Food industry to see relief in commodity price pressures?

Related tags Maize Wheat Us

Increased harvests for key food commodities could suggest a
near-term easing up of price pressures for ingredients companies
and food manufacturers but an overall draw-down in global stocks
means prices are still extremely vulnerable, writes Lindsey

The August WASDE (World Agricultural Supply and Demand Estimates) report​ released last week by the US government suggests that wheat, corn and soy stocks should rise significantly this year on the back of improved harvests across the globe.

"At 609 million tons, this year's global wheat crop is second only to the record of 610 million tons set in 1997/98,"​ claims the report. Compared to last month, projected production is up 3 million tons in China, 1.3 million tons in the EU-25, and 1 million tons each in Canada, Russia, and Ukraine.

But despite the increase in projected ending stocks for 2004/05, wheat stocks are still extraordinarily low by historical standards and set to remain at a level not seen for nearly 30 years.

"The short term situation overrides the slow stocks because competing suppliers will bring the price down, but price pressure will soon start building up for the next season because wheat stocks will not have been dramatically rebuilt,"​ Julian Bell, an economist at the public UK-based Home Grown Cereals Authority told

Food makers and ingredients firms across the world have been affected by rising prices for basic food commodities. In each of the last four years world grain production has fallen short of consumption, forcing a draw-down of global stocks for wheat, rice, corn and soybeans. Soybean prices recently hit 15-year highs and wheat and corn 7-year highs.

But according to Bell, European bread wheat prices are currently 30 to 40 per cent cheaper than the same time last year - "undoubtedly Europe is seeing a relief in prices"​ - suggesting savings are on the way for the food industry, even though uncertainty over next year's supplies hangs over current and near future prices.

Despite the largest projected US corn crop in history the US report said that the global stocks-to-use ratio for corn is also expected to be at a 30 year low, as stocks draw for the fifth consecutive year.

"Given the low inventory levels, we believe corn will remain vulnerable to supply disruptions, particularly weather and disease, until the US harvest is complete in late October/early November,"​ said investment bank Goldman Sachs in a report this week.

Corn is used extensively as a raw material in the manufacture of starch. A complex refining process converts the majority of this starch into sweeteners, syrups and fermentation products, including ethanol. Refined maize products, sweeteners, starch, and oil are abundant in processed foods such as breakfast cereals, dairy goods, and chewing gum.

Soya beans are also key commodities for sourcing ingredients used in the food and beverage markets. But the 15 year highs for prices have squeezed the margins and sliced into profits for many ingredients suppliers and food makers operating into today's global market. However an increase in global stocks - by 3.2m mt and a 7 per cent rise on last month's WASDE estimate - could equate to a relief in prices.

"Overall, the estimated global stocks-to-use ratio rose by 6 days to 88 days, which would be the highest level in 18 years and the second highest on record,"​ reports Goldman Sachs, that added it had argued for several months that soybean prices "were too high given the robust global stock levels."

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