Not much optimism from HGCA markets conference

By Andy Doyle

"Not much joy'' might be the best few words to sum up the general feeling from the recent Home Grown Cereals Authority grain markets outlook conference in London. A big Eastern European harvest coupled with a large carryover of stocks from last harvest serve to keep pressure on prices for the year ahead. But there may be some uncertainties that add hope.

HGCA senior economist, Julian Bell, reported that feed wheat prices in the UK were similar to last year but that milling wheat and malting barley prices were lower. This situation was somewhat similar around the world but unlike 2004 world production of grains is expected to fall slightly below consumption resulting in a small reduction in stocks.

Stocks versus prices

In his presentation Julian asked if we could continue to have low prices with falling world stocks? There is no answer to this question except to state that availability is the only real driver of price. The world has become so accustomed to low priced markets that they are now taken for granted.

Farmers of the world have always delivered an adequate grain harvest except for the occasional blip caused by nature. For this reason it will take a continued period of low harvests and stock draw-down to restore prices to a level that makes sense to farmers worldwide. The question now is, ''Will farmers around the EU begin to negotiate by their actions rather than by their words?''

New market drivers

The mood of the meeting suggested that higher prices could become a reality. And some believe that this is possible sooner rather than later. World demand and consumption continue to rise, as does world population. But the greater market pressure in the short to medium term must be the demand for biofuels. Two years ago the International Grains Council predicted that world demand for biofuels could be as high as 200 million tonnes by 2010. One might now predict that this could well be exceeded as many parts of the world scramble to offset the effects of increasing oil prices.

But what if oil prices fall again - will this remove the biofuels market? One commodity trader I spoke with after the conference is of the firm view that it will not. While the supply of oil is likely to be at or past its half way point the demand for oil will continue to increase. Leaving aside the need to 'fuel' growth in the developed world the improving economic situation in many of the densely populated Asian countries brings a new challenge.

It is a definite ambition of many millions of people in these countries to be able to afford and drive a motorised vehicle. Demand from this latter source alone will put pressure on the world's ability to supply, even ignoring the fact that this is a limited resource. For these reasons renewable fuels will have to form part of the future of land use.

This new demand for product or alternative land use will force a realignment of agricultural product prices. As long as people are prepared to pay for fuel and this land use is more profitable than food production then the most valuable product to the producer will win out. Taking this to its natural conclusion food prices, certainly ex-farm food product prices will have to rise to secure supply. This is beginning to happen in the grain sector in this country.

"Increasing farm gate prices will be resisted by vested interests but they will not be able to keep out the tide forever. At this point the world's traders will have to learn to trade again'', my trader friend commented.

"In the past few decades supply was secure and the opening up of world markets basically put a price equilibrium across the globe. As a result trading tended to be, not of the product itself but of the logistics of getting it from 'A to B'. In the future trading will be about securing supply with two different market segments vying for supply. Roll on that day.''