Digital Re-print - July | August 2012

Global Feed Markets: July - August 2012

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 2010 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

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.
While the world wheat crop may be turning out 15/25m under initial forecasts – and as much as 30/40m under last year’s, this market can at least draw on abundant carryover stocks from recent past, well-supplied years.


US crop disaster is a game-changer
thinking twice about the scope of its sales campaign amid its ongoing preoccupation with domestic food price inflation. That would be a pity for feedgrain consumers in Asia who have been viewing India as an alternative source of supplies to tight and expensive US maize and shrinking supplies of ‘Black Sea’ (former Soviet country) feedwheat. India’s oilseed crops might also be affected, raising its draw on global oilseed supplies and possibly reducing its oilmeal exports in a year when these too will be sorely needed. Down under, parts of Australia have also had some worrying dry spells. So has Argentina. Both have reduced wheat plantings this year, suggesting these key exporters will not make up for northern hemisphere crop shortfalls. . This combination has predictably seen prices soar as much as 40% to 50% across the grain and feed markets, with more than a little help from enthusiastic ‘investors’, eager to reprise the bull market of 2008/09 (when all the major commodities in this sector set record high prices). Adding fuel to the fire, US and global consumption is not reacting quickly enough to the rise in costs – with maize and soyabeans already trading at their highest ever (details below). Yet, if the worst-case yield scenarios materialise in the USA for maize and soya, there is no doubt demand will have to be cut radically to prevent

WO months ago the USDA shocked markets with a massive US maize crop forecast that promised to cap costs across the feed sector and take upward price pressure off relatively adequate wheat supplies. Two months later, Mother Nature has provided an even bigger surprise – probably the worst US combination of drought and heatwaves since the 1950s – possibly even since the ‘dust bowl’ days of the 1930s. Crop estimates are sliding weekly. Maize production may turn out the smallest since 2006/7’s 267.5m tonnes, more than 100m under the USDA’s original 376m tonne target – perhaps even smaller. Soyabeans could shrink to a four year low of 76/78m tonnes compared with early hopes of 87m. If that were not enough to contend with, Russia, Kazakhstan, Ukraine and the southeast quarter of Europe are suffering their own droughts and heat pressures, slashing further millions of tonnes off wheat and possibly coarse grain and oilseed harvests too. Adding insult to injury, parts of north-west Europe have seen record breaking rains, both in duration and volume which, along with some cold temperatures, have put crops back and threatened quality in the two largest supplying countries – France and Germany as well as the UK. Hopefully a break in that weather as we go to press will alleviate this situation at least, rescuing the bulk of milling wheat crops from downgrades to feed – though for the next few weeks, these still hang in the balance. European rapeseed and sunflower crops could also be affected. India, which a month ago seemed poised to enter the world market as one of the largest wheat exporters, has meanwhile been short-changed with its vital monsoon rains and the government there may be

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health like solvents, can it be done outside? Alternatively, check the area in question has adequate ventilation before starting and in case of the worst case scenario happening, make sure you have proper emergency arrangements in place and provide rescue equipment.


Getting caught out >
But it is often the apparently mundane and routine things that catch people out. That is why it is so important to constantly check that work areas are free from obstructions such as trailing cables and that buildings are kept in good repair. And remember to think about visitors’ safety as well; once they have set foot on your premises their safety becomes your responsibility. Toilet and welfare facilities should also be provided and cleaned regularly as well as a clean drinking water supply maintained. Microbiological hazards are critical too. It is not just the well supplies running out completely well before known zoonotic infections such as brucelprices might have to the end of the season – a so-called ‘negative losis or ring from their the need to maintain increase worm, but awareness$8 peaksthreat of infection from carryover stock situation.’ In reality, stocks recent of the by a fur ther 25% , i.e. will not be allowed to run out because prices animal wastes and other materials that can toward the $10 / will cut off demand well before that happens. harbour hazardous micro-organisms. So the big question being asked as we go to bushel level or higher. press is at what price will a satisfactory level Machineryindicated Wheat, as and vehicles > of ‘rationing’ of supplies occur? For soyabeans above, is the odd man out. While the world Farm machinery continues to increase there has been talk of prices having to rise in wheatpower and sophistication. Often it size, crop may be turning out 15/25m under to from their recent near $18/bushel toward is initial forecasts highly as much as 30/40m complex and – and expensive. Its use $20 or more – a prospect that already has needs tolast year’s, this market can at least draw under be restricted to trained, competent soya meal – and thus the rest of the oilmeal on abundant carryover stocks from recent complex- trading at record high prices. Maize past, well-supplied years. In fact the stock/

