Monday, February 1, 2010

Global Grain Stocks are at an Eight Year High


Note: Updated story from Sept. 2010 here Stocks-to-use Ratios of Rice, Wheat, Cereal and Coarse Grains with a discussion on Food Security September 2010

Last week, with the regular weekly agricultural economic and sustainability news update thread, I discussed the article which I had just contributed to over at Seeking Alpha which stirred up a hornet's nest, titled "Jim Rogers, The World Is Not Short of Grain." If this subject of grain stocks interests you, and you haven't read it, please do. There are now 41 comments, including one from Jim Rogers. My purpose of writing on this subject again today is to clear up some unfinished business in the way of responding to some questions and article references which were posed to me.

The premise of my article was to try to lay out my macro economic view as it would relate to agriculture, especially in light of the January USDA reports showing record grain harvests in the U.S. as well as global stock levels. I covered related issues in reasonable detail in the Seeking Alpha article linked above and will not restate them here. After the article was published, I continued to have a discussion with commenters at the Seeking Alpha site and also posted a few comments over at The Oil Drum, a blog which discusses the energy issues of our time.

In my favor, was the fact that in 2009, I wrote a total of five articles bearish on agriculture and farmland prices, based upon my macro economic deflationary view of the global economy. These views were contrarian to a prevailing attitude of agriculture bullishness and met with some mindsets who chose to ignore the macro economic picture's affect upon agriculture. My impression is that many investors have viewed all agricultural related investments to be sacred and guaranteed. I feel they have a big surprise coming. With recent falls in agricultural commodities and farmland prices, my contrarian viewpoint so far has come true. Here are links and dates to the five articles from 2009:
There is also a subset of pessimists who have decided that USDA data is unreliable, but the fear-mongering article not backed by any factual data is reliable, Catastrophic Fall in 2009 Global Food Production by Eric de Carbonnel, as well as the USDA basher by By Michael Hampton – To him, I'll just say that my own farm community, where I grew up in the Midwest verifies record harvests this past season in spite of a very difficult, late, wet harvest. For those doubting the January production report, however, the USDA is continuing to collect data for a revised report to be released in March, reviewing and refocusing on crop amounts yet unharvested.

And, I received this email from a fellow blogger friend who wrote this very insightful note:
.......rather than debate the accuracy of U.S. Government stats (it's a given they can be pretty poor), I merely point to Ag Futures prices. They're not doing much - end of story. I used to work on the CBT floor. The private forecasters are big business. Their surveys are extremely thorough. If there were shortages looming, they would know and prices would be rising. Accumulating futures positions in Ags will move the market as they're relatively small.....The Rogers trade is a demand growth story - 75 million (and growing) net new mouths to feed per year. But as you point out, a deflating environment will reduce demand for the number one consumer of grain - livestock.

My first order of business, following last week's note, is to add data from some additional references other than the USDA concerning global grain stocks. I will keep summaries brief for the sake of simplicity of reading and provide links for those wanting more detail. Keep in mind that each data providing organization has its own problems and limitations and sources overlap. Since conclusions are very similar from the organizations, I'd guess the overlap is considerable.

1) FAO (Food and Agriculture Organization of the United Nations based in Rome): Forecast for global cereal stocks (dry grains) the end of 2010 is to reach an eight-year high. From this FAO report:
Based on the latest estimates of cereal production in 2009 and the anticipated utilization in 2009/10, world cereal stocks by the close of seasons ending in 2010 is forecast to reach 509 million tonnes, the highest level since 2002. This forecast is around 4 million tonnes higher than in the previous season mostly on account of a continuing increase in wheat stocks. At the current forecast level, the ratio of world cereal stocks to utilization, an important indicator for global food security, is expected to approach 23 percent, nearly unchanged from the previous season's level and slightly higher than its 5-year average.

2) EPI (Earth Policy Institute, Lester Brown): Grain stocks show that we are at an eight-year high. They claim we have 77 days of consumption, a seven-year high level. Levels were lower in the early '70's.

3) The International Grains Council: World grain stocks at the end of 2009/10 are projected 12m. tons more than previously, at 385m., an eight-year high.

4) USDA: World inventories of corn, soybeans, rice and wheat at 482.3 million metric tons this year, up 8.3 percent from the prior year, according to the U.S. Department of Agriculture.

Most interestingly, in a 2009 FAO report by David Dawe, he lays out some of the complicating factors of obtaining reliable global grain stock data. He goes on to explain how China's huge draw down of stocks during this past decade skewed the data to suggest that stock to use ratios were approaching dangerous levels, when in fact, by removing the China statistics, the data appeared quite normal. From the FAO December 2009 Food outlook, The agricultural market situation today is different from that of 2007/08. World cereal stocks are at far more comfortable levels than they were two years ago, with the stock-to-use ratio at almost 23 percent, 4 percentage points more than at the time.

As you can see in the following January, 2010 FAO food price chart, cereal prices have been relatively flat for the past two years.

Now, it's time to review Jim Rogers 1/15/10 CNBC comment. . .

The fundamentals (for agriculture) have gotten better. The inventories are now at the lowest they've been in decades, not in years.

'Nuff said.

As my previous writings have concluded, I will reiterate that future grain production and prices will depend upon the following, and that each year or group of years may find one or two factors which predominate in importance:
  • Weather
  • The Dollar's value
  • Energy (crude) prices
  • Input costs
  • Governmental Ag policies
  • Demand
  • Trading practices, Markets
  • Interest Rates, credit availability
  • Global Macro economics
In the end, I have to marvel at how this fragile and complex system works together as well as it does each tenuous year. Don't get me wrong. I critique and review and cover the news of the shortcomings each week here. But, for this once, I'd like to step back in amazement at these mind boggling food supply numbers and recognize the people who work together so diligently to accomplish this annual, astonishing feat of producing the world's food.

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