Commodities & Futures: Surplus of grain looking more likely

GRAIN crop prospects look good worldwide, especially in the United States and several of the other main exporting countries.

China, one of the largest importers, is steering clear of the market for the time being, apparently hoping to buy in later at lower levels. Another, the former Soviet Union, is expecting a much bigger harvest of its own this season - and therefore sharply reduced import needs.

Although the crop outlook for Russia and the Baltic states has recently deteriorated slightly, there has been an offsetting improvement in Kazakhstan.

The London-based International Wheat Council - which is warning of possible serious repercussions for exporters if Russia does achieve self-sufficiency by 1995 - is forecasting a world production surplus in the 1992-93 season, which began last month. So, too, are the United Nations Food and Agriculture Organisation, the US Department of Agriculture and other leading analysts.

There is, of course, plenty of time for the weather to play havoc with crops - and projections. The FAO warns that any sudden deterioration, 'such as a poor monsoon in Asia, could still put global food security at risk'.

Yet, with perhaps the second- biggest world harvest ever in prospect, the message for the market is that there is likely to be too much grain around in 1992-93. With big importers on the sidelines, or forecast to cut purchases, prices have inevitably been tumbling.

Matters for wheat, moreover, have not been helped by the big rise in the European Community's carry-over stocks from last season, which probably left it with larger inventories of the grain than the US for the first time.

So far, however, wheat prices are still well up on the lows touched last year, but not so those of maize (corn). They have been undermined by recent developments in the US, which - because it accounts for about 40 per cent of global maize production, but 70 per cent of all exports - is the main influence on the market.

This year, the US could have a very big crop of maize and soyabeans, with possibly a record harvest of the former, some say. So maize, which at under dollars 100 a tonne is already priced well below wheat, may become even cheaper.

As a result there could be a return to the normal trading pattern in the feed market, which would mean a cut in consumption of wheat and therefore additional downward pressure on its price, according to traders.

But if the short-term pointers to grain prices are generally bearish, so is at least one potential longer- term factor. This is the threat of shrinking export outlets if the former Soviet republics, now in control of their own grain sectors, can boost domestic production.

In a recent detailed study, the IWC said that if Russia alone achieved its 'ambitious target' of grain self-sufficiency this would have a 'pronounced effect on world trade patterns'. Success, it concluded, 'would very much depend on the modernisation of production techniques, a considerable improvement in transport infrastructure and an efficient procurement system'.

The former Soviet Union - which in 1984-85 imported a record 55.0 million tonnes of grain, 26 per cent of total global imports - bought an estimated 38.1 million (about 20 per cent) in 1991-92. This season, according to IWC projections, CIS grain production will rise to 169.4 million tonnes from 146.5 million in 1991- 92 and import needs drop to 25 million, with Russia alone accounting for 19 million of the total.

Russia predicts its grain production this season at 93-94 million tonnes, just over 10 million below initial projections, but 4-5 million more than in 1991-92.

If the former Soviet Union does achieve self-sufficiency, the big grain exporting countries will suffer, as alternative markets have not been developed. The US, the EC and Canada have been the main exporters of wheat to the former Soviet Union, which for the first two accounted for 23 per cent of their total sales in 1991-92 and for the latter 15 per cent.

About 16 per cent of US exports of coarse grains (principally maize) went to the region last season, as did 41 per cent of the EC's, 29 per cent of Canada's and 10 per cent of Australia's.

'The feasibility of some of the republics of the former USSR eventually attaining a high rate of self-sufficiency should not be dismissed,' says the IWC. Climatic influences will remain a problem, but many grain-producing regions have good natural fertility and, with the use of fertilisers, average yields could rise substantially.

But higher production would also call for more efficient transport, storage and utilisation.