Digital Re-print September | October 2012

Global Feed Markets: September - October 2012

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GLOBAL
GRAIN & FEED MARKETS
Every issue GFMTs 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.
Canada was expecting a bigger rapeseed crop of 15.4m tonnes versus last years 14.5m. Latest official figures suggest heatwaves, disease and gales have cut that back to just 13.4m. Although Europes crop now seems slightly bigger than last years, the global rapeseed supply is well under expectations.

Relative calm as supplies tighten

PARADOX presents itself since our last review. Global grain and feed supplies have, as we feared then, have continued to tighten with smaller than expected 2012 crops. Yet prices have actually dropped well off their peaks from all-time record highs in the case of maize and soyabeans. The global wheat output estimate has shrunk by at least another 6m to 7m tonnes, largely due to the further cuts we (and most of the trade) expected in the drought-plagued former Soviet Union, especially Russia (down 4m alone in the past month). The world wheat crop total (around 658m tonnes versus last years 695m) may yet go lower still as Australias crop runs into dry weather problems (another 4m to 6m lower?). World maize production estimates have fallen by another 8m tonnes since August and now aggregate a 64m tonne fall since July, mainly due to dismal yields in the USA but also reflecting under-estimated drought and heat impacts in Central & Eastern Europe (both in the EU and the former Soviet CIS countries). Wo r l d o i l s e e d output estimates have also been cut sharply and are now at least 11m tonnes below nitial forecasts, thanks to a drought-afflicted US soyabean crop, 3m tonnes taken off South/east European sunflowerseed output (again in both the EU and the CIS) and a sur pr ise cut of 2m tonnes in Canadas rapeseed crop estimate. Despite all that, on the benchmar k US futures markets, wheat is down 5.7% as we go

to press after losing as much as 10.7% of its late July peak ($9.45/bu or about $347/tonne) at one stage. Maize has shed almost 11% of its alltime record price ($8.34/bu = $329/t) while soyabeans supposedly tightest off all now - are down by more than 10% from their own record peak (just under $17.95/bu = $659.50/t). So what is going on? There are several reasons why neither commercials nor speculators are prepared to get as carried away with the crop figures or the accompanying revival in talk of world food and feed shortages as they were during the last widespread global crop failure year of 2008/09. Firstly, demand for grain is falling in response to high prices in this time of global economic malaise. This is no small development - the first drop in global offtake since the mid-nineties. While there were a few tight/expensive seasons in the eighties and early nineties when global cereal demand was either steady or fell slightly, the overall history of grain consumption in the past 30 or 40 years has been one of almost relentless growth, fuelled by

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all the well-known factors - growing populations, rising developing country incomes, new outlets in bio-fuels etc etc). This 22m tonne drop in 2012/13 grain consumption (so far, it may end up more!) reflects a 13.7m tonne fall for wheat and 8.5m tonnes for coarse grains (the latter entirely due to less use of maize). Breaking that down further, almost half of the total cut in grains use will be for animal feeds (12.7m less wheat versus

slightly more coarse grain use). The rest of the cutback will come mainly off industrial outlets (notably, 12.7m less corn going into US bio-ethanol). Consumption of oilseed meals is doing only slightly better. Previously growing steadfastly at 10/12m tonnes a year, global demand for

these is expected to go up by a mere 2.3mtonnes in 2012/13. De ma nd , t he n , is adjusting to this series of unusually severe crop shortfalls and high prices, albeit still not fast enough to cope with an estimated 75m tonne drop in cereal output and a shortfall of almost 20m tonnes in global oilseed production. The bottom line that will supposedly determine forward grain and feed costs is the impact on stocks. To meet even these levels of consumption, global carryover stocks of

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grain will be reduced by almost 42m tonnes about 11% - to a five year low, oilseed stocks by 20/22m tonnes or 27% (though oilseed inventories are at least declining from the previous years record high). That markets are not getting too excited about these bullish fundamentals especially the unusually tight stock/use ratios - is an issue giving much food for thought to commodity market analysts. On the one hand it is argued that funds are already heavily invested in maize and soyabeans and aware that market volatility and risk of losses increases at peak, especially record-high, levels but that alone would

could suffer lost demand during a sustained economic slowdown, especially if the prices of raw materials are driven up by fund investment. Those fears are persistently diverting managed money back into dollars, driving commodity prices down and making even these masters of the universe far more cautious than during the last commodity boom. Another factor restraining outside investors and speculators in general is the relatively weaker distant futures price of the two tightest commodities maize and soyabeans. Both markets are effectively displaying the futures trades faith that next years crops will revive and redress the balance.

