December 17, 2003
European Union Feed Wheat and Corn Review
Executive Summary
In Marketing Year (MY) 03/04, drought and dry conditions reduced the EU-15 wheat harvest to less than 92 metric million tons (MMT). Total EU-15 coarse grain production in MY 03/04, is estimated to have fallen to 92.5 MMT, to give a total EU-15 grain output of 184.2 MMT.
In 2002/03, EU-15 wheat output was 103.7 MMT, and a coarse grain output was 105 MMT, to give total grains output of 208.6 MMT. This was combined with a high level of wheat imports. Wheat imports totaled over 12 MMT, notably from the Black Sea region and lead to a higher use of wheat as feed, up over 15% from 01/02 and record wheat exports of 16 MMT.
The dramatic reduction in domestic grain availability during MY 03/04, with production declining by 24 MMT compared to the previous year, has pushed prices to high levels, and combined with the Euro's strength against the US Dollar, reduced expected EU exports in MY 03/04 to 8 MMT for wheat and 4.5 MMT for coarse grains.
The European grains balance sheet is currently tight, with continued strong domestic prices seen continuing until the new season crop becomes available in the Summer of 2004. The European Commission's response to the tightness on grain markets has been to suspend export subsidies and slowly release intervention stocks onto the domestic market during the course of the year. Whether this will be enough to keep prices in check and provide sufficient domestic grain availability remains to be seen over the next couple of months. It is reported that French feed manufacturers' requirements are essentially uncovered after January or February. Based on the current market situation, the European Commission are not expected to make any important policy changes to alleviate the situation.
Instead, it is expected that the high prices available on EU markets will encourage the imports of grains, including over 2 MMT of wheat and around 1 MMT of sorghum from the US, as well as a 2.4 MMT increase in corn imports to 5.4 MMT in MY 03/04. This would be sourced mainly from South America and could even include some shipments from China. This estimate does however rely on there being sufficient quantities of non biotech corn being available. The EU will not however be importing anything but minor quantities of US corn as not all the biotech varieties used in the US are permitted to be marketed in the EU.
Stocks, both public and private will be drawn down heavily during the 03/04 MY, with EU-15 grains stocks falling from 33 MMT to 19 MMT. The European Commission has announced reduction in set-aside for 2004/05 from 10% to 5% in order to stimulate EU grains production in 04/05. This measure is tentatively expected to increase EU-15 grain production by 5 to 7 MMT in 04/05.
A good harvest in 04/05 would serve to replenish depleted stock levels. With stock levels low, any bad news for the 04/05 production outlook will be likely to create nervousness on the markets.
The situation in the New Member States (NMS) of central and eastern Europe is also of poor harvests and extreme tightness in domestic balance sheets. Poland has an estimated 2.5 MMT feed grain deficit, though with domestic prices currently lower than those in neighboring countries, it is difficult to see this deficit being plugged without important policy or market changes.
WHEAT
2003/04 Production
A severe drought from late spring through the summer lead to reduced EU-15 wheat output. The drought and allied heat wave particularly impacted on production across the 'South' of the EU: Portugal, Spain, France, Italy, Austria, and Greece.
The French wheat crop in 2003/04 was below average due to some winterkill resulting from winter frosts, coupled with a dry spring and the only summer rainfall being in may to early June. This has lead to a high quality crop, with higher than normal protein levels, averaging 11.5% to 12% and up to 14% averages in some areas.
Across parts of central Europe (Germany, Poland, Hungary, the Czech Republic, Austria and some parts of France) very cold conditions during the winter lead to higher than usual levels of winterkill. Following the record crop in 2002/03, wheat production was down by 8 to 9% in Germany for MY 03/04. In Austria, some winter kill combined with a severe drought combined to reduce soft wheat yields by 19%. However, this was partially offset by hard wheat yields rising 29% and a small increase in area planted to hard wheat varieties.
In Northern Europe, the same dry and sunny summer conditions helped to produce an average crop in the UK, and Scandinavia, while the Netherlands recorded a record crop.
In Italy, imports are set to exceed domestic production during MY 03/04. The durum crop is generally poor due to excess rains during the 02/03 winter, particularly in southern Italy.
New Member States
A poor wheat harvest in Hungary is leading to considerable tightness in Hungarian markets. In line with neighboring countries, Polish grain yields were impacted by the weather conditions, with overall grains yields declining 12% year on year, 15% for wheat.
