The market for the 3 major cereals is very finely balanced

Let’s take a very careful look at what’s going on with the fundamental market indicators in the cereal grains market.

Prices dipped in the last couple of weeks and then recovered somewhat, the G20 gave birth to half-hearted ideas with the French sounding their usual ineffectual trumpet. The Russian lifted an export ban on wheat, US corn was thought to be in greater supply as the USDA reported perhaps prematurely on area. The Thai election, bringing in a radical pro-poor government, heralded price subsidies that could price Thai rice out of the market, and in the last few days, China has been buying corn.

That prices are historically high there is no doubt. We will not labour this point; the market dips and the media rush about saying that the food crisis is over. It isn’t. Looked at over the last 10 years, prices are not at their peak, but they aren’t far off it.

We should be looking at long–term, aggregate supplies of cereals in this market – perhaps not if you are a daily trader, but certainly if your interest is investment in agriculture or agribusiness where you would expect a 3 to 5 years payback period (perhaps a lot longer if the investment was in a more challenging country than Australia or North America.

Our aggregate supply-demand-stock balance shows that while supply and demand have crept up with demand inching slightly ahead of supply, stocks have dropped off sharply. Overall we think that major cereal grain stocks will be 20% of demand in the coming year; this is sharply lower than 26% for 2010/11 and lower again than the previous year. Only in 2007/08 when prices skyrocketed was the proportion lower still (18%). The market is very finely balanced with only about 5 million tones between supply and demand. This is a better projection than the negative 34 million tons last year that has drawn down stocks so sharply, but still with little room for production difficulties.

Corn has performed well over the period driven by the demand for bio-fuel and livestock feed – as the world’s economy has begun to recover, so have people consumed more high value meat and dairy products. Assuming the recovery continues, this demand isn’t going away. Wheat, of course had a bad year in 2010/11 and although production has recovered it still isn’t back to where it could be. As for rice, despite efforts to raise yields, it has shown the slowest rate of growth of the three majors.

Where does this leave us? Economic recovery presupposes more demand for carbohydrate, for humans, animals and to turn into fuel. Wheat has some capacity to expand supply and is a good investment. There seems no reason to believe that corn will get substantially weaker.

Rice presents a problem, however. The larger producers, China and India basically cover their own supply, so the internationally traded market is very thin – about 7% of production. The main exporters are the Mekong region countries (Thailand, Vietnam and Cambodia) and they have been having a bumper crop. However expansion of the Viet crop is limited by land area and Thailand’s new government may introduce policies that simply mean Thailand is priced out of the export trade. So rice is a critical variable in carbohydrates to watch going forwards.