not stop them betting on rising prices if these seemed a dead cert. The bulls reticence might be better explained by two or three other factors. One

Crop recovery in 2013 is not only about record high grain and oilseed prices buying adequate additional acreage. It is even more about the weather returning to normal. This

the mid-eighties to the nineties). If yields returned to the 2011/12 high of 3.5 tonnes/ha, even stable acreage would increase world grain output by almost 100m tonnes. Even an average 3.4tph would add 45m tonnes. In theory, global cereal acreage could go much higher it was regularly in the 540s (mn acres) in the 1990s and exceeded 570m in the mideighties. True, other crops, especially oilseeds, other land uses and conservation programmes have taken a big bite out of that potential cereal base since then. However, it does not seem beyond the bounds of possibility that acreage could climb toward, say, the past decades higher end (just under 537m acres). A combination of higher acreage and a return to more normal weather which may be too much to ask) could clearly turn the past years bull market on its head. That said, low stocks of maize and soyabeans need replenishing and until that happens, markets will remain highly sensitive to weather risks. So much depends, in the next few months, on South America getting normal planting and growing weather for its maize and soyabean crops, Russia and Ukraine avoiding winterkill, the US Plains coming out of long term drought, Australia getting enough rain to prevent further crop losses from lack of rain but a drier harvest than during the last two years to improve milling quality. After two unusually hard winters, West Europe needs a milder one, a wetter spring/warmer summer, Southeast Europe more rain in this years droughtaffected regions, Northwest Europe more co-operative harvest weather, India a better Monsoon. Until some of these potential crop revivals are up and running, let alone in the silo, the threat of more price volatility to the upside, and speculators exaggerating price rises, cannot be ruled out. Yet if all does go well with the weather we could well be seeing cheaper feed ingredient prices next summer, just as the raw material futures markets suggest.

Main commodity highlights since our last review

is the still febrile mood on global financial markets in the wake of the 2008/09 banking meltdown underlined by the seemingly endless crises in the Euro-zone, Chinas economy, supposedly the engine of Asian and global growth, slowing faster than for some years, the USAs naggingly slow emergence from recession in shor t a general mood of pessimism. The fear persists that commodities, once seen as the safe haven for hot money, years planted area to cereals, for example, actually rose 0.3% to a relatively high 534.4m acres but that small increase was wiped out by a 5.7% drop in the global average yield amid this years climate disturbances (although it might also be noted that this years world average yield of 3.3 tonne/ha was hardly small by historical standards either. It was actually the third highest ever and 30-40% more than markets were used to in, say, the period from

Wheat trading up on Russian withdrawal, Australian crop threat

Wheat markets went through two stages in the last two months. Initially prices headed south under the leadership of the Chicago futures market, losing over 10% of their July peak at one point. Prices came under pressure from a similar decline in maize values which had propped up wheat for the past year through the two cereals feed connection

