At a recent feed grains outlook conference, the general mood might be described as neutral. Despite the big harvest of 2014, the feeling was that consumption will be big also and that price levels for the year ahead will be heavily influenced by production levels from the southern hemisphere crop and the prospects for next harvest.

The annual conference, organised by R&H Hall/Barnett-Hall/Precision Liquids, gives a good overview of world affairs to provide a balanced view of the plethora of factors that impact on both the supply and demand sides of the grain and feed markets.

One of the biggest changes in the global market is that there is now no big single driver of demand that will continue to expand consumption and keep supplies tight in the face of increasing production.

And, given the continuing upward trend in average global yield levels and the potential to further increase the planted area, output can be further increased in the years ahead. But this will only be driven by price.

For more than a decade now, bioethanol production provided an increasing demand for global corn production. This demand has now plateaued as the industry matures, especially in the US.

However, increased production will only happen when price levels support production on more marginal land and in more marginal locations and this is driven by the dynamics in the market. Extra acres will only be planted when prices are high enough to more than cover production costs.

China drives soya demand

China has an almost insatiable appetite for protein and that is reflected in its importation of soyabeans. Alex Miller, senior soya merchant at Cargill UK, explained its relevance.

China is a huge country with over 1.36 billion people and still growing. With a baby born every two seconds and a person dying every three seconds, the Chinese population increase is put at over 6.6 million annually.

Of the five big global soya importers, China alone accounts for 76% of this volume. By comparison, the EU takes a mere 12.3% of imports. China consumes 33% of the world’s soyabean production and imports about 63% of all traded soyabeans. Much of this consumption is used to produce animal feed and meat for its increasingly wealthy population.

Indeed, China imports more soyabeans than the third biggest producer (Argentina). It is also a significant producer of soyabeans itself, with roughly 14 million tonnes (Mt) annually. But much of this production is in northern regions, while much of the recently constructed crushing capacity is in the south.

These figures clearly show why China is so significant in the global soya market.

Alex suggested that it has the capacity to further increase consumption to about 103Mt from something over 70Mt currently. The migration of pig production from individual households, where they were fed with food waste, to large farms is part of the reason for this increased potential.

China now has a huge amount of crushing capacity for soyabeans, which has increased considerably in recent years. Alex said that the industry is supported by government, which also carries huge stock levels.

Severe famine in the years between 1958 and 1961 is still very much in the memory and explains the importance of food security in China. It is estimated that the state carries close on 30% of consumption in stock. This is also used to help control food inflation at times.

From a policy perspective, China continues to implement a 95% self-sufficiency policy for grains. Alex suggested this happening at the expense of soyabeans and that grains are seen as the more important staple. However, he feels that things are changing in China and wonders if the state is not as all-powerful as it once was.

With increasing GDP per capita, especially in the major cities, Alex believes that there will be more meat imported in the years ahead.

While this may still not dampen the enthusiasm for soyabean imports, it is making it more challenging for EU consumers to source product, especially quantities that are not pre-arranged.

Attitudes changing in Russia

Russia has been in the news for the past year for many of the wrong reasons, but it still remains a very significant producer of grain and especially wheat.

As well as being a big producer, with predictions that it would surpass 100Mt in 2014, Russia has become a very significant exporter in recent years, especially of wheat.

The volume that it has to export, and in particular decisions to ban exports to hold down internal prices, have impacted heavily on world markets in the past decade alone.

But things may be changing in Russia. Richard Willows is sales and marketing director at Black Earth Farming Ltd (BEF) in Russia where he has lived and worked since the mid-1990s.

He presented an overview of this 271,000ha farming business and the changing attitudes of Russians to exporting and international issues. The BEF land base is mainly owned, with about 40,000ha leased and some of this is currently under negotiation for purchase.

The farm operation is based in Voronezh and the land base is in four blasts. It is located roughly equidistant from the Black and Baltic Seas at a distance of roughly 1,100km.

Wheat is the main crop, accounting for about 33% of turnover. This is followed by sunflowers with 22%, corn at 12%, oilseed rape at 9%, sugar beet at 8%, barley at 7%, soya at 5% and the remainder made up 4% of turnover. There is currently storage capacity for about half a million tonnes of the 750,000t normal harvest output.

Rotation and fallow help to keep yields as high as possible, but yield in Russia is limited by climate and particularly temperature.

Farming is seen as a race against time and there are over 30 million hectares of land currently not used in Russia.

Land is seen as a declining asset if it is not farmed well and BEF is no longer farming its marginal land. Richard stated that the business is now farming less land, but doing it better.

There were a few other points worth noting. There is no forward or futures market for grain in Russia, so this adds to selling pressure at harvest.

There is also limited storage, so the period post-harvest frequently sees a lot of wheat exported. Up to recently, it was anticipated that Russia would harvest over 100Mt this year, but this now seems unlikely because of poor harvest weather in parts of the north of the country.

The fact that there is no forward selling (beyond a month anyway) and limited storage capacity are significant reasons why so much Russian grain is exported immediately post-harvest.

“Words are not worth much when dealing in Russia and there is no arbitration on broken deals,” Richard commented.

The country’s infrastructure is generally creaking and there is a real shortage of rail capacity to move grain. But there is new investment going on and this will help in time.

Richard also indicated that increasing internal demand for grain is changing attitudes to exports. Indications are that the government will confine exports to 27Mt this year and that this will shortly be met.

