Supply & demand in the market

September 16th, 2010 - Between the end of June and early August the grain markets staged an impressive rally, with malting barley new crop prices advancing by about 65%.

What initially started as concerns over dry weather conditions in Western Europe and subsequent reduced yields in main producers France and the U.K., was soon put aside by the news of unprecedented hot conditions in Russia and the Ukraine. Once this news was confirmed by lower harvest results (wheat for instance up to 30% down) and was followed by the announcement of an export ban by Russian President Putin, it did not take long for prices to go completely out of control, as such leaving the market in a shock.

In order to get a better understanding of what has happened in the past period, the figures of the USDA provide a good basis.

For the 2010/2011 marketing year a total world grain crop of 1,753 billion tons is foreseen. This compares to last years figure of 1,784 billion tons. Demand is put at a record 1,784 billion tons, which compares to last years 1,755 billion tons.

The ending stocks are put at 19,4%. This is down from last years 21,8% but still well above the 16,7% resp. 17,3% of the disaster seasons 2006/2007 and 2007/2008.

 

What these figures especially show, is a structural increase in demand for grains due to the global population growth and changing eating habits in the developing parts of the world. The importance of a sufficient global stock position is thus increasing, or the other way around if you will, supply shocks are increasingly unwanted and a threat to stable food prices.

In summary, we have moved from :

A

towards

B

comfortable stocks + smaller (yet sufficient) crops

 

lower stocks + crops that are unsufficient to cover demand

 

It therefore goes without saying that the markets will remain extremely sensitive to any further production setbacks. This means that much attention will go to the crops that will be harvested from now till the end of the year, like Canada, Australia and Argentina.

In case these crops come in as estimated today, the market has a chance to relax further down the road. We doubt however, whether such relaxation will imply clearly lower prices.

Meanwhile however, any additional production losses, will result in immediate higher prices, and extreme price increasements can not be ruled out under such circumstances.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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The above information is for general purposes only. Any reliance you place on the given information is therefore strictly at your own risk.

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