The grain market works

MOST of the grain market this year is likely to follow the malting barley lead of huge price increases because, for the first time in nearly a decade, there is a properly working market.

As usual, the main buyers are playing cat and mouse, having delayed price announcements until after mid-August. But Minch Malt put the cat among the pigeons with its 58% price rise for malting barley, even if it comprises only about 10% of Ireland’s grain production.

The big grain buyers, Glanbia and Dairygold Co-op, often don’t announce grain prices until September.

Glanbia is normally first to take the plunge. Both seem to wait until the last moment before committing themselves, perhaps waiting to see how the harvest pans out.

Presumably, they have little interest in increasing their grain intake. That would require early price announcements, and indications of what they might pay in 2008. Such a policy might find a ready audience from cattle farmers, for example, who could easily double their incomes by switching over to grain crops, if they got this year’s grain prices.

However, there’s no guarantee of similar grain prices next year for Irish farmers who switch from unprofitable cattle farming to grain growing.

Wheat prices, for example, could quickly return to more normal levels.

It is the major grain commodity of relevance to Ireland, and since 1999, much of the global supply was met not from annual production, but from intervention stores.

But stored tonnages steadily decreased, and the world became more efficient at quickly moving bulky commodities from places of surplus to places of deficit. This allowed importers to hold less grain stocks, and still ensure they can supply wheat and wheat products on time. At the same time, a relatively peaceful world gave governments a sense of national security, resulting in a drop in government-held stocks. But while stored surpluses prevented prices rising, grain growers around the world responded by taking land out of production.

For example, the Black Sea region has been growing only two-thirds of the cereal area it did 25 years ago, a drop of 40m hectares. China grows 12.5m hectares less than its peak production in the late 1970s.

But grain availability tightened in the last 12 months. Once again, grain became a “perfect market”, where price responds quickly to supply and demand. The result has been a sudden, severe, price hike. Prices are now higher everywhere than they have been for over 11 years.

But if “disused” grain regions — up to 50 million hectares— are brought back into production, global stocks will be quickly replenished. Already, compulsory set-aside has been reduced to 0% for the EU’s 2008 growing season. That should increase the EU’s 2008 harvest production by between 10m and 17m tonnes.

In a perfect market, high grain prices could be short-lived.