Cereals Update

    Cereal Markets May 2012


    Supply and Demand

    There are three major supply and demand uncertainties: Consumption, area and yield. A change in any component will invariably alter price. Overlaying all these are:

    • Exchange rate -  if sterling strengthens against the US dollar prices fall;
    • Local supply and demand nuances: where local shortage means that supply has to be brought from further raising grain price.

    Variation in consumption from year to year is small and only seems to become the dominant variable for a short period over late winter/early spring for the previously harvested crop. 

    Major speculation on cropped area for 2012/2013 crops is now at an end although loss of planted crop due to drought, flood or other reason could still be a threat in parts of the world.  With the increased certainty on crop area, all the major forecasting bodies have produced supply and demand forecasts for 2012/2013.

    View the world winter wheat 2012/12 forecasts (MT) table.

    March 2012

    The conclusions from these forecasts are:

    • Total grain supply and total wheat supply see no major changes. This leads to no significant price change
    • Return of a premium for wheat over maize

    These forecasts simply provide the baseline – yield can vary significantly from that forecast and could create a surplus or shortfall.
    This is illustrated by our calculation of ‘notional exports’ for the major exporting countries. View the graph. 

    The calculation assumes that the amount of grain consumed and retained as stocks is relatively fixed and that the surplus is available for export.  Current estimates of areas have been used and the variation calculated from the percentage change from trend.  All these exporting countries still show an upward yield trend even over the last 10 years, although the statistical significance has been low (and the rise for Australia negligible).

    The EU is the biggest producer of wheat.  The historic percentage yield change from trend is relatively small, even a small change can have a large impact on availability.  The effect of yield is greater in those countries we recognise as having volatile production such as Australia and Russia.  A production disaster in any of these three blocs (EU, Russia and Australia) could increase price by about 25%.  The first serious suggestion of drought in Russia has been made and EU yields have been subject to downwards revisions, although recovery is still possible for both exporters.

    The health of the global economy can impact supply side.  For those countries where consumption has increased rapidly such as India and China a rise in price or fall in wealth might be expected to reduce demand.  Certainly, the futures market falters on bad economic news.  However, price rises do not transmit evenly between countries as a result of internal supply and demand and national protection measures.  Thus, according to the FAO in the last two price spikes, prices rose by relatively little domestically in India and China compared with international prices.  In addition, our analysis has shown that the rate of increase in consumption of grain did not actually fall during either the 2008 or 2010 price spikes – grain price may have risen but grain remained the cheapest alternative food source.

    Local issues
    Both Vivergo and Ensus, the two UK ethanol producers using wheat, may be fully operational by next harvest and if UK grain production is low, the UK may become net importers of grain.  This would raise price in the local areas to these plants but may have no influence in some areas.  Exports from France, which has a large surplus, are likely to compete with long road haulage within the UK from surplus areas.

    What to do
    Over the last four years ‘little and often sales have rarely achieved the best prices compared with a more managed strategy locking into high minimum prices prior to the fury of the autumn period when prices have moved up or down by an extraordinary amount.  This looks like being another year when either early sales or late sales will be dramatically wrong.