward urning to the next Latin American Argentina already tipped to sow ecord area to compensate for this ses. That would certainly help ease

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