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Analyzing the resilience of grain markets amidst volatility

28 September 202316 min reading

In an exclusive interview with Miller Magazine, we had the privilege of conversing with Arnaud Petit, the highly respected Executive Director of the IGC. Mr. Petit offers a profound exploration of the ever-evolving terrain of the global grain market. His insights illuminate the intricate interplay of weather patterns, geopolitical events, and logistical complexities that wield immense influence over grain markets worldwide. Additionally, Petit provides valuable reflections on the pivotal role played by the grain industry in fortifying global food security.

In the ever-evolving landscape of global grain markets, one organization stands at the forefront, guiding and informing the industry – the International Grain Council (IGC). As the world grapples with an array of challenges, from supply chain disruptions to geopolitical tensions and environmental concerns, Arnaud Petit, the Executive Director of the IGC, is at the helm, navigating the council through turbulent times.

Arnaud Petit, Executive Director at IGC

In this exclusive interview, Arnaud Petit provides a comprehensive overview of the current state of global grain markets, offering insights into the delicate balance of supply and demand dynamics. Petit delves into the primary drivers behind the increased volatility in the grain market, emphasizing the role of weather patterns, supply chain disruptions, exchange rate fluctuations, and evolving consumer preferences. 

One of the critical topics addressed is the collapse of the Black Sea grain export corridor initiative and the increased military action by Russia. Petit provides insights into how these geopolitical events are poised to impact global grain trade and prices, and what consequences these developments may hold for world grain trade.

Food security, a pressing global concern, takes center stage in the discussion. Petit outlines the role of the grain industry in improving food security worldwide and highlights the initiatives in which the IGC is actively involved, contributing to a more resilient and stable food supply chain.

Petit also reflects on his personal perspective in leading the IGC through these tumultuous times. He provides insights into the unique challenges that have emerged and how the organization is adapting to better serve the industry. Below, you’ll find Mr. Petit’s insightful responses to our questions.

PRICE PRESSURE EASES AS GLOBAL GRAIN AND SOYBEAN OUTLOOK IMPROVES

Mr. Petit, can you provide an overview of the current global grain market situation and share insights into the global grain supply and demand dynamics?

The new market outlooks show that we are looking for an increased global supply of grains and soybean. These forecasts should bring some relief to the market. The price pressure is going down with several downturns. The GOI index for cereals and oilseeds prices is now stabilising around 270. A figure not seen since January 2021.

Nevertheless, the market is clouded by the uncertainties on logistics in the Black Sea, the potential lack of quality wheat and the trade restriction on the rice market.

The International Grain Council (IGC) recently made adjustments to its world grain consumption estimates. Can you explain the rationale behind these changes and their significance for the grain market?

Amid increased supply, we are noticing a recovery in terms of consumption in grains and oilseeds. For wheat, growing food and feed uses, coupled with a rebound in industrial uptake, are set to underpin a 1% y/y (year-on-year) rise in world consumption at 803 million tons (mt). Although strong competition from maize is anticipated, notably in Europe, North America and parts of Asia, global wheat feeding is forecast to rise by 2% y/y, to 153m t. Continued population growth, notably in Asia and sub-Saharan Africa, will contribute to a projected 1% expansion in global wheat food demand, to a record 556m t. At 25m t (24m), forecast industrial use is up modestly m/m, incorporating a higher projection for Brazil, where the first wheat-based ethanol plant is scheduled to be commissioned in 2024.

For Maize: Largely reflecting ample and competitively-priced availabilities, global consumption is forecast to rebound to 1,208m t (+3%). While the bulk of the expansion stems from higher feed demand, gains in food and industrial uses are also expected. At 722m t (+3%), feed consumption is forecast to rise, mostly on increases in the EU, across Asia and the Americas, including in Mexico.

Forecast industrial is use is seen at 308m t, up by 1% y/y on Brazil’s growing ethanol sector and gains in the US. In the latter, utilisation is forecast at 164.2m t (+2%), with increases for ethanol (fuel and non-fuel), glucose and dextrose more than offsetting an expected dip for high-fructose corn syrup.

FACTORS FUELING VOLATILITY IN GRAIN MARKETS

The grain market has experienced increased volatility due to various factors. Can you elaborate on the primary drivers behind this volatility and their potential long-term implications for the grain market?

