Cereals

Global cereal stocks fell from the equivalent of 28 percent of utilization at the beginning of the 1987/88 crop year to 19 percent at the beginning of the 1989/90 crop year. By the end of 1989/90, cereal stocks are expected to fall further, to the equivalent of 17 percent of utilization—the percentage regarded by the Food and Agriculture Organization of the United Nations (FAO) as the minimum necessary to ensure world food security and the lowest percentage since the 1974/75 crop year. Cereal prices rose sharply in 1988 and, because of the generally tight supply situation, remained strong in 1989 (Chart 4). Prices of both wheat and maize declined during the second half of 1989, however, as improved weather conditions led to a recovery in the production of both crops in the United States. Rice prices began to decline in the fourth quarter of 1989 on account of generally favorable production prospects in Asian countries.

Food Commodities: Indices of Prices in SDRs, January 1980–March 1990

(1980 = 100)

Source: Commodities Division, IMF Research Department.

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Food Commodities: Indices of Prices in SDRs, January 1980–March 1990

(1980 = 100)

Source: Commodities Division, IMF Research Department.

• Download Figure
• Download figure as PowerPoint slide

Food Commodities: Indices of Prices in SDRs, January 1980–March 1990

(1980 = 100)

Source: Commodities Division, IMF Research Department.

• Download Figure
• Download figure as PowerPoint slide

Wheat prices moved up sharply in 1988 (Appendix Table 5) in response to expected crop losses in the United States and Canada associated with the extremely dry weather during the spring and summer months. In the United States, while area planted to wheat remained at the level of the previous year, area harvested declined by 5 percent and average yield per harvested acre declined by 10 percent because of the drought. As a consequence, U.S. wheat output fell by 14 percent in 1988/89. Sharply lower yields and some reduction in area harvested reduced wheat production by 39 percent in Canada and 8 percent in Argentina. Nevertheless, global production of wheat fell only marginally below the 1987/88 level, because the declines were almost entirely offset by larger crops in other countries. Despite a 3 percent decline in area harvested, the European Community recorded a 5 percent increase in wheat production, as favorable weather conditions boosted yields by 7 percent. Production also increased by 17 percent in Australia. Global utilization of wheat exceeded 530 million tons for the second consecutive year, which was about 30 million tons above global wheat production in 1988/89. Accordingly, world stocks of wheat declined by 21 percent and the ratio of world stocks to utilization fell to 22 percent at the end of June 1989.

Global wheat production in the 1989/90 crop year is expected to increase by 7 percent to a record level of 535 million tons. In the United States, high prices and a reduction in acreage idled under government programs stimulated a 17 percent increase in area planted to wheat, but average yields fell an estimated 4 percent—to their lowest level since 1978—because of dry weather conditions, winterkill caused by sharp temperature changes, and high spring temperatures. Reflecting these developments, U.S. wheat production is estimated at 55 million tons, which is 12 percent higher than in 1988/89 but still 3 percent below the pre-drought level. Production also rebounded from the 1988 drought in Canada (by 53 percent), although high temperatures in July 1989 kept yields below pre-drought levels. In Argentina production is expected to increase by 21 percent, as yields are the third highest on record and the area under wheat cultivation has increased, partly because of reductions in export taxes. Production in the European Community has expanded by an additional 5 percent in 1989/90, reflecting high yields and a 5 percent increase in area planted to wheat. Large production gains are also forecast for India, where a record crop is anticipated, and for China and the U.S.S.R. Global utilization of wheat is forecast to increase by about 1 percent in 1989/90 to nearly 540 million tons. With utilization still in excess of production, the ratio of stocks to utilization is expected to fall from 22 percent at the beginning of the crop year to 21 percent at the end.

Prices of wheat decreased somewhat during the first quarter of 1990, reflecting increased competition among major exporters, mainly between the European Community and the United States, and the expectation of a record high world wheat crop. Both the area planted to wheat and yields are expected to increase in 1990/91. The largest gains are anticipated in the United States, mainly in response to a lower acreage reduction requirement and strong prices. Production prospects in other major producing countries, notably Canada, China, and the U.S.S.R., are also considered favorable. With global wheat feed consumption likely to be limited because of abundant supplies of lower priced coarse grains and continued expansion of food use of wheat in line with the trend in recent years, total world utilization of wheat is expected to fall short of production, leading to some rebuilding of stocks. Wheat prices are expected to decline further, particularly during the second half of the year.

Global production of maize fell short of utilization by a wide margin in 1988/89, resulting in a 40 percent decline in world stocks. The stock to utilization ratio fell from 32 percent at the start of the crop year to 19 percent at the end. Production in the United States declined by 31 percent to 125 million tons as a result of a 29 percent decline in yield because of the 1988 drought. In Argentina hot dry weather conditions also led to a 35 percent decline in area harvested and a 15 percent decline in yields; consequently, maize production fell by 44 percent. Increased production in the European Community, Thailand, and the U.S.S.R. partially offset these production losses. Global utilization of maize in the 1988/89 crop year fell by 1 percent, mainly reflecting a 13 percent decline in maize use in the United States in response to high drought-induced prices. By the third quarter of 1988 prices were more than 60 percent above the 1987 level and remained near the higher level through the first half of 1989.