He said that the export market is now only relevant to growers in the south and that internal consumer prices are now about €20/t over export prices across much of the country.

He suggested that domestic demand will increase by over 4Mt in the 2014/15 marketing year alone. This is thought to be mainly for livestock production, but there are no official figures available for domestic consumption.

Like any other country, Russia does not operate in isolation. Richard indicated that the financial sanctions being imposed are beginning to hurt and it is having a big impact on currency value.

A lower ruble is good news for exporters in the short-term, but it also increases the cost base associated with imports in the medium- to long-term.

Finance is now costing 18% to 20% per annum for 11-month money – for those who can get it.

That said, Richard suggested that Russia is no longer willing to compete at any price on international grain markets and this may change the dynamic of global pricing.

In the past, it often heavily discounted its grain post-harvest to secure sales. Now most of this grain is needed internally and the era of cheap Russian grain may be over, Richard suggested.

At BEF, he has instilled a culture of segregation to meet specific market needs, coupled with an assurance scheme for customers.

He only markets BEF grain, with product going to home, Baltic and EU destinations. He told us that his biggest single customer produces around 1.5Mt of feed annually.

Richard feels that the future of farming in Russia is very uncertain. Access to finance could limit many plans and he indicated that the people now feel persecuted, but remain defiant of the west. Russians are a proud people and they are unlikely to yield to western pressure.

If sanctions limit food availability in supermarkets, the people will once again rekindle natural entrepreneurship and local, basic food will once again play a bigger role in feeding the people. The question is how long will the people tolerate this situation?

Cereal substitutes story

Only four years ago, citrus pulp was a commonly used feedstuff, especially in dairy rations. Today, it has been almost totally replaced by soya hulls. Philip Lynch from R&H Hall explained the recent dynamics of feedstuff availability.

Brazil and the US were the big suppliers of citrus, a by-product of the citrus crushing industry, mainly the orange juice sector. Orange crushing took place in July and August in Brazil and six months later in the US. These two periods largely filled the supply year.

In the 2010/11 production year, there was a fall-off in demand for concentrated orange juice, especially in the US, and this occurred in conjunction with decreased production following significant hurricane damage to groves in the US.

These factors, and others, combined to made it much more difficult to source citrus pulp.

The following year, logistics became messy in Brazil and transport costs increased. In that same year, soyabean export was given priority because of demand. Direct transport to Ireland ceased and the product became out-priced when sourced through Rotterdam.

In the same period, soya hulls have taken over in rations. These largely originate from Argentina and they are the by-product of soyabean oil crushing.

Argentina is the major supplier of both soyabean meal and soya hulls because the crushing plants were built around ports to facilitate exports from that country.

In the US and Brazil, the crushing plants are mainly in the countryside where the beans are grown and the by-products are fed locally. Brazil and the US mainly export whole beans.

One tonne of whole soyabeans produces 720kg of soyabean meal, plus 220kg of oil, plus 60kg of hulls. So it takes just over 350,000t of soyabeans to produce a 22,000t shipment of hulls.

As the meal and the hulls originate from the same plant, it makes sense to have them loaded and transported on the same ship.

At the moment, soya hulls are difficult to source because Argentinean farmers are slow to sell beans as they are using their stocks as a hedge against the country’s high inflation level.

It takes nearly one month to get a shipment delivered and spot orders can take much longer as the beans have to be encouraged off farm for processing.

The island of Ireland is a significant consumer of hulls, taking 25% to 30% of Argentinean exports. So there is a great need to be organised to help prevent supply problems, Philip stated. It is also a concern that we really have only one supplier of hulls and this presents a risk in itself.

Post-ethanol hangover

“We are in a post-ethanol hangover” was how Dan Basse, the president of market analyst company AgResource, described the current market situation.

Demand for corn for bioethanol production drove markets for over a decade, but now this market is mature and the emphasis returns to food for the foreseeable future. For the moment, there are no new demand drivers to help prices.

Dan indicated that any additional demand in the years ahead will most likely originate from developing countries. He stated that the population in the EU is set to fall by 50 million people up to 2040, with Japan and Russia set to decrease by 24 million each, while China will increase by 125 million during the same period.

That said, Dan believes that the price lows of the current marketing year are behind us. Strong demand helped relieve harvest pressure and consumption has responded well to lower prices.

He indicated that the US is exporting its big grain stocks and that this will leave more scope for prices in the coming year. However, for the moment, he sees US growers opting to grow more soya acres and less corn acres in the year ahead.

One significant change in the US has been the return to oil exports. While bioethanol is now regarded as a mature market, new technologies have helped to release significant energy reserves in the US, which is now expected to reach self-sufficiency in oil by 2019. This is changing many things, not least the cost of oil and energy worldwide.

Within the US, the transportation of oil is bringing some additional challenges. The rail system cannot cope with the volumes of fuel and agricultural products at the same time.

This is resulting in increased transport costs along with delays in getting grains to port. “We have become Brazil,” Dan joked, in reference to the logistical problems encountered in Brazil a few years ago.

There is now an ongoing debate in the US with regard to constructing a pipeline infrastructure to transport this oil. The need is unchallenged, but there is considerable opposition on the ground regarding its construction. The question is, what will the politicians decide?

“We are not yet at peak oil,” Dan stated. “Nor are we at peak agriculture.”

There are still many areas of the world which can come into agricultural production, but many of these will only be economically viable when prices are high.