Wheat production in the Czech Republic for MY 03/04 declined to 2.6 MMT a fall of 800-900,000 MT over the two previous campaigns. Over-production in these two years had lead to reduced plantings for 03/04 as well as the impact of flooding in the winter of 2002 and higher than typical winter kill levels. This lead to a 40% drop in winter wheat production offset partially by increased spring wheat.
Consumption
During the MY 02/03, feed consumption of wheat was boosted by substantial imports of wheat from the Black Sea region as well as good domestic availability. However, for the MY 03/04, an 11 MMT drop in EU wheat production to 92 MMT, as well as very poor harvests in Russia, the Ukraine and the countries of central and eastern Europe has reduced the availability of wheat. This is coupled by with a 9 MMT reduction in EU corn output in MY 03/04.
Therefore, feed consumption of wheat is estimated to decline from 47.3 MMT in 2002/03 to 43.5 MMT in 2003/04.
In France, the higher prices resulting from the poor harvest will lead to reduced exports and decreases in both feed use and a running down of stocks.
In Spain, consumption of feed wheat is set to decline dramatically in 2003/04 due to high wheat prices, from 6.5 MMT in 02/03, to 4.5 MMT in 03/04. Feed wheat is expected to be replaced partly by sorghum from the U.S., Corn, some non grain feed ingredients (NGFI) and improved pasture conditions reducing some feed requirements, particularly in the extensive livestock areas where over 23 m sheep 3m goats and 2 m cattle are farmed. This is due to Fall rainfall being 50% higher than normal, encouraging very good grass growth.
German feed use is set at 9 MMT, and can be defined this year as a 'protein feed' with protein levels up to 14%. What would have been milling wheat is going to be used as feed wheat. However, demand for quality wheat remains strong in Germany, with roughly 40% of the crop of 'A' quality. Selling opportunities for this class of wheat are often better.
The UK feed sector is characterized by high prices for feed and feed substitutes, coupled with high freight rates. This may lead to increased on farm feed consumption, particularly as high levels of forage have already been used up due to the dry summer.
In the Netherlands, it is also expected that more rye, barley, sunflower meal (including 0.5 MMT from the Black Sea region) and soymeal will be incorporated into feed use. There is a question mark over whether corn gluten feed will be used in fee.
Trade
The level of exports from France depends on the evolution of the Euro exchange rate, it may however be that some of the expected exports go to feed rations domestically. Some wheat will probably be exported to Italy and Spain. Currently, Belgian imports from France appear to be continuing at a typical pace despite the high prices.
Spain has already imported 300k US wheat so far this season, with a similar quantity expected between now and the end of 03/04. Of this, most is high quality wheat plus around 60,000 MT of soft red wheat.
In Germany however, prices are firm and rising. The trade expects the current strong price outlook to last until at least early in the new year when southern hemisphere crops become available. German imports are predicted to decline by 350k due to the lack of supply, as traditional suppliers to the German market do not have any export availability. Exports are expected to fall by 1 MMT year on year, though there is a notable increase in exports to the Benelux as yields in the Länder next to these countries were particularly favorable.
In the UK, imports are expected to fall slightly due to the quality of some of the domestically produced crop, though there remains a demand for imports with specific characteristics so the UK import figure could be revised up slightly.
February is seen as a key period for price expectations for the remainder of the 03/04 MY as the size and quality of the Latin American and Australian crops become known, expectations could also be impacted by winter developments in the Black Sea region. Currently, shipping costs from Australia would preclude imports from this source, which could encourage the current high wheat and feed prices to persist for longer at these levels.
During the 02/03 MY, much feed quality wheat was imported into Italy from the Black Sea region, including over 1 MMT in the first half of 2003. This exceeds the normal feed requirements, so it is likely that some of this will be consumed during the 03/04 MY. For the rest of Italian feed wheat requirements, these are expected to be sourced intra-EU. Corn gluten is generally seen as too risky to import due to Italy's ban on even approved varieties of biotech corn.
Austrian exports are expected to decline due to the low availability of domestic feed grains. Imports have also declined due to the lower availability in supplying countries Hungary and the Czech Republic.
