OCTOBER 15, 1996
This report provides the data and tables from the current GRAINS: WORLD MARKETS AND TRADE, PART TWO. This report draws on information from USDA's global network of agricultural attaches and counselors, official statistics of foreign governments, other foreign source materials, and results of office analysis. Estimates of U.S. acreage, yield and production are from the USDA Agricultural Statistics Board, except where noted. This report is based on unrounded data; numbers may not add to totals because of rounding. The report reflects official USDA estimates released in the World Agricultural Supply Estimates WASDE 319-October 11.
This report was prepared by the Grain and Feed Division, FAS. Agbox 1048, 14th and Independence Ave. Washington DC 20250. Further information may be obtained by writing to the division, by calling (202) 720-6219, or by FAX (202) 720-0340
The next issue of the Grains circular will be available electronically after 3:30 pm local time on November 13
EXECUTIVE SUMMARY SITUATION/OUTLOOK The export forecast for corn by the United States was lowered two million tons to 49.5 million tons, as exports of feed quality wheat are expected to displace corn. Calendar year 1996 rice imports by the Philippines are now forecast at 900,000 tons, down from 1.2 million, while CY 1997 imports are projected at 300,000 tons, reduced from the previously projected 1.2 million tons. Projected imports of feed-quality wheat by South Korea push the 1996/97 world wheat trade forecast up 2.2 million tons from last month as weather- related harvest delays bring into question the quality of some of this year's global bumper wheat crop. The calendar year 1996 rice export forecast for Thailand was reduced this month from 5.5 to 5.25 million tons. The 1995/96 Canadian barley export estimate was raised 150,000 tons, to 2.75 million tons, largely due to expected increases in global feed needs. South Korea is now forecast to import 77,000 tons of rice during 1997, down from the September forecast of 350,000 tons. Barley imports in 1996/97 by Eastern Europe were raised fourfold, to 200,000 tons, largely due to an estimated increase in Polish utilization. FOREIGN COUNTRIES' POLICIES AND PROGRAMS The EU introduces export subsidies back into the world wheat market. MERCOSUR fosters the development of an integrated regional rice market. Mexico's grain and feed imports rebound as the effects of the recent peso crisis wain. Ukraine losing its status as an important world supplier of grain. Israeli flour millers sue Government of Israel over trade policy dispute. WORLD AND U.S. GRAIN OVERVIEW WHEAT The forecast for 1996/97 world wheat trade stands at 90.8 million tons, up 2.2 million tons from last month but still representing the lowest level of international wheat trade in over a decade. Annual global production is projected to increase by eight percent to 581 million tons -- the second-highest on record -- and for the first time since 1992/93 is anticipated to exceed consumption. The global bumper crop is expected to create greater exporter competition and at the same time lower import demand as production increases in all the major exporters and most of the traditional importers result in aggressive efforts to place larger supplies. However, as the harvest season continues it becomes increasingly apparent that, in response to the record-high prices of the past year, quality was occasionally sacrificed for increased yield in producing this year's crop. This will result in a large amount of wheat going to feed while demand for high quality food wheat remains strong. Prices, while still at historically-respectable levels, have reacted to the abundant global crop by falling off dramatically from the record highs reached last spring. The additional production will provide an opportunity to increase the world's severely depleted reserves by a projected 11.6 million tons, resulting in a 1996/97 global stocks-to-use ratio of 20.5, up from last year's record low but still the second-lowest level on record. RICE The calendar year 1996 forecast of international rice trade was reduced slightly this month from 18.9 to 18.8 million tons. Reductions in export forecasts for Thailand, down 250,000 tons to 5.25 million tons and Burma reduced 50,000 tons to 350,000 were partially offset by increased export forecasts for China and Uruguay, up 100,000 and 50,000 tons to 300,000 and 550,000 tons respectively. The import forecast for Mexico was cut from 350,000 to 300,000 tons and the forecast for the Philippines was cut from 1.2 million to 900,000 tons. Forecast imports by Other Africa were increased by a combined 500,000 tons while import forecasts for China, Malaysia, Turkey and Russia were also increased. Total forecast 1997 rice trade is unchanged despite reduction in import forecasts for both the Philippines and South Korea. COARSE GRAINS Global trade of coarse grains during 1996/97 is forecast at 86 million tons, down moderately from the 1995/96 trade level. Global production of coarse grains in 1996/97 is expected to be sharply higher than in 1995/96, due largely to increased corn prospects in the United States, China, and the