Feed ingredient supply and the futures markets

We live in a truly amazing and rapidly changing world – and for many of the older generation, things change far too rapidly, writes Stuart Lumb. Twenty years ago commodity price movements were, on the whole, relatively minor. At the time we had intervention stocks to fall back on when crop production problems occurred around the world.

Today, however though, political crises, currency fluctuations, abnormal weather patterns are flashed round the globe at the touch of a button making commodity prices far more volatile. Thirty years ago China and India were relatively small players in the market, but as their populations and spending power has dramatically increased, so has their footprint in the commodities market.

Speculators have also joined the markets, as alternative investment to stocks and shares. This results in any price moving factors being pounced upon, and the resulting price movements being more rapid, and often overdone.

Tony Bell is raw material director at BOCM PAULS and he gave the audience at a recent meeting of the South of The Humber Pig Discussion Group a fascinating insight into the world of commodity trading.

“The much tighter world supply and demand situation, with much lower world stocks, and speculator interest, can result in prices moving more in a day, than we use to see in a year,” he told the audience”

In the past, the EU used intervention buying to maintain a strategic reserve of wheat, but that policy was no longer in place, he explained. Stocks were much tighter now, and at the end of this crop year, it’s estimated there will be only 11 million tonnes of wheat held in the EU.

In practical terms we need probably 10 million tonnes to keep production going, so the available stock is probably no more than one or two million tonnes. That’s not much if harvest is delayed by a few days.

Mr Bell said that some major nations did still have a policy of holding strategic stockpiles of grains. China has 60 million tonnes of wheat and soya, while India has 20 million tonnes of wheat as a buffer.

Sometimes issues arises that push prices further in one direction than would be expected. Throughout this year, the political situation in Ukraine has put life into the market, pushing prices up by £16-17t at one stage, although these concerns have now all but subsided.

Mr Bell said the cure for high prices was high prices. Last year’s high wheat and corn prices had resulted in greater production this year and brought values down again. World production forecasts for 2013/14 were much higher than 2012/13.

Last year in the US there was less corn available and so more wheat was used in feeds, quite unusual for compounders in the USA. This trend was likely to be reversed as forecasts for the maize crop in 2013/14 indicated an 80 million tonnes increase compared to 2012/13.

A lack of rainfall at critical times of the year – or the opposite – could seriously affect raw material tonnages and their pricing, Mr Bell ponted out. In the US two years ago the worst drought in 50 years, at critical time for maize and soya crops, caused a doubling in prices. This year, a dry winter is gave concern over the development of the crops, but again these concerns have subsided and record crops are no the cards.

Two years ago also saw the largest ever drop in soya bean meal production as a consequence of a major drought in South America and reduced plantings in the USA. Production is now back to normal levels, but demand is at record levels, with China a major player.

China imported 68 million tonnes of soya last year, which was 15% up on the previous year. This also represents 39% of the world crop – well ahead of the EU at 21%; US at 20%; and Brazil at 11%. Put another way, China’s demand is nearly equal to the EU and the US combined.

China’s standard of living is rising. The Chinese love their pork and chicken, and with increasing living standards demand continues to increase. There are concerns about the current economic impact of a slowing in the Chinese economy. That said, this will only affect the growth rate of consumption, rather than cause any fall in demand.

Soya and South America are synonymous. The situation in Argentina is fascinating as there are eight million tonnes of beans in store, on farm. The reason for this situation is that there is a 40% tax levied on exports, making farmers naturally reluctant to sell. Another contributory factor is that Argentina is suffering horrendous Inflation – 30-40% – therefore these huge stores of soya are a hedge against inflation.

Supply and demand drives the market prices, and the best and most analysed estimates come from the USDA’s monthly WASDE reports. These are eagerly awaited by the trade and speculators, and can directlt affect market prices.

Mr Bell closed by saying there’s never a dull moment working in the commodities markets. There’s always something unexpected that drives prices in one direction or another.

Views can change regularly as new information arrives that will impact on production or demand – on a worldwide basis. It’s an interesting role for those involved in buying raw materials, but not always for the faint-hearted.

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