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Weather, Politics and Biofuels Make Volatile Markets

22 October 2010

Volatility in the grain markets is something that is here to stay and the industry has to learn to live with it, writes TheBioenergySite senior editor, Chris Harris.

Since the 2007/08 season, the UK grain market has seen prices fluctuate from £75 a tonne to £64 a tonne the following year to 22 a tonne the next year when there were wheat surpluses and back to £66 a tonne this year to date, Jack Watts, Senior analyst with the market intelligence unit for cereals and oilseeds for the Agricultural and Horticultural Development Board told the recent Grain Market Outlook conference in London.

He said that the market has been driven by both weather and politics in recent years.

Mr Watts said that globally growing conditions in 2010 were below expectation and that estimated for wheat, maize and barley production are all down for the current year.

Wheat is expected to show a 4.3 per cent drop of 29 million tonnes, maize a 1.1 per cent drop of 9 million tonnes and barley a 10.5 per cent drop of 15 million.

However, he said that maize demand is expected to be up this year while demand for wheat and barley is expected to fall.

In 2010/2011 the world was expected to see a small surplus in grain supply but hope for a quiet season ahs quickly faded, Mr Watts said. Now the global market is expecting to see a drop in stocks.

As stocks are reduced, the global markets are feeling less comfortable about wheat stocks and maize stocks around the world remain tight and are expected to get tighter.

Some of the main factors that have been affecting grain stocks and prices have been the changes in exchange rates around the world and also global oil prices. All the time the global wheat prices are moving away from the prices fetched for maize.

Global Grain Surplus/Deficit

The main reason for these fluctuations in the grain markets have been weather conditions and in particular the loss of the world's cheapest source of wheat - Russia.

In the UK the early indications were also for a surplus in the wheat supply, but that has reduced as the year has gone on. Even now, Mr Watts said, more adjustments are being made on the demand side for wheat.

He said that globally, because of the high prices being demanded for wheat, importers are likely to use their stocks and stock levels will fall.

This should bring better prices later in the year, Mr Watts said.

He said that one of the main factors affecting the market ahs been the failure of the crop in Russia. For several years Russia has been exporting more and more grain onto the global market and North East Asia and Saudi Arabia had started to become dependent on Russia.

When Russia fell out of the market, the global market had to quickly adjust and now the market cannot be guaranteed.

NO-one was interested in buying US wheat while there was cheap wheat coming from the Black Sea area, but now, Mr Watts said, the world has had to turn to the US as its source of wheat.

However, he added that because of frosts in Canada, it was not likely to benefit from Russia falling out of the market.

Nor, Mr Watts said is the EU going to benefit.

But the world is now looking to South America and Australia to help the market with the US already being a beneficiary of the global state of affairs. The only limiting factor on US exports is that freight rates will affect its competitiveness.

Mr Watts said that the US is moving back to its position achieved in 2008 and 2007 with accelerating exports. Only transportation will limit US in the export markets.

World Wheat Supply and Demand

In the EU stocks are down, largely because of the weak Euro, and this has pulled in exports of wheat. Stocks are down by 1 million tonnes and current export estimates are down by 2 million tonnes - and this is largely feed quality wheat.

Mr Watts said that initially yields have been down but harvesting is continuing and the EU is looking for more quality wheat to come on to the market, particularly from the Baltic countries.

France will have large exports mainly to third countries outside the EU, while Germany will be concentrating its exports within the EU. A shortage of high quality wheat in Germany is likely to force up quality imports. When this occurs, Mr Watts expects the US prices to form the ceiling - a role that is generally adopted by the German market.

Availability will also be affected by increase biofuel usage in the UK and with stocks being down at the beginning of the season.

Around the world, maize stocks are also shrinking despite the growing importance of South America in the market this season alongside the main players of the US and China.

Ethanol demand in the US for corn has been rising, but Mr Watts said, this trend is now steadying. The balance of the corn going to ethanol production has levelled off because of the uncompetitive prices of ethanol compared to gasoline.

However, as the proportion of ethanol that is blended with gasoline rises, the markets are likely to respond.

In the EU, imports are expected to increase, but they are still expected to fall 10 million tonnes short of their height in 2007. Market volatility is expected to continue in the EU as stocks diminish.

In the barley Market, the EU is expected to the largest winner globally as the EU will be issuing intervention stocks of over 5 million tonnes. Despite a production shortfall, exports are up because of the situation in Russia where the harvest was hit by weather conditions.

World Maize Supply and Demand

In future, the UK could bring more land into production as the effects of the poor situation in Russia continue to be felt. As the global area for maize increases, the industry worldwide also has to look at its yields and productivity, Mr Watts said.

In the US yields have doubled partly because more land has been set to growing maize, but also because of genetic modification and other climatic factors. The wheat area in the US started to plummet as the maize and soy areas grew. This has to a large extent been down to the mandates for ethanol and other biofuel production.

However, Mr Watts said that the US share of the global wheat market is going to be restored.

The increase in global pork and poultry production to meet a growing meat demand is also going to increase feed grain production and this too will have an effect on the global market.

In general the global grain markets are going to hinge on the political drivers in Russia and China, global weather conditions and economic conditions.

October 2010

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