In the 1989/90 crop year, global production of maize is expected to increase by 15 percent. Virtually all of the increase is attributable to recovery in the United States, where output is over 50 percent higher, because of an 11 percent expansion in area harvested and a 37 percent rise in average yield per acre. The increase in production led to a 10 percent price reduction in the second half of 1989. Global utilization of maize in crop year 1989/90 is, however, expected to increase approximately 4 percent, mainly because of increased use in the United States, and to exceed production by 19 million tons. As a result, by the end of September 1990, stocks are expected to fall to their lowest level since 1984/85 and the ratio of stocks to utilization is forecast to decline to 14 percent.

A further expansion in acreage planted to maize is expected in the United States in 1990, owing to cultivation of maize on land previously planted to soybeans, and, assuming normal weather, a possible further recovery in yields. Reflecting favorable prospects for the coming U.S. maize crop, a weakening of prices, particularly during the second half of 1990, is possible. Given the low level of stocks, however, production below expectation could lead to substantial price increases.

After nearly three years of relatively low prices, the price of rice rose markedly in the 1987/88 crop year, as utilization exceeded production for a second consecutive year. World closing stocks fell from 55 million tons (the equivalent of 17 percent of utilization) in 1985/86 to 45 million tons (14 percent of utilization) in 1987/88.

In the 1988/89 crop year, world paddy production of 487 million tons was 25 million tons higher than in 1987/88, with output recovering from the drought that had lowered production in 1987/88 in a number of countries in South and Southeast Asia. Production in India rose by 25 percent to a record level in 1988/89, while production in Thailand increased by 17 percent. Global utilization of milled rice increased by 7 million tons (2 percent).

In 1989/90 world paddy production is expected to increase by about 16 million tons to an estimated 504 million tons. With favorable weather conditions and an expansion in area cultivated, rice production in China is forecast to rise by 6 percent. India is expected to produce a slightly smaller crop than last year, but it would nevertheless be the second largest crop on record. Record crops are forecast for Bangladesh, Indonesia, and the Philippines, reflecting increases in yield and area under rice cultivation. Global utilization of milled rice is expected to increase by 7 million tons (2 percent). Reflecting the projected excess of milled rice production over utilization, world stocks of rice are expected to increase by 5 million tons, raising the ratio of closing stocks to world utilization to 16 percent.

Owing to tight rice supplies in exporting countries, low world stocks, and strong import demand, world rice prices peaked in the third quarter of 1989, their highest level since 1981. From the fourth quarter of 1989 to the first quarter of 1990, they declined by about 15 percent. A further weakening of prices in 1990 is not unlikely, because of reduced import demand, more abundant exportable supplies, and possibly also increased competition between Thailand and Vietnam for low quality markets. In 1989 Vietnam became an important rice exporter, exporting an estimated 1.3 million tons, or 9 percent of estimated world trade.

Vegetable Oils and Protein Meals

After increasing by 31 percent in 1988, the index of market prices for vegetable oils and protein meals declined by 5 percent in 1989. The weakening of prices of vegetable oils and protein meals, particularly during the second half of 1989, is mainly attributable to the recovery of the U.S. soybean crop from the previous year’s drought-reduced level, the sharp increase and late shipment of soybean output in Brazil, and record world production of palm oil. Lower average prices were recorded for all but two commodities in the group—groundnut oil and meal (Appendix Table 6). In 1989 the price of groundnut meal remained at the 1988 level, while the price of groundnut oil was 37 percent higher, reflecting reduced supplies of groundnuts and groundnut oil in major exporting countries, mainly in Senegal, because of irregular rainfall and locusts, and in Argentina, because of severe drought conditions.

In the 1988/89 (October-September) crop year, world oilseed production, in terms of oil equivalent, increased by about 1 percent to a record level of 58.4 million tons, despite a sharp reduction in soybean production. Soybean output declined by 8 percent, mainly because of a drought-related decline in production in the United States, while rapeseed and sunflowerseed production each declined by 1 percent. These reductions were more than offset by increased world production of palm oil (9 percent), groundnuts (20 percent), cottonseed (4 percent), copra (8 percent), and palm kernels (8 percent).

In 1989/90, world oilseed production is expected to increase by an additional 5 percent to 61.5 million tons, in terms of oil equivalent. World soybean production is forecast to recover by 13 percent as a result of a substantial rebound in soybean yields and production in the United States to the pre-drought level and increased production in Argentina on account of a record area planted to soybeans and a recovery in yields from the drought-reduced level of the previous year. Production of palm oil, after increasing by 11 percent in 1988/89, is estimated to increase by 8 percent in 1989/90. Copra, palm kernel, and sunflowerseed production are also expected to increase. Increased supplies of these commodities are expected to more than offset estimated declines in cottonseed, groundnut, and rapeseed production.