EU, and expected increases in barley production in Canada, Morocco, and the EU. Foreign coarse grain stock levels are forecast to rebound in 1996/97, mostly due to increases in Canadian and EU stocks. US stocks, drawn down sharply in 1995/96, are projected to rebuild somewhat in 1996/97, but remain at relatively low levels. World stock levels at the end of the 1996/97 season are forecast to increase roughly 17 million tons to 108 million tons. The global stocks-to-use ratio is forecast to rise slightly to 12.6 percent, the third lowest level on record. FOREIGN COUNTRIES' POLICIES AND PROGRAMS The EU Brings Wheat Export Subsidies Back to World Trade Not many weeks ago, the EU was imposing wheat export taxes in order to dampen high internal prices, which were prompting complaints by domestic users. Internal prices then eased off as it became apparent that this season's grain crop was going to be huge, and that wheat supplies around the world were also becoming more abundant. This new situation led the EU to end wheat export taxes, and shortly afterwards, bring back export subsidies, to the consternation of competing exporters. The first step was taken on August 29, when wheat export subsidies were awarded to the former colonies that form the African, Caribbean, and Pacific (ACP) nations group. Those subsidies, the first awarded in 15 months, were set at $7 per metric ton. Since that time, subsidies have been granted at progressively higher levels for a wider range of wheat export destinations. These developments follow an earlier action on the resumption of export subsidies for barley and the continued subsidies for malt, rye, and oats. Resumption of wheat and barley export restitutions reflects the EU's apparent concern with disposing of their largest grain crop in history. This increase in production is partly a result of reducing their set-aside rate for two straight years and partly a result of favorable rains resulting in a huge wheat crop in Spain, following several years of drought. Furthermore, the EU will make an additional cut in the set-aside from 10 percent to only 5 percent for the 1997/98 grain crop. But the EU was not the only wheat exporter to produce an excellent crop this season. Argentina, Australia, and Canada all are expecting bumper harvests in 1996/97, so the EU's decision to resume grain export subsidization will only exacerbate the downward trend in world wheat prices stemming from larger supplies. Exporters will have to struggle for a share of a smaller world import demand in 1996/97 because wheat crops in a number of importing areas, such as China and northern Africa, are also quite good. The general rebound in world wheat production has been in no small way due to the very high prices during the 1995/96 season. No doubt, the EU's imposing of taxes on its wheat exports last season contributed to those high prices. Now it is feared that EU's market distorting wheat export subsidies will encourage an overly aggressive response in other exporting countries and lead to an excessive decline in world prices. For further information, call Ken Murray at (202) 690-1252. Israel's Flour Millers Take Own Government to Court on Wheat Import Policy Israel's Ministries of Agriculture and of Industry will have to provide convincing arguments by early November in order to preserve the continuation of certain policies regarding the import of wheat into the nation. Such was the decree of Israel's High Court on September 19 in response to a request by ten of the nation's 22 flour millers, who believe that the government's current import policies place an unfair burden on them to the benefit of the nation's flour and bran importers. The Government of Israel (GOI) maintains an agricultural production policy of subsidizing farmers according to area cultivated. This formula encourages the cultivation of extensive tracts of rain-fed land in outlying areas, some of which are not profitable even with the subsidy. The import policies under dispute represent a governmental attempt to provide purchase guarantees to farmers following the government's withdrawal from the wheat market six years ago. Before allowing privatizing wheat imports in 1989, the GOI was the sole buyer of the entire domestic wheat crop, the sole importer of milling-quality wheat (sourced almost exclusively from the United States) and thus the sole supplier of wheat to the millers. The government also set the prices of flour and baked bread. Such complete control of the nation's wheat economy had enabled the government to insure that farmers always received a positive return for their crop. Upon the initiation of private wheat imports the government introduced new requirements designed to continue to assure a profit to farmers at harvest's end. These new policies included both a linking of import licenses to purchases of domestic wheat as well as the pegging of domestic wheat prices to those of imported U.S. wheat. Under these policies, millers now must show proof that they have purchased approximately one ton of domestic wheat for every three tons of wheat they hope to import (the current 1:3 ratio is reset annually to match the ratio of Israel's