people. For example, if tractors, farm vehicles and other workplace vehicles fall into the wrong hands, the repercussions can be lethal. Obviously, these vehicles should be properly maintained and suitable training given to all operators. Remember, in agriculture the most common cause of serious and fatal injuries involves moving and overturning vehicles. Proper guarding is absolutely vital, for example, to prevent the terrible accidents that can occur with PTO shafts. Incidents occur when the vehicle has been left unattended; always check the vehicle braking system and make sure it is properly maintained. It is also advisable to use the ‘safe stop’ procedure whenever you leave a vehicle; handbrake on and controls in neutral, before turning the engine off and removing the key. Each vehicle and piece of machinery needs to be assessed against actual conditions of use so that safe systems of work can be put in place.

Avoiding falls >
Falls are the second highest cause of death in agriculture, but most fall injuries can be avoided. To stop your farm losing out on time and money as a result of fall injuries, ensure that all consumption ratio for wheat the superwork at height is plannedat and close of the 2012/13 season that began July 1 is vised, with competent people in charge. almost 27% happen with roofs, ladders, Falls often comparedfrom under 15% for maize (Sep/Oct season). Even so, once those vehicles, bale stacks, among others, so it wheat stocks (about 197m tonnes) start to get seriously diminished, it begs the question,

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how will markets behave without that large cushion if crops happen to under-perform again next year? The prospect is not fanciful. Not only do Australia and Argentina run the risk of dry weather, farmers in the USA – the largest single country producer and exporter of wheat – are already starting to worry whether the legacy of this devastating drought may linger into the autumn when next year’s winter wheat crop is sown. These three producers are, of course, all key contributors to the quality end of the bread wheat spectrum. On the plus side, Australia and Canada might expect better pre-harvest weather than the last two years, raising the quality component of their next crops. One unusual side phenomenon of this bull

market is the way that wheat – despite that relatively looser stock/use ratio – has outpaced gains in the much tighter maize market. Since June 1, Chicago wheat futures’ first delivery month has been up by almost 55% at its recent peak compared with gains for maize of 43% and soyabeans of 33% over the same period (though soya is 53% over its 2012 low of $11.60/bu). This is partly due to wheat having been sold short earlier by speculators looking at the large carryover stock and partly due to ideas that wheat consumption will boom as a replacement for maize and, to a lesser extent, soya. With final US (and other foreign) crop losses still to be fully counted – maybe millions of tonnes better or worse than the estimates

recently traded on the markets (again, see below for details) – with demand still to be rationed, with funds and other ‘outside’ speculators possibly only partly aware of the gravity of t hese su pply shortfalls, the grain and feed markets are sailing in uncharted waters. Prices reflect that, getting more volatile in late July at these high levels. Big political decisions may have to be made – like adjusting the US renewable fuel mandate to curb some of the 125m tonnes of US maize that now gets sucked into the biofuel sector annually. The government has for the moment ruled this out but if the crop is as small as many experts now think, expect that decision to be revisited fairly soon. As one of our US sources put it, “at the stroke of a pen, this could send corn prices tumbling.” Feed and other ‘traditional’ consumers of corn will rightly demand some action along these lines. Remember, as recently as 2005, the US only used 33m tonnes of corn for ethanol, before Mid-eastern political strife and Hurricane Katrina helped the US decide to use this feedstock to cut dependence on foreign fossil fuel fuel supplies. In addition, recent press repor ts are surprisingly confident that the lat ter objective – US fuel independence might now be achievable without constantly raising use of food commodities for this pur pose , ins tead using shale gas and other reserves. One report this month reckoned these domestic sources could provide the US with at least 100 years of complete fuel self-sufficiency. Of course, that will not happen overnight and it would seem unfair and impractical to call time on corn ethanol industry without warning. However, in the context of these emerging alternatives, the constant need to supply more corn for global feed and food consumption, the need to control food price inflation etc, one might be forgiven for wondering if corn ethanol is becoming an unaffordable luxury for which the writing may be on the wall. Speculators are meanwhile taking more interest in the grain and oilseed futures markets as investments, an unwelcome development for the consumer, given their propensity to exaggerate price spikes. Banks