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and from ideas that the US was out-pricing itself on world export markets. The US and European markets also came under selling pressure from Russias unexpectedly strong export sales performance in the early months of the new season. Despite that countrys crop eroding by another 4m to 5m tonens to just 38/39m tonnes (versus last years 56.2m) and exports tipped to drop from 21.6m to just 8m or 9m tonnes, Russia was making all the running in export tenders, discounting Europe, Canada, Australia and the USA by $30, $40 even $50 per tonne and more. Why, one might wonder, would Russia be so eager to get rid of its 2012/13 exportable surplus so quickly in a year when its own tightening stocks are driving up its internal prices and food price inflation? In the first place, the early sales probably pre-dated the lowest Russian crop estimates so it probably thought it had more to sell. There was probably also an element of cashing in on the high wheat prices while they lasted (US and EU wheat futures have stopped pointing north and are now starting to offer distant 2013 crop discounts). Also, Russia was probably eager to get its image back, to reassure its customers that it was still a major exporter and a reliable one. Ukraine and Kazakhstan were also selling more freely than expected, given their own disappointing 2012 wheat crops, similarly undercutting the more traditional wheat exporters. There was also talk of Russia taking in a lot of Kazak wheat to offset its heavy export programme. Although the last two months have seen some very active import trade, especially from Egypt and other Mid-eastern countries (stocking up amid the renewed political turmoil in the region), the net appearance, until recently, was of a fairly competitive export market. That began to change in recent weeks as Russia finally started to look like running out of exportable supplies at least within affordable reach of export ports. As its prices have risen with each new tender, its withdrawal from the market after Oct/Nov has been more or less taken for granted by the trade, leaving the field open for other suppliers to squeeze out a better deal from their customers. That enabled US wheat futures to cut their losses, helping to stabilise and slightly firm up the EU market, especially new crop months. Europe is seen as a prime contender to fill much of the Russian/CIS vacuum but there will be competition from others too the US, Canada, South America. Russias smaller crop has taken USDAs estimate of the 2012/13 world wheat crop down to around 659m tonnes. It assumes 26m tonnes of Australian wheat, a figure some think could slide to 20/22m after lack of rain in the countrys southeast. On the plus side, Canadas crop has edged up to around 28m versus last years 25.6m while the Continental West European crops appear to have fared better than expected on quality after all the rainy harvest problems in July and August. Germany in particular is a big relief as the EUs top producer of the higher quality hard wheats. The notable exception is the UK, where poor harvest weather has reduced quality significantly, pushed prices higher than they should be versus Continental European wheat and will likely continue to require more imports to make some of this grain useable (in both milling and feed sectors). EU wheat consumption in total is seen falling by about 2m tonnes to 124.5m, entirely in the feed sector. The drop will not be made up by other grains with the EU total for cereals into feeds expected to decline by almost 6m tonnes.. An expanded EU export programme of 17.5m tonnes (16.5m last year) will leave stocks unusually low at just 9.4m in July (13.5m last year, as much as 19m in 2009). In that exposed position and encouraged by prices as much as 30-40% higher than at this time last year, it is hard not to see farmers across Europe sowing more wheat for the 2013 harvest. The same will apply to many other producers. US winter wheat area could rise by about 3% this autumn, according to some of GFMTs sources but planting has been slow amid dry weather in the Western Plains. Hopefully that will not prevent the hoped-for bigger crop. Although wheat is better stocked than maize and soyabeans, the inventory is tighter than usual and in relation to consumption needs which, as we warned in our last review, do seem to have been under-rated as it replaces US and European maize crop losses in the feed sector. That means markets over the next few months will be closely tracking northern hemisphere planting estimates, winter and spring weather. With the withdrawal of cheap Black Sea or CIS wheat offers, EU and world wheat prices could remain well supported near or above current, still relatively expensive levels and, even if the next crop does start to shape up a large one, wheat will not be able to divorce itself too far from what happens in the maize market. to replace shortfalls in maize supplies? Where will the Australian crop settle volume and quality - wise?

Maize hopes pinned on 2013 crop revival too

Maize pr ices have come dow n in recent weeks as the long slide in US crop estimates appears to be bottoming out, not far off our previous reviews idea of around 270m tonnes. Some US pundits had put it as low as 250m (a few even lower) in September but harvest yields have often been better than expected. There has also been talk of planted/harvest acreage being under-rated - which could mean the crop is actually closer to 275/280m but that may be wishful thinking on the par t of the bears. Several other factors have influenced recent cheaper prices. One is a dramatic slowdown in US expor t trade as impor ters have either cut coarse grain use, turned to other cheaper suppliers, like Brazil, Argentina and the Ukraine, or bought more feedwheat. Australias two weather damaged milling wheat crops, leaving a large stockpile of lower quality wheat, have been a key source for Pacific Rim compounders. So, to a lesser extent, has Indias record, relatively low quality wheat crop (and its inadequate storage capacity an imperative to expor t rather than watch huge stocks spoil. Another factor holding back US maize prices has been a slowing down in the US corn ethanol sector as high corn costs cut deep into ref iners prof its. US feed demand for corn is also down this season, all helping to take some of the pressure off unusually low ending stocks. However, on the more bullish side, the USDA did chop about 5m tonnes off its estimate of 2011/12 end-season stocks (at September 1), suggesting feed use was not down quite as much as expected and giving corn prices a bit of a lift as we went to press. Outside the US, the main adjustment on the supply side has been a 4.4m tonne cut in this years EU maize crop estimate, now seen around 57m tonnes compared with last years 65.4m. Some of this will be replaced by a better barley crop but, as in the EU wheat market, this loss will be met by lower overall demand for cereals in feeds. Also wor th mentioning is the forecast from respec ted analys t Infor ma of a possible increase in next years US maize crop acreage from this years 96.4m to 97.5m ha. With a more normal trend yield of around 162 bu/acre that would produce a record crop of almost 372m tonnes