Hungarian exports are expected to decline to 700,000 tons for 03/04. The Hungarian government has reportedly been considering an export ban for grains, though it is considered unlikely that they will implement this. However, local markets report that wheat and corn are 'evaporating', being exported truck load by truck load. Farmers are holding on to their grain supplies with little grain available on domestic markets. It is expected that some good quality wheat and corn will be exported to neighboring countries, replaced by low quality feed grain imports. The price sensitivity of domestic users favors the use of the cheapest grains that can be sourced. Exports from the US to Hungary are considered unlikely at current prices as the cost of transshipping from Adriatic ports to Hungary is approximately $35 to $37 per MT.
For the Czech Republic, exports are expected to decline in 03/04. So far in the MY, 55,000 MT are reported to have been exported, with little more expected during the rest of the year due to domestic scarcity of feed grains keeping prices high. In addition, due to its landlocked geography, there is a certain degree of isolation from international markets due to high transport costs. Trade sources indicate that while prices have recently risen to around €125 for milling wheat, though price expectations for Spring 2004 are around €140. This figure is based on the expectation that no changes to government policy will occur. Should any form of export restrictions be imposed then prices are more likely to remain at their current level.
As with Hungary, small-scale exports from the Czech Republic may be taking place, grain that will need to be replaced, though wheat from the Americas would be expected to cost around €170 once all transport costs have been included.
During the 02/03 MY, the Polish government held stocks had been depleted due to the Polish Agricultural Markets Agency selling wheat stocks to raise capital to fund intervention on meat markets. Reduced production combined with low stocks have created a deficit of at least 1 MMT of wheat, though some in the trade argue for a figure closer to 1.7 or 1.8 MMT. The expected total grain import requirements for Poland in MY 03/04 could be as high as 2.5 MMT.
However, as prices are currently lower in Poland than in neighboring countries, with domestic prices of feed wheat around $150/MT (roughly €130/MT). Currently, corn is $140/MT, oats, $130/MT and rye around $110. In addition there is still a 20% import tariff on grains, though it is expected that the Polish government will probably introduce a temporary tariff reduction or tariff quota. It is also within the realms of possibility that a Polish export tax for grains could be introduced. The source of the import requirements is difficult to assess, with North and South America the most likely suppliers.
Stocks
During the MY 02/03, wheat stocks rose by some 2 MMT to 13.2 MMT due to the substantial domestic availability of wheat. The massive decrease in grains in the EU during MY 03/04 will lead to a stock draw down, currently estimated to be at least 4 MMT down to an ending stocks figure of 8.7 MMT, though several countries report that the eventual ending stocks could finish the MY at an even lower level. ONIC, the French cereals agency, currently forecast the closing 03/04 French wheat stocks at around 1.5 MMT. This would be at the lowest level since the late 1980's. In Germany, stocks are expected to be reduced by at least 900,000 MT to 2 MMT, though the final figure could well be lower.
Price expectations in France for wheat towards the end of the MY 03/04 are €180, followed by a sharp run down in price as the 2004 crop comes on line in the summer of 2004, assuming normal conditions. This could see a drop in the domestic wheat price back down to a more typical €110 level. Under these conditions, there is no advantage to holding stocks so they are expected to be reduced.
In both the UK and Belgium, stock levels in the summer of 2003 were at high levels, and are expected to be reduced. Belgian stocks in July 2003 were reported to be around 0.75 MMT, around 0.5 MMT more than the usual level. Italian stocks were also reported to be at high levels due to imports of Black Sea wheat exceeding feed requirements during the first half of 2003.
CORN
The hot, dry summer across much of Europe impacted heavily on corn production, with output falling to 30.2 MMT in MY 03/04, a decline of over 8 MMT year on year. Although, the summer weather conditions only had a marginal impact on the 03/04 Spanish corn harvest.
The corn harvest in France fell substantially, to 11 MT in MY 03/04. Over 200,000 ha. of corn was cut as silage during the summer of 2003. The poor harvest will lead to a reduction in feed use and lower levels of exports. The French ending stocks for 02/03 were zero. Old crop had been fully used up as the new crop started to arrive several months early due to the exceptional weather.
While official German corn production numbers are still at 3.4/3.5 MMT, production is pegged at 2.5 MMT due to the severe damage from the drought and some corn being cut as forage/silage.
