Wheat and soy prices remain susceptible

Related tags Goldman sachs Wheat

Global prices for ingredients such as soy and wheat are still
vulnerable to increases as global harvests could be impacted by
weather risks and generally low stocks, something that will
inevitably hit the China market hard as it is increasingly turning
to imports to feed demands.

The September WASDE (World Agricultural Supply and Demand Estimates) released by the US government reports a similar outlook to August - that key crops wheat, corn and soy stocks should rise significantly this year on the back of improved harvests.

The rising prices are likely to affect China in particular, which in recent years has become a net importer of food products as it struggles to feed its population which is consuming increasing amounts of processed foods as a result of the recent economic boom.

But investment bank Goldman Sachs warns that there is actually an upside risk to prices.

"In total, WASDE projections for wheat production could be reduced by as much as 3 to 5m mt over the next month or two,"​ they said in a recent statement.

Goldman Sachs stressed that WASDE did not adjust wheat output projections for the shortfalls that are likely to result from dry conditions in Australia and an early freeze in Canada and the northern US.

Food makers and ingredients firms across the world have been affected by rising prices for basic food commodities. In each of the last four years world grain production has fallen short of consumption, forcing a draw-down of global stocks for wheat, rice, corn and soybeans. Soybean prices recently hit 15-year highs and wheat and corn 7-year highs.

Currently China's grain prices are continuing to rise as demand outstrips supply. Last month the country declared a crop trade deficit for the first time, as figures revealed that for the first six months of the year it imported $3.73 billion more in crops than it actually exported. Further to this the figures revealed that it imported 1.8 times more grain than the corresponding six month of 2003, most of that accounting for soya and wheat from both South and North America.

Meanwhile, in the face of the rising grain imports, China is also having to pay more it. Goldman Sachs warned last week that the current market price for corn - which in December closed at 218cts, but on September 14 - does not reflect a 'sufficient risk premium given the historically low level of inventories,' and remains extremely vulnerable to an 'upside in price opportunity.'

"Given the low inventory levels, we believe corn will remain vulnerable to supply disruptions, particularly weather and disease, until the US harvest is complete in late October/early November,"​ said the bank.

Corn is used extensively as a raw material in the manufacture of starch. A complex refining process converts the majority of this starch into sweeteners, syrups and fermentation products, including ethanol. Refined maize products, sweeteners, starch, and oil are abundant in processed foods such as breakfast cereals, dairy goods, and chewing gum.

As the bank errs on the side of caution, the United Nations backed Food and Agriculture Organisation (FAO) yesterday raised its latest 2004 cereal output forecast by 29 million tonnes to 1 985 million tonnes, up from its previous projection in June 2004.

"The stocks of the major cereal exporters are actually seen to increase, so this will raise the buffer available for unexpected crop failures. International prices for most cereals have fallen since June, while international cereal prices in 2004/05 should be less volatile than earlier expected,"​ said Henri Josserand, chief of FAO's Global Information and Early Warning System.

The FAO went as far as to say in its positive outlook, 'global cereal stocks should be averted since world cereal utilisation in 2004/05 is expected to be 1 985 million tonnes.'

Soya beans are also key commodities for sourcing ingredients used in the food and beverage markets. But the 15 year highs for prices have squeezed the margins and sliced into profits for many ingredients suppliers and food makers operating into today's global market. However an increase in global stocks - by 1.3m mt for end of 04/05 - in the September WASDE​ pushed the global stocks-to-use ratio up by 2 days to 90 days.

The same picture as for wheat, Goldman Sachs warns that current prices do not adequately reflect the 'low level of US inventories or the potential for an early freeze' that could lead to a drop in the US crop. "We believe there is upside price opportunity at current levels,"​said the bank.

But in answer to China's vulnerable position on the world grain market, the government is now implementing measures to increase global production. Currently the goverment is trying to implement measures aimed at the better organisation of grain production, as well as plans to increase wheat produciton by 700,000 tons and an investment of $3.75 million to build a series of grain production bases.

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