and other finance houses are raising medium/ longer term forecasts for feed and food raw materials and bodies like the OECD and FAO are warning about these factors threatening rising future prices. To some extent, this is all self-fuelling. However, there is no gainsaying the sheer uncertainty over current maize and soya crop outlooks, the tighter than expected wheat supply and the lack of adequate ‘rationing’ of consumption – mainly for soya and maize. It all gives little cause for optimism on forward grain and feed costs. This deficit will take time to sort out, probably another crop year at least, during which any further weather problems could find markets sensitive indeed.

Main commodity highlights since our last review
Wheat - not running out yet
Two key factors have dominated wheat trade in the past two months – the rising value of corn and the collapse of wheat crop prospects in the former Soviet Union. Each leg up for US maize futures is immediately reflected in higher wheat prices in the US, in Europe and on global wheat export markets. The extent of the downturn in former Soviet country crops has clearly surprised markets thinking back in June that this was no repeat of 2010 when droughts, heat and wildfires slashed the region’s output to just 81m from the previous year’s 114m tonnes. Since then, the total FSU crop forecast has dropped from 98m to 88.6m tonnes but the latest figures coming out of Russia and Kazakhstan especially now suggest the total could again end up closer to 82, even 81m tonnes. The region enters 2012/13 with about 26m tonnes of carryover stocks – about the same as in 2010/11 – so not much real change in that balance. In 2010/11, the main three CIS exporters shipped 13.8m tonnes, down from 35.8m the year before. This season, USDA expects them to export 23m - which now looks rather optimistic - versus last season’s 36.8m. It all sounds familiar. But how important is this export drop to the wheat market? Firstly, world import needs are already seen 13.6m tonnes lower – almost equal to the drop in CIS export availability – due to less demand from a whole range of countries led by the EU, China, Egypt, South Korea and Mexico. However, this lower demand figure might be optimistic too, based in part on reduced feed use of wheat (minus 17m in total). Will that actually happen if maize supplies run dangerously low? Expect to see wheat feed forecasts start to rise in the weeks and months ahead and imports with them, reducing the bearish impact of the shrinking world wheat trade factor. However, even if world trade in wheat does increase, the current season’s supply from the main