Several drivers can be identified as a driver of volatility. The first one is the weather which impacted the quality at the field level and brought some uncertainties about the production in the southern hemisphere with the comeback of the El Nino phenomena.  The disruption of the supply chain in the Black Sea region. Since the collapse of the Black Sea Grains Initiative, the cost of transportation has gone up significantly and contracting the margin at the farm gate. The flow of wheat trade from Ukraine is slowing to the benefit of more profitable crops such as rapeseed. The third driver of the volatility is the quick movement of the exchange rate. During the worst period, the price of wheat in African countries has doubled due to the exchange rate. Finally, we have noticed a change of tone in the rice market. The recent ban and export taxes imposed by the main rice exporter have increased the rice prices (to all categories).  Currently, the buyers are looking for alternative originations but some consumers in the ASEAN region might change their habit and shift to wheat products if the price increase continues.  

CHALLENGES AND OPPORTUNITIES IN EXPORT PROJECTIONS

The collapse of the Black Sea export corridor initiative for Ukrainian grain and increased military action by Russia have significantly impacted grain markets. How do you foresee these geopolitical events influencing global grain trade and prices in the near future, and what are the potential consequences for world wheat trade?

The global trade is expected to retreat from last year’s peak, pegged at 195.9m t (-6%). The downgrades are partly countered by increased import forecasts for North Africa and the EU, tied to improved prospects for durum trade. Reflecting strong early-season purchases by Italy, the projection for the EU is raised by 0.3m t, to 5.8m, still less than half of last year’s volume amid prospects for smaller arrivals from Ukraine.

At 2.5m t, Ukraine’s shipments during the first two and a half months of the season are on track to reach the Council’s full-year projection of 12.0m, unchanged m/m despite higher than previously estimated output. While efforts are underway to boost transshipment via EU ports, intensified attacks have reportedly curbed export capacity at Danube River ports and discouraged some buyers.

Amid the low profitability of wheat, Ukrainian farmers are forced to shift to other crops such as oilseeds. Around 5 mt t less of wheat would be exported by Ukraine in comparison to the last marketing year. The vegetable oil market is providing more value-added for the oilseeds and grains sector in Ukraine.  The wheat area decreased by more than 15% when we just noticed a decrease of 7% in volume. The challenge of not having a deep sea port working in Ukraine will be a regular erosion of the wheat production without new areas to substitute the lost production.  

Conversely, the outlook for Russia is raised by 2.0m t m/m, to a new peak of 48.5m, on a larger crop number and a record pace of shipments, privately estimated at 11.6m (+72%) as of mid-September. 

 UKRAINE’S GRAIN STORAGE AND TRADE MOVES

In response to the disruption in grain exports, Ukraine, Romania, Moldova, the United States, and the European Union held discussions to accelerate Ukrainian grain exports. What are some key outcomes or commitments resulting from these discussions, and how do they address the challenges Ukraine is facing?

During the marketing year 22/23, Ukraine got a good wheat harvest but with a lot of grain still, in stock, the risk was to have too much loss of grains and exacerbating the food crises. These countries worked on a plan to allow Ukrainian farmers to use silo bags. We assess now that 12 to 15 Mt of storage capacity are in this mean. The second priority was to allow the market to keep going and therefore the grains to circulate. That was the main reason for the setting up of the so-called “solidarity lane” (free as well as the Black Sea Grain Initiative”. Both corridors provided sufficient certainty for the grains operators to get access to these grains. The solidarity lane provided more margin of maneuver for EU traders to export 32 Mt of wheat without drying the EU market and Ukrainian traders exported more than 32 million tons of grains to more than 40 countries. The ultimate consequence was the downturn of the wheat price by 40% in 3 months. 

These two big “grains motorways” were not improving the inland logistics and increased the cost of transportation. In consequence, Ukrainian farmers turned to the oilseed complex, more profitable and allowing business decisions in a short period. The flow of grains in the EU has shown also the weakness of the single market when it comes to a quick circulation of grains between member states. It is definitively a challenge to overcome.

BLACK SEA’S IMPACT ON GLOBAL FOOD SUPPLY

World leaders and organizations have called on Russia to rejoin the Black Sea grain deal. Can you explain the significance of this deal for global food security and the role it played in delivering grain to developing and food-insecure countries?

