Milling & Baking News - July 27, 2004 - 7

E D I T O R I A L

Wheat stocks-use ratio as major price force

lmost unheeded in many market analyses is the
dramatic fall in global stocks of grains, particularly when measured against use. In the case of
all grains combining wheat and coarse grains and coarse
grains alone, the ratio of ending stocks to annual use
at the close of 2003-04 dipped to the lowest in modern
history. For wheat alone, the ratio was again at the low
reached in the memorable 1973-74 season when emergence of the Former Soviet Union as a massive buyer
prompted history-making advances in grain prices.
When it comes to all grain, ending global stocks of
258 million tonnes at the close of 2003-04 account for 17
per cent of use of 1,525 million. Not only is that ratio the
lowest it has ever been, but it contrasts with 31 per cent
as recently as 1998-99 and the all-time high of 36 per cent
in 1986-87. These raw numbers underscore how greatly
the world grain situation has changed. At the ratio peak
in 1986-87, ending stocks of 469 million tonnes were
nearly twice the current total, while use, at 1,300 million,
was 15 per cent less than currently.
The patterns are essentially the same in global wheat,
where the 2003-04 ending ratio was 22 per cent, against
the peak of 37 per cent in 1986-87. Coarse grains dropped
to 14 per cent, compared with 35 per cent in 1986-87.
Just as fascinating is the way that the stocks-use ratio
for wheat in the United States does not deviate greatly
from the global pattern, even though U.S. holdings are
relatively small as part of the global total. At one time,
the American stocks were the linchpin in world changes.
Stocks at the close of 2003-04 in the United States represented 23.1 per cent of the crop year's disappearance,
not too different from the global low of 22 per cent. The
U.S. ratio fell to a recent low, of 15.8 per cent in 1995-96,
but then rebounded to 39.7 per cent in 1999-00. Those
dramatic U.S. changes are reflected in market prices
moving in opposite directions.
While there's no question but that the shrinkage in world
stocks accounts in substantial part for the past year's price
strength, some analysts wonder why this did not prompt
greater upturns. The U.S. carryover anomaly may provide

an important part of that explanation, with the carryover
this year at 41 per cent of domestic use. Ending global
stocks in a range of 10 per cent to 20 per cent of use equal
reserves of hardly one or two months' needs. Considering
how growing conditions in important producing areas
recently have been erratic and even below average, many
observers contend that such stocks are inadequate.
Countering these concerns are many factors. The period
since the peak stock-use ratios were reached is one marked
by the disappearance of national buying authorities and
their replacement in nations such as Russia and China
with entrepreneurial operators intent on restraining costs
by minimum inventories. This drive to reduce costs is not
confined to the nations where communist dictators once
ruled. In developed nations, maximum attention has been
paid to similar strategies, ranging from the just-in-time inventory systems pursued by many food manufacturers at
one end of the supply chain to reluctance by farmers about
bearing the cost of large inventories.
More recent focus on supply chain management,
which means lowering costs, has also seen sophisticated
electronic systems meant to boost efficiency. Concerns
over food safety, related to both domestic security and
consumer worries about makeup of the food supply,
have prompted new tracking systems. These are being
used not just to provide traceability, but also to offer new
ways to monitor both external and internal grain flows.
Recent studies of the food industry reveal that the ratio
of inventories to sales - much the same as the stocks-use
ratio in global grain - was halved in the last half of the
20th century. The sharpest fall occurred in breakfast cereals, which should be no surprise to the global grain industry that has observed this trend in smaller stocks. At one
time, global grain stock ratios as low as those currently
ruling would have produced amazing price strength in
markets worried about reserves. The more modest reaction occurring does not solely point to increased sophistication and better information flows, but also to a domestic and global grain industry able to operate with much
smaller inventories than once thought possible.

Scant consolation in dismal orange juice market

f the wheat industry needs any consolation for the
sluggish demand experienced in the United States
and most developed nations, it need look no farther than orange juice. Here, domestic consumption is
estimated to have fallen 6 per cent in the last two years,
prices last May dropped to the lowest levels in three decades, and the dismal outlook is causing major producers in Florida to give serious consideration once again
to abandoning their cropland in favor of accepting the
purchase entreaties of real estate developers.
The blame for the orange juice consumption decline,
after many years of soaring increases, is laid at Dr. Robert Atkins and his acolytes' allegiance to low-carbohydrate diets. Not every expert agrees with this analysis
of what has gone wrong, citing calorie-counting and
consumer shifts away from concentrate products, which
involve drinking products with higher retail prices that
cut into usage. The orange juice industry is responding
to consumer concerns by aggressive advertising seeking
to promote the health benefits of drinking its products.
The hope is that these expenditures will re-ignite demand growth at the levels enjoyed a few years earlier.

bakingbusiness.com / world-grain.com

So far as basic industry structure and economics are
concerned, the similarities between orange juice and
wheat are few and far between. In the case of orange
juice, the retail market is dominated by two huge players, Tropicana Products, a division of PepsiCo Inc., and
Minute Maid, a unit of The Coca-Cola Co. Indeed, vertical integration has become an extremely important issue.
For instance, it has prompted doubts that are being expressed about the value of futures contracts traded on the
New York Cotton Exchange, which have been the main
measure of prices for producers. Of course, retail prices
largely reflect negotiations between major producers and
the grocery industry. Retail levels have hardly reflected
the sharp drop in grower prices, which at their bottom
were less than two-thirds of contract highs.
Except for being thrust into the same high-carbohydrate "tub," the wheat and orange industries seem to
have few elements in common. Yet, the current difficult
consumer environment raises possibilities of alliances in
the battle against the common foe. Wheat could hardly
ask for a better ally when it comes to influencing consumers than orange juice. MBN
Milling & Baking News, July 27, 2004 / 7

http://www.bakingbusiness.com http://www.world-grain.com

Milling & Baking News - July 27, 2004

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