domestic production to its total use). Millers also must purchase the domestic wheat based on U.S. prices. Meanwhile, Israel's flour importers, who are not subject to the stipulations applied to the millers, have been free to import significantly less expensive Eastern European flour without fulfilling a domestic purchase requirement. Israel's flour millers complain that the government's import regulations have artificially inflated the price of domestic flour to the point where it has become uncompetitive against the unrestricted imported flour which is flowing into the marketplace. Millers request that the government's wheat import requirements be applied equally to the nation's flour importers or dropped altogether. The United States, which has been supplying the majority of Israel's wheat imports, would likely benefit from either alternative. For further information, please contact James Gartner on (202) 690-4130. MERCOSUR Fosters Integration of Regional Rice Market While much is written about the economic impact of the North American Free Trade Area, little is known about the other American Free Trade Area. But at the southern tip of the hemisphere the MercoSur is binding the economies of the of the Southern Cone more closely together. Recent developments in the regional rice market have underscored the potential for increasing integration of South American markets. Brazil is by far the largest rice market in the western hemisphere. Rice has always been the primary staple food in the Brazilian diet. Since the late 1970's Brazil has been the largest rice importer in the Americas and one of the largest in the world, with annual imports averaging about 1 million tons. After peaking in the late 1980's, area devoted to rice cultivation has fallen steadily in Brazil as a lack of government support and heavy debt burdens have forced many rice farmers out of business. Despite the decline in production and area, the Brazilian rice market has remained relatively stable and free from dependence on the world rice market. Expansion in production and exports by Argentina and Uruguay have allowed Brazil to meet most of its rice needs within the MercoSur trade area. Uruguay has been a substantial exporter of rice for more than two decades. Uruguayan rice is known as being of extremely high quality, very similar to U.S. rice. Since 1990, Uruguayan export levels have nearly doubled and production area has grown by more than 50 percent. This increase in Uruguay's production is a result not only of growing import demand in Brazil, but also of an influx of Brazilian rice growers who have invested in Uruguay because of the more favorable economic climate. While Argentina has long been a significant exporter of wheat and corn, it was only a small scale supplier of rice on the international market. Since 1990/91 area and production have doubled and exports have climbed from 75,000 tons to a projected 425,000 tons for 1997. Thus far the impact of this expansion in Argentine exports has been limited with Brazil taking 85-90 percent of Argentine exports. Recently, however, Argentine exporters have begun to broaden their export range with considerable shipments to Peru and Chile, among other importers. Regional Production Trends Brazil Production in Brazil is divided evenly between two regions. In central Brazil dry-land rice is grown on recently deforested lands. Oddly enough, despite the fact that production in this manner allows planting during only two or three seasons before the fertility of a particular lot is exhausted, total production of dry-land rice is very stable. Dry-land rice is estimated at about 50% of total production. Among industry analysts, no significant changes are forecast for dry-land rice production. In Rio Grande Do Sul (RGDS), rice cultivation more closely resembles U.S. production. Rice is produced in leveled and irrigated paddies and cultivation is mechanized. However, it is precisely in this area that rice production is in steady and possibly irreversible decline. The most significant problem for rice growers in RGDS is the prevalence of heavy indebtedness among rice farmers. This debt burden has helped to fuel an exodus of rice growers from RGDS to both northern Uruguay and northeast Argentina. Some industry analysts report a 10% decline in planting intentions in 1996/97 alone. Industry insiders liken the rice production situation to the Brazilian wheat production crisis. In their minds, most farmers will manage to get by from year to year, but seasons when farmers experience drought or low prices will lead to a small percentage of farmers being forced from the rice sector for lack of public support or guaranteed minimum price levels. In good years it is unlikely that anyone would enter into rice production, as start up costs are considerable. The net result is a slow but inexorable decline in Brazilian rice production. Indeed, since the mid 1980's Brazilian production has experienced a general decline despite erratic year-to-year changes. Uruguay Traditionally, rice production in Uruguay has been concentrated in the southeastern Laguna de Merin region near the Atlantic coast. The recent influx of Brazilian