This article was first published in the November 2011 issue of InsideTrack.  To subscribe to InsideTrack contact Simon Ward on +44 (0)1954 252859 or info@increment.co.uk

First look at 2012 crop

In recent years, InsideTrack has looked at the trend-lines in order to assess the likely supply and demand situation when the first USDA report is produced in May 2012.  We ask no more than whether prices are likely to rise or fall as a result of an estimated change in the supply and demand balance.  Last year we found that our estimates based on 20-year trend-lines were close to the first report. 

Supply is more erratic than demand and depends on both change in area and changes in yield.  There appears to be no relationship between increases in land area above the average, and yields above trend-line: thus high prices do not appear to increase both area and yields or, conversely, extra land coming into production does not appear to be marginal land with a lower yield potential, reducing average yields. 

Given the accuracy of the 20-year trend-lines we have again used these to estimate our supply and demand forecasts but have also introduced a second estimate of supply based on the trend changes in crop area percentages.  We have assumed that the cropped area in 2012 will be the same as 2011.  This was the highest since 1996/7 and may prove to be an over-statement.

Average crop yields are rising more slowly than the overall increase in production per unit area.  The divergence is increasing, as the area of maize increases largely at the expense of barley.  Only maize and mixed grain have absolute yields above the average for all crops and only wheat and maize have a faster rate of yield improvement than the average for all grains.

Crop yield increase

Source:  USDA analysed InsideTrack

This year we have produced two estimates of supply.  The estimate ‘Production 1’, (shown in the chart below) takes into account relative change in crop area as a percentage of the whole. 

Total global grain supply and demand estimates, harvest 2012

Source USDA analysed Inside Track

Total global wheat supply and demand estimates, harvest 2012

Source USDA analysed Inside Track

We have also given the most likely range above the trend production and consumption estimates.  The spread is not rigorous but it would be expected that consumption and production outside of these spreads would occur in fewer than 10% of occasions.

‘Production 1’ suggests a higher trend level of production than the more simplistic estimate ‘Production 2’ based on the 20-year production trend alone.  However, both estimates show a trend level of production greater than consumption but the spreads are such that in a bad year, production may be below consumption and supplies would become even tighter.

There are potential uncertainties in the analysis.  Based on the linear trend lines alone, it would appear that the production of maize would be lower next year than this year even though the 2011/12 yield was below the trend-line.  The reason is that the area might be increasing at a faster rate than the linear trend.  If the area proves to be an underestimate, total grain production would be expected to be even higher than shown.

Arguably, the linear trend may under estimate the increase in consumption.  The distribution of consumption above and below trend-line appears not to be random.  For example, for the last 5 years consumption has risen progressively above the trend-line (to a level last seen 20 years ago).  We have shown in the past that consumption tends to increase when production is above trend.  There are also some interesting regional differences, with the greatest yield increases occurring in the food deficit countries.  However, the rate of bioethanol growth might be expected to slow.

Thus, at present there is no reason to assume that supply and demand will be very different from now.  There is a marginally greater chance that the surplus will increase.  Consequently, forward prices are likely to drift down with the current year’s prices.  However, the wheat premium over maize should be restored.