 
November 17, 2003
WILL SHORTFALLS IN WORLD GRAIN PRODUCTION CONTINUE?
Chicago wheat futures prices moved
above $4.00 per bushel in late summer of 2002 and again last week.
Prior to last year, wheat prices had not exceeded $4.00 since late
1996. December 2003 corn futures moved above $2.50 in late October
and settled near $2.40 last week. Prices are well above early season
lows in spite of a record large U.S. corn crop. Much of the strength
in grain prices is related to declining world stocks of wheat and
coarse grains.
World coarse grain production reached a record 907 million tons
in 1996-97 as the result of very large crops in the European Union,
China, Canada, Brazil, and Argentina which more than offset a poor
crop in the former Soviet Union. World production exceeded consumption
by about 30 million tons that year. World production declined to
876 million tons in 1999-2000 and to 860 million tons in 2000-01.
Over the past three years, including the forecast for the current
year, production has ranged from 869 to 892 million tons. Country
by country production has been very inconsistent, with small crops
in the former Soviet Union and Argentina in 1998, in China and Eastern
Europe in 2000, in the U.S. in 2002, and in the European Union in
2003. Crops were large in China in 1998 and 1999, in Eastern Europe
in 1999, and in Brazil in 2002.
Inconsistency in production over the last several years has resulted
in declining inventories as annual consumption has exceeded annual
production. Current forecasts make 2003-04 the fifth consecutive
year that annual world consumption of coarse grains will exceed
production. The annual shortfall in production has increased from
6 million tons in 1999-2000 to a projected 35.5 million tons this
year. The cumulative shortfall over the five year period exceeds
106 million tons.
A similar pattern has unfolded with wheat production. World production
reached a record 609 million tons in 1997-98, led by large crops
in the U.S., the former Soviet Union, and China. Of the major producing
countries, only Canada had a small crop in 1997. World production
ranged form 581 to 589 million tons over the next four years, dropped
to 566 million tons last year, and is projected at only 548 million
tons this year. Crop size has been inconsistent in many of the major
producing areas. U.S. production was small in 2001 and 2002; production
in the former Soviet Union was small in 1998 and 2003, but very
large in 2001 and 2002; Chinese production has declined steadily
since 1999; production has been on a roller coaster in Europe, Argentina,
and Canada; and Australia had a disastrous crop in 2002.
Current forecasts make 2003-04 the sixth consecutive year that
annual world wheat consumption exceeds annual production. The annual
shortfall was very modest from 1998-99 through 2001-02, with the
four year cumulative shortfall totaling only 13 million tons. The
annual shortfall reached 34.4 million tons last year and is projected
at 37.4 million tons for the current year.
For coarse grains, world inventories are declining, but supplies
are large enough to maintain consumption at a very high level. World
consumption during the current marketing year is projected at a
record 918 million tons, well above the 902 and 904 million tons
of the previous two years. Since rationing of use is apparently
not required, coarse grain prices remain at modest levels.
World wheat consumption was maintained at a very high level of
585 to 590 million tons from 1997-978 through 2001-02 and reached
a record 600 million tons last year. The smaller harvest this year,
however, is expected to push consumption back to about 586 million
tons. Some modest rationing of use is required, resulting in prices
moving to relatively high levels.
With world inventories of wheat and coarse grains now at relatively
low levels, the level of annual production becomes extremely important
for prices. Shortfalls will require some rationing and could result
in sharply higher prices, while large crops will be price depressing
as the world is not interested in maintaining inventories at high
levels. In this respect the coarse grain and wheat markets have
become a little more like the soybean market, where inventories
have never been maintained at consistently high levels. The implication
is that wheat and coarse grain prices may remain extremely volatile
as the market tries to forecast year to year changes in production
and demand.
The difficulty of maintaining world grain production at consistently
high levels over the past few years has also raised important questions
about agricultural policy and production technology. The focus continues
to shift from managing surpluses to addressing other market distorting
policies.
Issued by Darrel Good
Extension Economist
University of Illinois
 
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