Italy has a corn deficit. In the PSD, it is assumed that Italy will import 700,000 MT from intra-EU sources and the same quantity from extra-EU sources, however, it is far from certain that these quantities will be imported. In particular, there are doubts as to whether non-GM corn can be imported from Brazil. As some 60% of the feed ration is corn there also remains scope for replacement with other feed. During 02/03, there was a decline in Italian feed consumption of corn due to it's replacement with feed wheat from the Black Sea region. In addition, demand declined due to an 11% drop in poultry numbers.
Spain's import requirements for corn over MY 03/04 are predicted to be 2.25 MMT, of which 1.5 or 1.6 MMT will be under the abatement system. The shortage of French corn this year will encourage imports from South America at full duty. A shipment of Chinese corn has also been received during the current marketing year. However, wet millers need GM free corn, which is likely to be sourced from France, Brazil and some certified GM free shipments from Argentina. The premium for non GM corn over GM corn is around $15 per MT. By the time testing and other higher costs such as segregation are taken into account, GM free corn costs around $20 extra. In Spain, there are 37,000 hectares, or 8% of the corn area, planted to Bt Corn. It is reported that farmers who have planted GM corn are happy with the results so far.
With a UK import demand estimated to be almost 1.5 MMT during the 03/04 MY, it is felt that the demand is strong so could draw corn away from other markets due to the general scarcity on intra-EU markets due to the French drought.
Demand in the Netherlands for corn is significant, particularly from the poultry sector, however, due to the scarcity of French corn, Argentina and possibly China are being looked as likely sources. Argentine corn has been imported before and the GM issue is not considered a problem as most of the GM varieties used in Argentina have already been approved for use in the EU. Likewise in Belgium, imports of Argentine corn are expected to occur later during the year.
In Austria, the drought and consequent poor harvest have lead to a domestic deficit of roughly 300,000 MT for the 03/04 MY. This is expected to lead to up to 200,000 MT imports from the neighbors to the east, if it can be found.
New Member States
In Hungary, the area planted to corn continues to remain at a stable level of 1.1 M ha., however, this year's crop was poor owing to adverse weather with production at 4.6 MMT compared to levels of 7 MMT recorded several years ago. Imports are negligible, apart from some hybrid seeds. Exports are expected to be around 0.5 MMT. There remains, however, a shortage of feed grains in Hungary and the government has been mulling over an export ban (up to May 1st 2004).
The western corn borer is a real problem in parts of Southern Hungary. Crop rotation is an important tool to tackle this problem, however, some family farms are unable to rotate due to economic pressures thus exacerbating the problem. Hungary has adopted a conservative approach to GM technology with little desire to risk the positive reputation of Hungarian corn on EU markets.
In the Czech Republic, the area planted to corn continues to expand rapidly, rising from 70,000 hectares in 2002/03 to 78,000 hectares in 2003/04. Bt corn has been approved for field trials as well as having been approved for release onto the Czech market. It is likely that approval for plantings will be granted in three years on conclusion of the field trials.
Polish production remained more or less unchanged from 02/03 at 1.9 MT, though area planted in 03/04 had risen and yields fallen due to the drought. Polish corn production has also been rapidly increasing over previous years, as with the Czech Republic.
There is still significant demand for feed corn on polish markets during MY 03/04, with an estimated import requirement of 350 to 450,000 MT. It is, however, not at all clear where these requirements can be sourced from if at all. If corn is unavailable then estimates of imports of other feed grains will need to be raised accordingly. The overall feed grain import requirement is currently estimated at 1.5 MMT for MY 03/04. As BT Corn is the only GM variety approved in Poland, this will restrict the range of countries Poland is able to import corn from.
EU Feed Grain For 2003/04
The decline in feed grain availability in the EU during the 03/04 MY is reflected in the drop grain use for feed from 123.2 MMT in 02/03 to 118.1 MMT. Increased imports of NGFI such as tapioca, as well as increased use of oilseed meals should help to offset the reduction, though the table also serves to reflect the tightness in EU grain balances this season.
Feed use in the Netherlands is estimated to fall from 3.2 MMT in 02/03 to 2.8 MMT in 03/04.
For the New Member States, Poland has an estimated 2.5 MMT grain shortfall, Hungary and the Czech Republic both have extremely tight balance sheets with some need for imports and a risk of seeing current domestic supplies literally evaporate out of the country 'truck by truck'.
Source: USDA