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FEATURE flours as well as wheat bran are as a rule sold at low prices to the feed manufacturing industry. exporters looks adequate at this stage. The The extruder enables also such USA for one, the world’s leading exporter, ‘by-products’ to be upgraded can sell the world a fair amount more than into high-grade foods. Both the 32.5m forecast by USDA (plus 4.4m by-products can be processed tonnes) without drawing down its still large into breakfast cereals, but are carryover stocks to risky low levels. We can also used in a modified form also expect Canada, Europe and Australia as ingredients in other foods. (which still has large stocks) to maximise Bran flakes are highly popular export opportunities. Even the CIS countries today. Extruded wheat bran, may yet surprise the markets with a more for instance, can fetch double exports than the trade expects (somewhere the price of wheat bran in its around the 18/20m mark?). Remember that in native form. The opportunities 2010/11 – the Ukraine and Russia responded that wheat bran presents as a to the shock of crop losses with what many high-grade food are significant. saw as an excessively cautious export policy. concerns, Russian exporters have continued How far will wheat consumption in feeds rise as The high to tight fiber content Carrying into 2011/12’s year of crop recovery to make the running on recent world import users look for alternatives dietary and expensive of wheat bran gives the product an (and accumulating some stocks too), this did deals, making the cheapest offers. Indeed in US maize? ‘aura of health’. little for the region’s reputation as a reliable early August, the US, EU and Canada have Will a disappointing Indian monsoon curb its The basis for supplies are supplier. Remember too that the CIS region, hardly got started on their 2012/13 sales (the new export programme – those making all the products mentioned above is especially Russia, has big future plans to US is even running behind targets). needed to fill in for shortfalls from ‘Black Sea’ grain expand its grain trade, especially into Far Still, that hasn’t stopped Chicago wheat wheat producers. flour. This is what the extrusion process has in common Will dry weather worries recede in Australia East Asia where export port infrastructure futures rising to four year and European is being built up at considerable cost. Provided milling wheat to 17-month highs – prices and Argentinawith conventional bakery proc– and will Australia’s quality domestic cereal/bread prices can be kept that could yet look cheap in a few month’s improve after esses. The difference however two years of weather-damaged lies in the dough texture. The under reasonable control – and their crops time if corn strength continues to fee this crops? dough framework of convendon’t fall too much further - CIS governments bull market. How high will maize prices go? However, well might yet take a bolder approach to export supplied, wheattional ignore this trend. based on can’t bakery goods is proteins such as gluten and penopportunities than markets are assuming, tosans. The texture of extruded with a view to future trade, especially toward products is based on starch. The the latter end of this season if their 2013 raw material must have starch Nobody two months ago could ahave content of at least five to ten Are all the expected to the US maize crop to sink as Latest 2012/13 balance = USDA percent in order to under low as some of the recent estimatesensure a Main producers (000 tonnes) ‘Black Sea’ stable end product will have serious consideration. Demandtexture. The 2010/11 2011/12 2012/13 protein content pressure, that to be rationed by price andmay be low,as wheat crop is, below ten percent. Flours with mentioned above, is growing to take some such protein contents are typilosses yet of the strain off traditional users by reducing China 115.2 117.9 118 cally unsuitable for baking. As the flour price On the other hand, dough rising can also be a capacity of two metric tons per hour – are demand from the relatively newer corn counted? EU 135.7 137.4 133 is – among other factors – also influenced by controlled through specific chemical or physical twice as high in the traditional process as in ethanol sector. the protein content, low-protein ( joint agents. Fluctuations in 81.1 raw material quality the extrusion process. In addition, the extruder Crops in Ukr aine and Russia flours are the FSU 114.4 88.6 ..or 81/82? It has just adequate less about 32m tonnes) are also under are easier to balance in the extrusion 29.5 process. offers the flexibility required to produce related outputexpensive than high-protein ones. The supply but will the Australia 27.9 26.0 extruder drought allows and could go In addition, it is possible to accurately adjust the products such as baking peas and croutons or stress from thereforeand heatalso inexpensive EU have adequate 23.2 25.3 26.6 flours to be processed. even bread chips on a quality – weather by lower, further crimping supplies for export. given processing line texture, Canada and particle size. colour, Argentina 16.1 14.5 12 Moreover, extrusion is a highly energy-effi- selecting an appropriate configuration. key this month On the plus side, Europe itself has a good cient process. The much lower water 694.7 contents 665.3 or 657/658? WORLD TOTAL 651.1 M on InforMatIon: A big US crop crop ore the way of an estimated 65.5m in the product formula in comparison to tra- Extrusion increases value of hard tonnes versus last year’s 64.6m and less with plenty World end stocks 197.2 197.1 182.4 or 176/177? Christopher Rubin, Bühler AG ditional production, in conjunction with short generation red winters and thanTel: +41in 2010. That should take some 56m 71 9551111 retention times, ensures low energy costs, Even very dark flours (low-grade flours) of the pressure9553851 improved hard spring Fax: +41 71 of domestic feed users but especially during subsequent drying. The energy and wheat bran are suitable as raw materials Email: crops show more promise. It’s interesting wheat prospects may help contain breadwheat prides will still rise in sympathy with the costs per ton amid all their current crop for processing by the extruder. Low-grade US/global market. Website: to note that, evenof finished product – based onprices globally. Extruded Bran Sticks – a by-product transformed into valuable food

