Download Note on the Current Global Wheat Market Situation

Note on the Current Global Wheat Market Situation Wheat futures prices increased by more than 50% in July, reaching on the 5th of August their highest levels since September 2008 at around $290/tonne. Prices volatility has continued, but prices had decreased by the 24th of August to around $250/tonne. On 5th August Russia announced that it will put in place a cereals export ban from 15th August until end of the year. These developments have been reported prominently in parts of the media (e.g. BBC , FT, Independent). The top line message remains that despite this reaction from the markets there is not likely to be a shortage of wheat from the harvest this year (despite the reduced harvest and export ban in Russia) due to the high levels of stocks currently being carried globally. International stocks matter more than UK stocks as the EU and UK are integrated in the global market. However, UK wheat stocks are also at a healthy level. 1 The IGC (International Grain Council) forecasts suggest that consumption may outstrip forecast production for this year but the buffer provided by current stocks is ample (www.igc.int ). Though not as high as this year, last year there were also periods of higher prices before the harvest when there is a sensitive reaction to any information about levels or yield, creating a lot of volatility, which should hopefully settle once final harvest information is available (see Figure 1). We are monitoring the situation and harvest in the UK closely. So far while average yields remain slightly down on the five year average for the UK, quality is good and despite some delays due to rain the harvest is progressing well. A price spike is a sign that markets are working: it is expected to encourage farmers to plant more cereals this autumn with a view to higher production next year which would help to rebuild stocks. Figure 1: Chicago Board of Trade wheat and maize prices 2005 to date 500
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CBOT Wheat ‐ 01 Nearby
CBOT Maize ‐ 01 Nearby
Source: HGCA website (www.hgca.com )
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Both global and UK cereal stocks are indicators within the UK Food Security Assessment (January 2010) and are rated at favourable levels.
Background The wheat futures price rises were fuelled by downward revisions of the harvest estimates due to the severe drought in Russia and other Eastern European countries and the announcement of the Russian export ban. Ukraine has considered also introducing similar measures. Volatility in the cereals markets is common in the run up to the harvest when news about detrimental weather conditions in any of the main producing countries can lead to significant price increases. In June last year, the Chicago Board of Trade (CBOT )price, the global reference price, reached almost $250/tonne but then dropped again quickly (see Figure 1). As a comparison, the CBOT price was at $250/tonne on 2 August 2010 but then increased to almost $290/tonne on 5th August 2010 following the announcement of the Russian export ban. By the 24th August price had decreased to around $250/tonne as there are forecasts of favourable weather in Russia and Ukraine has up to now decided not to introduce a ban on exports of wheat. Despite the problems with the harvest and the Russian export ban, the wheat price level is somewhat surprising given that recent estimates mean that the global wheat market is estimated to now be in a deficit (‐13 million tonnes) that still leaves a healthy level of stocks available. Two years of large oversupply in the wheat market (+47 million tonnes and +29 million tonnes) mean that this amount can easily be absorbed by current stocks. The situation on the wheat market is therefore very different from the situation 2 years ago where stock levels were much lower and exacerbating factors such as oil prices and disadvantageous exchange rates are not present. The UK buys only small amounts of Russian wheat as the quality is insufficient for bread making. UK farmers supply most (up to 80%) of the UK’s millers’ requirements. Russia mainly exports wheat to Egypt, Turkey, Syria, Iran and Libya for unleavened flatbreads. As Figure 1 shows the wheat price increases have so far not strongly spilled over into the global maize market even though the maize market situation has been much tighter over the last 2 years. IGC (International Grains Council) estimates a deficit also for maize this year (see Table 1), although recent news on the US harvest prospects have been positive. Table 1 shows production, consumption and stocks estimates for the last 5 years for wheat and maize. Table 1: Production, consumption and stocks of wheat and maize 2006/07 to 2010/11 WHEAT
06/07
07/08
08/09
Production
Trade
Consumption
End year Stocks
Year/year change
MAIZE
598
111
610
124
-13
06/07
609
110
613
121
-3
07/08
686
136
638
168
47
08/09
Production
Trade
Consumption
