ANALYSIS - Three consecutive years of bad weather events around the world together with volatile markets since 2007 have created uncertainty in the grain and protein meal market, writes Chris Harris.
While there were flat wheat markets around the world until 2007, an extreme drought in Australia started the period of volatility, the UK's Agriculture and Horticultural Development Board senior analyst, Jack Watts, told the Outlook 2013 conference in London on Wednesday (13 February).
A succession of weather conditions has affected the maize and soybean markets globally as well as wheat and these weather induced production issues and not demand have driven feed costs higher.
Mr Watts said that with already low stocks as well, global demand might need to be rationed through high prices.
Last year, in particular the global crop was influenced by disastrous drought in the US from the middle of the year as well as drought in South East Europe.
The global market was also hit by tight EU supplies and a poor crop in former Soviet Union countries of Russia.
The UK became a net importer of wheat last year because the weather conditions washed out the harvest.
Despite the fact that India came through with high wheat stocks and there is potential for good soy yields in South America, there has been a need for demand rationing.
Mr Watts said that in the coming year strong wheat plantings around the world offer good prospects, provided there are no disastrous weather conditions again.
However, there has been a better winter this year and there have been encouraging signs for a good maize planting.
The UK, however, is still likely to be a net importer of wheat this year, because of a poor planting season.
Mr Watts said that in the markets the global maize crop and movements underpins what happens in the wheat markets.
For the soybean market, the demand from China is one of the most significant market drivers because it takes a quarter of the total global soybean production.
While in the 2011/12 year, global soybean production fell, demand rose considerably - outstripping production.
In this current, 2012/2013 crop year, while the crop in the US is expected to be down, this will be compensated for by a rise in production in South America, provided there is not a similar drought that the region experienced last year.
The main concern for production in South America, Mr Watts said, will be getting the crop to the ports for export.
"Soon Brazil will be the largest producer, overtaking the US," Mr Watts said.
He added that the price of soybean meal has also risen, which has forced up feed prices. This is because in 2011, the more valuable soybean oil from the crush was unable to rally because of the tough demand competition from palm oil. To make up the difference, the price of meal rose and bore the brunt of the bean price rises.
The grain markets have also started to attract speculators because of the tight stocks and the volatility created by the global weather conditions from 2007 onwards. Before 2007 there was little speculation in the grain markets and this kept prices fairly flat.
Mr Watts said that while in the UK and Europe there is no speculation on the grain commodity markets as there is in the US, it is advisable to take risk management measures by forward buying feed grain and trying to take some of the uncertainty out of the market.
He said that the focus must be on the production margin rather than trying to beat the market.
He said the markets in the UK and Europe would benefit from a forward pricing mechanism and not a simple futures market to help to reduce the uncertainty and volatility.