After declining in 1988/89, world consumption of protein meals is forecast to increase by 5 percent in 1989/90. Over 90 percent of the increase in total meal consumption is expected to be met by soybean meal, as the recent decline in soybean meal prices has increased its attractiveness over cereals and vis-à-vis other competing protein meals. The lower price is likely to lead to a rise in soybean meal’s share in livestock feeding rations. World consumption of vegetable oils increased by 4 percent in 1988/89 and a further rise of 5 percent is foreseen in 1989/90. Over 40 percent of the increase in vegetable oil consumption is expected to be met by palm oil, about one third by soybean oil, and the remainder by sunflowerseed oil, mainly in response to more abundant supplies and relatively more attractive prices for these oils over other competing oils. As a result, closing stocks of oilseeds and vegetable oils, in terms of oil equivalent, declined by 5 percent in 1988/89 and are forecast to decline by an additional 1 percent in 1989/90.

Average prices for most vegetable oils and protein meals are expected to weaken in 1990 compared with the previous year. Downward pressure on prices during the first quarter of 1990 has emanated from favorable prospects for soybean and sunflowerseed production and unusually large unsold quantities of the Brazilian and Argentine crops, a slower than expected seasonal decline in the record level of world palm oil stocks combined with estimates of a further large increase in world palm oil production in the first quarter of 1990, and a high level of coconut oil exports from the Philippines. Continuing uncertainty pervades markets over the timing and the effect on prices of new economic reforms in Brazil. Palm oil prices could strengthen somewhat from early-1990 levels. While the area of mature palm trees in Malaysia and Indonesia is expected to continue to expand, it is anticipated that a decline in yields per hectare in Malaysia resulting from tree stress in 1988/89, below normal rainfall during 1989, and reduced fertilizer usage will limit the rise in world production, and help reduce the ratio of stocks to consumption. In April 1990 coconut oil prices reached their lowest level since September 1986, and traded at a discount of nearly $100 a ton to soybean oil, mainly reflecting a rebound of coconut exports from the Philippines. Some strengthening from recent levels is likely, as below normal rainfall in the Philippines and Indonesia is expected to adversely affect production in late 1990 and in 1991. By contrast, prices of groundnut oil rose sharply in late 1989 and during the first quarter of 1990, reflecting tight supplies in world markets. Exportable supplies of groundnut oil are expected to improve but remain low in 1989/90; consumption is also expected to decline, as consumers shift to sunflowerseed and other more attractively priced oils.

The U.S. soybean crop harvested in late 1990 will also exert an important influence on prices. With world oilseed and vegetable oil stocks expected to tighten further by the end of September 1990, unfavorable crop developments in the United States or other major producing countries could result in higher and more volatile prices during the remaining months of this year.

Sugar

The average annual free market price of sugar rose by about 25 percent in 1989. Prices climbed sharply in the first half of the year, then stabilized at around 14 U.S. cents per pound (Appendix Table 7). This was the fourth consecutive year that free market prices have risen, and, in nominal terms, they stood at their highest level since 1981. The underlying reason for the price rise is that world consumption continues to exceed world production. During 1988/89, world production grew by 2 percent to a record level of 105 million tons, partly reflecting favorable growing conditions in China, the EC, and Thailand. Although somewhat restrained by the increase in prices, world consumption continued on its upward trend, reaching 107 million tons. The main increases in consumption took place in India and in countries in the Middle East. In addition, U.S. consumption stabilized in 1987/88 and 1988/89 following nine consecutive years of decline. A major reason for the change in the United States is the seeming inability of various sugar substitutes to maintain earlier growth rates. The net result of these developments in consumption and production was that world closing stocks of sugar declined nearly 6 percent, falling to 29 percent of annual consumption—the lowest stock to consumption ratio in a decade.

In 1989/90, world production is forecast to increase for the fourth consecutive season, reaching a record 109 million tons, or 3.8 percent above the previous year’s production level. Production is forecast to grow in all major sugar regions, except the European Community, where a small decline is expected. The U.S.S.R., the world’s second largest producer after India, is expecting a near record crop of 9.4 million tons despite adverse weather conditions during part of the growing season and a host of logistical and administrative problems.

World sugar consumption in 1989/90 is expected to marginally exceed the production level of 109 million tons. While a record, the figure represents a growth of only about 1 percent, versus an average annual growth rate of almost 2½ percent for the decade. The higher price levels of 1989 are the main reason for the sluggish overall consumption picture, having had a particular impact on demand in several of the developing countries. Nevertheless, almost all major regions of the world are expected to increase consumption in 1989/90. An exception may be South America, where economic problems in several of the national markets may lead to a small decline in sugar consumption. U.S. sugar consumption for 1989/90 is expected to be at 7.6 million tons, about 1 percentage point above the 1988/89 level, and this increase could contribute to a further increase in the U.S. sugar import quotas.

World sugar stocks at the end of the 1989/90 season are forecast to fall below 31 million tons, which, although less than 1 percent below the 1988/89 figure, would be the lowest stock level since 1980/81. The forecast translates into a stock to consumption ratio of 28 percent, the lowest ratio since 1975/76. Since the anticipated stock drawdown is very small, however, it is unlikely to fuel a major price rally from current levels, unless a large production shortfall occurs in one or more of the major sugar producing countries.