End year stocks
year/year change
710
87
725
117
-16
795
101
775
137
20
796
84
779
154
17
Source: International Grains Council (www.igc.int ) 09/10
estimate
677
127
648
197
29
09/10
10/11
forecast
644
117
657
184
-13
10/11
estimate
forecast
809
86
820
143
-11
829
90
837
135
-8
However, on the main European Exchange, the French MATIF, both wheat and maize prices have increased recently (see Figure 2). This could be due to the reduced barley harvest in Russia impacting more on the French maize market than on the US maize market due to the closer geographic proximity and more substitution on the European feed market. Figure 2: French (MATIF) wheat and maize prices 2005 to date 350
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MATIF Wheat ‐ 01 Nearby
MATIF Maize ‐ 01 Nearby
Source: HGCA website (www.hgca.com ) Purely based on global fundamentals, therefore, the recent price movements in global (CBOT) wheat and maize prices are somewhat surprising given the healthily supplied wheat and fairly tight maize market. There might have been more focus on the Russian harvest situation due to the wildfires which have been in the news making other drought related news from Russia more ‘newsworthy’. Russia is an important wheat producers and exporter but is less important in the maize market, which could explain the different movements in wheat and maize prices. The additional price movement in global and European prices after the announcement of the export ban also seems rather strong, with prices at the Chicago Board of Trade increasing to the permitted daily maximum increase for the first time in two years. In the last ten years, Russian exports varied significantly from year to year accounting for between 4% and 15% of global exports. In the last five years, export levels were a bit more stable and in each of the last three years though Russia was the third largest exporter. However, even before the ban, Russian exports were already estimated to be significantly down on last year and a good harvest is expected in the US and global stocks at the start of the marketing year are at their highest levels since 01/02. This should provide sufficient buffer in the market to the reduced global supply due to the Russian bad harvest and export ban. The interchangeability of wheat and maize for livestock feed means that some grains users may move to substitute maize for wheat for this purpose, also lessening the pressures on wheat availability. Before the export ban, Russian stocks were estimated by the USDA and the International Grains Council to fall back to the levels seen before the two bumper harvests in 2008/09 and 2009/10. The Russian export ban was motivated largely by concerns over food price inflation and its impact on pensioners, and others on low incomes. Russian farmers will get less for their crop than on international markets this year from the export ban. Russian exporters with futures contracts, generally at much lower prices than currently seen, are winners because an export ban is regarded in many contracts as a force majeure and therefore contracts can be cancelled. However, in the longer term exporters are likely to lose out as Russia’s reputation as a major reliable exporter is damaged. Potential effects on consumers A 50% rise in wheat prices, if sustained over a period of time, would put significant additional pressure on costs of millers, bakers and intensive livestock producers and ultimately consumer prices. Thus Premier Foods, which makes Hovis bread, have said that “the industry will be unable to ignore a 50% rise in wheat prices”. That statement however, coincided with the publication of the company’s trading figures and appears to have been partly motivated by the need to reassure investors and market analysts that stock market values of food processors would be maintained. In any case, the impact on consumers is likely to be limited by the fact that the raw material is only one element of total cost: wheat costs account for less than 10% of the cost of an average loaf of bread. For consumer inflation to be really significant, costs throughout the food chain have to rise. Significant food inflation in 2008 was not simply the result of the international agricultural price spikes, but importantly also substantial rises in oil prices and the weakening of sterling. We have some modelling research in hand which should enable us better to estimate how far and how fast any significant changes to these key variables would affect consumer prices. Sources: www.hgca.com www.igc.int http://www.usda.gov/oce/commodity/wasde/ http://www.bbc.co.uk/news/business‐10851170 http://www.ft.com/cms/s/0/51913ed6‐9e60‐11df‐a5a4‐00144feab49a.html http://www.reuters.com/article/idUSTRE6742QQ20100805 http://news.yahoo.com/s/afp/20100805/ts_afp/russiaheatwavefiresfarmcropscommoditiesgrain_20
100805162243 http://www.independent.co.uk/news/business/news/russian‐wheat‐export‐ban‐threatens‐higher‐
inflation‐and‐food‐riots‐2044769.html