The Black Sea region represents around 33% of the grains exported to the world as well as the most competitive region for wheat. If there is a problem with grain production in Australia (el Nino phenomena) then the Balck Sea region is the likely area of supply for ASEAN countries. The Black Sea region is also able to provide row commodities as well as semi-processed products (pasta – flour) for the Middle East and Sub-Saharan countries when the grains market is too volatile. IGC’s members held talks about the relevance of having the Black Sea region connected to the global market. The Black Sea grain deal delivered more food security as 32 Mt went out of Ukraine via this corridor and Russian grain traders were also able to export more than 42 Mt of wheat, a new record. For the marketing year 23/24, the IGC forecast is about close to 60 MT of wheat would be exported by both Russia and Ukraine. This volume will be achievable if both countries can use their deep sea port infrastructure. 

Weather patterns are also playing a crucial role in shaping grain markets, with concerns about wheat quality and protein content. How are these weather-related issues affecting the supply and demand for wheat?

We are expecting a lower wheat harvest in Australia due to drought (El Nino). Therefore several countries in Asia and the Middle East will have to find alternatives most likely in the Black Sea region and Europe. If the wheat price is too volatile, those countries might see the flour market as an opportunity to secure their supply. Due to below average quality of wheat in Europe, the Turkish milling sector has an opportunity to increase its exports. 

IGC LEADS THE WAY IN SUSTAINABLE GRAIN TRADE

 Sustainability and environmental concerns are increasingly important in the agriculture and grain sectors. How is the grain industry addressing sustainability issues, and what role does the International Grain Council play in promoting sustainable practices?

The International Grains Council looks at sustainability and environmental concerns from a market perspective. You are right to highlight that there are several sectorial initiatives to respond to these concerns such as Argentina with the carbon footprint initiative, and USSEC with the sustainable soybean protocol for example. The question is now how the traders can navigate between these different protocols and continue to operate most efficiently. International Grains Council will organize 3 commodity-specific webinars on the protocols related to sustainability during the 2nd semester of 2023. The objective is to do a state of play of the initiatives in each sector including wheat (date 14th December 2023) and examine the point of view of the importers.

Food security is a global concern, especially in regions highly reliant on grain imports. How can the grain industry contribute to improving food security worldwide, and what initiatives is the International Grain Council involved in?

Together with the delegation of Japan, IGC held a dialogue between producing and importing countries, at the lGC Conference 2023, to discuss the actions to take in case of food crises. A plea for market transparency and facilitating the trade flow of grains was done by a large majority of the delegation. Market transparency works always at the advantage of the weakened points of a value chain which means the importing countries. Facilitating trade flow is the best way to reduce the cost of trade for nations that are highly dependent on grain imports. A document endorsed by several delegations, with the contribution of international organizations and the private sector, will be published soon. Follow us at @IGCgrains on X to get access to this document.

GRAIN TRADING’S EVOLUTION: FROM ‘JUST IN TIME’ TO ‘JUST IN CASE’

What advice or key takeaways would you offer to businesses and professionals in the grain industry as they navigate the challenges and opportunities ahead?

This is a unique period where supply chains are being reshaped, with the cereals sector remaining a policy priority as a staple food and new opportunities to develop food demand, through the example of the consumption of legumes. The economic model of grain trading is gradually changing from “just in time” to “just in case”. I am convinced that in the near future, we will see a new form of business relationships, including contractual relations, within the value chain to address food security. We must continue to support these developments and inform public policies so that those involved in the grain trade can continue to play an essential role in global food security.

RISK FACTORY LOOMING OVER BLACK GRAIN SUPPLY

IGC’S NEW ANALYTICAL FRONTIERS

Mr. Petit,  the COVID-19 pandemic, supply shocks caused by extreme climatic conditions, and most recently the Ukraine war...In an era marked by a series of crises and unprecedented volatility in grain markets, you find yourself leading an organization closely scrutinized by the industry. Could you share your personal perspective on navigating the IGC through these turbulent times? What unique challenges have emerged in your role?

The fast evolution of crises and the challenges we face means that we must be even more connected with the private sector. This implies that we must also have real-time information to better analyze the data. These crises also highlighted the need to better understand logistics issues, a subject that was not at the center of the IGC’s concerns. While remaining a tool for monitoring global grains markets, the IGC secretariat has profoundly expanded its analytical capacity to introduce other factors that have become essential such as logistics, transport costs and trade policies. For my part, these experiences allowed me to discover the fascinating network of United Nations agencies and the added value of working together with other international organizations. 

The current challenge is to be able to maintain this analysis of global markets while developing information tools adapted to each region which has its specific market conditions.


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