KEY FACTORS IN THE MONTHS AHEAD

Winter weather for the Black Sea (CIS), European and North American crops Estimates of sown areas for Northern Hemisphere winter wheat Will the Arab countries continue their buying spree, stocking up in politically unstable times? . Will wheat consumption in feeds rise further

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which could send corn prices tumbling (by next autumn !) A f inal fac tor to note is the relatively high level of af latoxin being repor ted in t his year s U S cor n pr oduc tion , a f r e q u e n t i s s u e w i t h d r o u g h t / h e a ta f f e c t e d c r o p s . T h a t d o e s n t o n l y af fec t the feed sec tor through direc t maize use. It can also have implications for ethanol producer s who sell their by - p r o d u c t , d r i e d d i s t i l l e r s g r a i n s ( DDG ) into the feed sec tor for par t of their prof it and whose produc tion processes, some sources sugges t, may ac tually concentr ate the mould in the end-produc t. US DDGs are a big sell into Asian mar kets including China so this is a possible issue to watch.

demand and anchor grain and oilseed costs? Speculators perceptions of whether the bull market is over or has another leg to climb

Oilmeals soya less tight than thought?

Soya traders are rapidly re-calculating their supply/demand sums as we go to pr ess following a sur pr ising upward revision to last years US crop of just over 1m tonnes. A spate of encouraging early har vest yield repor ts meanwhile suggests the 2012 crop may have been even more severely under-rated. This could mean that total US soya supplies are anywhere between three million and six million tonnes higher than assumed the equivalent of finding an extra 2.5m to 5m tonnes of soya meal. Along with rising estimates for the next Brazilian soyabean crop and hopes that Argentina will also sow and produce a much larger harvest in 2013, this puts a much more bearish slant on the soya market indeed the entire oilmeal complex than consumers could have hoped a few weeks earlier. Soyabean prices have already plummeted by about 14% from their all-time record highs in the US, dragging US meal down with them. The effect has been slower to pass on to Europe, however, as Brazilian and Argentine old crop soyabean and meal supplies have begun to run out after last years shor tfall in the South American crops. Canada was expecting a bigger rapeseed crop of 15.4m tonnes versus last years 14. 5m. Lates t of f icial f igures sug ges t heatwaves, disease and gales have cut that back to just 13.4m. Although Europes crop now seems slightly bigger than last years, the global rapeseed supply is well under expectations. Global sunflowerseed crops have also been a disappointment

this year, down about 4.3m tonnes from last years ver y high level, fur ther reducing the ove r a ll su p pl y base for oilmeals. H ow e v e r, s u n and rapemeal, as the by-products of cr ush for oil, will still h ave to p r i ce competitively with higher value soya and if supplies of the market leader do improve, that should help keep meal costs overall under control. As well as a forecas t larger South American crop (from second quarter 2013) the US is expected to sow more soyabeans nex t spring (Informa sees the autumn2013-harvested crop possibly recovering to around 94m tonnes from this years 72/74m). However, that all depends on the weather cooperating.

KEY FACTORS IN THE MONTHS AHEAD

At what price will soyabean demand be rationed? It didnt happening at almost $17/ bu and prices are now well below that level Chinese consumption and timing of imports will continue a key influence on soya and other oilmeal costs How will next years EU/CIS rapeseed and sunflowerseed crops fare? Some help from alternative oilseeds/meals may be needed to ease the burden on soya suppliers. How much will Latin American producers expand soya planting this autumn? The markets want to see these mooted record large 2013 crops up and running and it will be a long, nail-biting wait until harvests actually arrive on the markets in Q2 2013.

KEY FACTORS IN THE MONTHS AHEAD

Has the US 2012 maize crop been underrated and what are farmers likely to sow next year? This factor will probably continue to over-ride most others, influence grain costs right through to the 2013 coarse grain harvest in 3rd quarter 2013, maybe delaying price reversals Competition from Latin America, former Soviet countr ies and India has cut demand for US maize, so has availability of Australian feedwheat Will the US government respond to calls to trim the renewable fuel mandate/corn ethanol use probably not yet if corn prices really are stabilizing, capable of falling fur ther without that help watch those pipeline stocks for clues. Will China need more or less maize impor ts nex t year and will non-US suppliers like South America and Ukraine benefit more from this demand? Will global economic recession continue to cu r b t h e e x pa ns io n i n m e a t / consumption, help to cap feed grain

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