KEY FACTORS IN THE MONTHS Maize could lose 100m tonnes AHEAD

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Maize exports – main suppliers 2010/11

USA Argentina Brazil Ukraine Others

45.3 15.2 11.6 5 14.8


How will speculators respond if the 2011/12 2012/13 US /global maize and soya and world wheat 48 40/30/20? c r o p s co n t i n u e to shrink? Believe 14.5 15.5 i t or not , their 11 12.5 reaction so far has 14 14 been descr ibed 9.5 15.5 as ‘restrained’ by many pundits. But they won’t stand by as onlookers if the prospect of another 20% or 30% on prices looks viable.

How low will the US maize crop go – 300m, 270m, even lower? This factor will probably override all else and influence markets right through to the following harvest in 3rd quarter 2013, probably preventing major price reversals

Oilmeals – supply curbed by falling crush growth
Weather in August will determine whether the coming US soya crop is 80m or 75m tonnes and will thereby decide whether consumers end up paying $15/16 or $ 20 -plus per bushel for supplies. If the crop does fall to the lower end of the scale, prices will be firmer across the entire oil meal complex. On USDA’s assumption of an 83m tonne crop, world soya meal production in 2012/13 (starting this October) will reach 183.5m tonnes against last year’s 177m. Even that will entail drawing down quite a lot of carryover stocks from last year’s crops. Clearly the US situation could push the figure well below 180m. The best hope for some price restraint is that South American soyabean producers, who plant from October onwards, will sow a far larger crop. The price incentive is there, they have the land. All they need is the weather

to sow and grow it. However, that relief will not be coming to the markets until the spring of 2013. In the meantime, we can expect soya meal prices to remain frisky, especially if there is any hint of a Latin American weather problem. Fortunately, back-to-back drought years in the region tend to be rare. Soya costs will also be determined by demand from the top buyer China and other leading importers of beans and meal. With soya meal hitting record high prices, global demand may be curtailed below the 181m tonnes forecast by USDA (+5m for the second year running after leaps of 9m in both 2009/10 and 2010/11). China – 28% of world consumption - has been slow to cut its demand but recent signs suggest it may be on the turn lower. Second largest market Europe is expected to consume about 30m for the second year in a row. Some Asian and other buyers may cut back, however. In terms of total oilmeals, there are no obvious replacements for the soya shortfall with most oilseeds producing similar crops to last year. On the other hand, growth of world demand for protein meals in total slowed over the past season to 3.8% from the previous year’s 5.1% and the coming season is expected to see growth of just 2.3%. Depending on how supply and price pan out, growth could be lower still, providing some restraint in this bullish market.

How low will the US soya crop go?
At what price will demand be rationed? It’s not happening at $17/bu! Chinese consumption and timing of imports remain and important influence on soya and other oilmeal costs What size this year’s EU/CIS rapeseed and sunflowerseed crops? Probably not enough to much sway the bull trend in the dominant soya sector. How much will Latin American soya producers plant this autumn? They could help put the brakes on escalating soya/oilmeal costs but it’s a long wait till they harvest in Q1 & Q2 2013!

The contribution to world corn supplies from Latin America, Europe, the former Soviet countries and India Will the US government trim the renewable fuel mandate/corn ethanol use – probably if the crop estimate contracts much further and pipeline stock requirements demand it. Almost forgotten amid the US crop disaster, still potential for China to continue much larger than normal maize imports. Will global economic recession curb meat/ consumption in some developing countries, cap feed grain demand and help anchor rising grain and oilseed costs?

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