World Grain - November 2012 - 80

FEATURE: MARKET VOLATILITY NEW NORMAL

From left: Richard Whitlock, Mike O’Dea and Jack Watts provide analysis of the state of global grains to attendees of the HGCA’s Grain Market Outlook conference.

drivers coming from external factors.” He noted the upcoming electors in the U.S. and Germany, and the impact that the Eurozone’s problems were likely to have on economic growth. “Prices have had to rise to ration demand,” Watts said. “More of the world demand is for a Western meat-based diet.” However, the effect of demand rationing is difﬁcult to forecast. “It is not an exact science. Expect this to be a source of further volatility,” he said. “The relationship between prices is changing, and it is all being driven by supply and demand fundamentals. 2012 is marking a new era. We still have maize issues from the U.S. drought, but we also have wheat issues emerging.” High prices were already having an effect on demand. Livestock herds in the U.S. are starting to be rationalized, Watts said. He also noted projections for reduced demand for ethanol. The U.S. isn’t alone in having lost maize production. Europe is also having maize issues, with the crop expected to be 10 million tonnes lower. “The market now looks to the Southern Hemisphere for some supply midseason,” Watts said, but the region is a much smaller supplier of maize as compared to soybeans. “The U.S. drought is a big issue here. It made a tight situation even tighter. We can’t just run down stocks, because they’re not there.”
80

DISAPPOINTING WHEAT PRODUCTION For wheat production, 2012 had been a “relatively disappointing” year, with the only year-on-year increases in output in North America. “The wheat markets need to respond to regulate the amount of wheat that’s used in animal feed rations,” he said. “The stock-to-use ratio is approximately 25%. Stock-to- use levels of the major exporters is of concern. The key feature further ahead is what happens in Australia and Argentina. We shouldn’t expect to see the close-torecord, 30-million-tonne crop we saw last year in Australia. About 20 to 23 million is the ballpark ﬁgure.” Argentina is different, with the key issue being that the area is in decline. The dominant soybean area is almost turning wheat into a niche crop, he said. In Europe, there have been several seasons of what Watts called “below par” grain production. “We are getting to a point where stock levels can’t really be drawn any lower,” he said. “The European grain situation is relatively tight.” The U.K., in particular, has a problem. The region started the season with relatively low stocks and had to cover a much wider period. Average yields of 6.68 tonnes a hectare are at the lowest level since 1988. However, the lower yields are mitigated to some extent by increased area, Watts said.

“Availability is estimated to be about 1.2 million tonnes down year-on-year,” he said. “Demand is expected higher. “The supply and demand balance is almost cut in half. The U.K. wheat market is looking at being in a net import situation. This is a function of the fact that the wheat crop has underperformed. Anecdotally, this poor summer has cost the U.K. 4 million tonnes of wheat.” Quality also is a major concern. Variability is large and that is having a bigger impact than lower averages, Watts said. “The percentage of samples reaching nabim speciﬁcation in 2011 was 40% of Group 1. In 2012, it was just 3%. Speciﬁc weight is pulling it down,” he said. “Markets have had to respond. In 2011, there was no need to see growth in imports. In 2012, milling wheat prices have just become a function of the imported German ‘A’ wheat price.” “The draw down in stock levels is forcing wheat to think about putting a bit of a premium in over maize. India could become useful.” BARLEY DEFICIT Watts noted that barley is in its third consecutive season of supply deﬁcit. “The Black Sea is the biggest deﬁcit area,” he said, adding that it is a key supplier to the big importer Saudi Arabia. There’s a mixed picture for oats. “The decline in demand for oats is coming from the feed side,” he said. “The milling side is a success story.” The key message is that farmers need a pre-planting price signal to actually grow the crop, Watts said. PALM OIL AT A DISCOUNT In the oilseeds sector, Watt noted the developing discount in palm oil. This is likely to encourage a change in demand away from other commodities, such as soybeans. Soybean production is driven by the U.S. and South America. He described 2011-12 as very unusual in that there were crop downturns in both regions. The U.S. crop is forecast lower, while in South America there are early hopes

November 2012 / World Grain / www.World-Grain.com

http://www.World-Grain.com

World Grain - November 2012

Table of Contents for the Digital Edition of World Grain - November 2012