growers has led to development of important rice production areas in northern Uruguay. During the past 10 years rice acreage has increased by more than 75 percent thanks to planting in north-central and north-west Uruguay. Along with that acreage increase, production is up almost 100 percent and exports have increased from 200,000 to 500,000 tons per year. Over the long term it is expected that rice area will continue to expand in Uruguay. As demonstrated by the increasing cultivation during the past decade, Uruguay has substantial amounts of land suitable for rice production which are not used. Increases in rice acreage should be gradual, averaging 5-10,000 hectares per year. Bringing new land into production requires that irrigation infrastructure be constructed first, and some industry sources doubt the capacity of local waterways to support expanded cultivation. In any case, the high cost of land improvement is expected to make increases in planted acreage gradual. Each of Uruguay's production areas are characterized by a relatively high level of technological and infrastructure development. Recent drought conditions would not be expected to have any impact on the Laguna de Merin region, with any production loss concentrated in northern Uruguay, due to low water levels in area reservoirs. Considering the continued expansion in planted acreage, 1997 export availability should be only marginally affected. Argentina In Argentina, rice area has more than doubled during the past ten years and regional industry sources universally maintain that the potential exists for production to be doubled again within the next ten years. Production on a rough basis has increased from less than 400,000 tons per year to almost one million. Expansion in northeast Argentina is not constrained by either land or water availability. The major constraint to increased production is lack of storage and processing infrastructure. For this reason, actual expansion of Argentine rice production is closely tied to either increased exports to Brazil or substantial investment in rice processing and storage facilities by export oriented firms. Just this year, analysts forecast an increase in planted acreage of a minimum of 10,000 hectares. This increase comes in spite of the current drought conditions. Production increases are largely the result of new Brazilian investment in the Argentine province of Entre Rios. As direct rail links exist between these growing areas and Sao Paolo, production has a natural outlet in Brazil. As is the case in Uruguay, this increase in rice area is complemented by an increase in the planting of Brazilian rice varieties (Paso-144); further facilitating the integration of Argentine producers into the Brazilian market. So while prospects for increased Argentine production are heavily dependent on demand from the Brazilian market, proposed economic austerity measures may dampen the recent expansion in rice cultivation. An economic restructuring package recently proposed by the Argentine government included provisions such as a 40 percent increase in the cost of diesel fuel, a major consideration for rice producers. In addition, lack of storage and drying facilities limit Argentina's ability to effectively process and transport any production increases. Internal Market Structure Brazil The market in Brazil has long been dominated by sales of 1 kg consumer ready packages, with over 80% of all Brazilian rice sold in supermarkets. This market is very diffuse; each mill has its own brands and producers are tied closely to local mills. It has been only recently that larger packagers/processors have begun to launch nation-wide brands. Supra-arroz, the nation's leading brand, markets approximately 360,000 tons of rice per year, or 4.5 percent of all domestic sales. Brazil's second largest retailer, Camil, posts yearly sales of 285,000 tons- just 3.5 percent of the market.(Camil alone processes over 200,000 tons of Argentine rice yearly, accounting for 80 percent of its output). In addition, Brazilian consumers have demonstrated a clear preference for the cooking characteristics of domestically produced rice. Brazilian packagers avoid labeling their product as being imported as doing so would create the perception of inferior quality. The only well known case of a foreign brand being introduced successfully into the Brazilian market has been the introduction of a brand by Saman of Uruguay in Recife in the northeast. Imports are generally purchased by millers/packagers. Imported rice from Argentina, Uruguay and the United States will be packaged under pre-existing brand names and sold without being labeled as imported rice. It cannot be over-emphasized that for such packagers, the vast majority of the rice they handle is domestically produced and is perceived by consumers as being of higher quality. Brazilian importers have little incentive to import unless absolutely necessary and certainly have no incentive to promote their packaged imported rice. At the same time, many importers have long and well established relationships with exporters in both Argentina and Uruguay. Many of these exporters are actually expatriate Brazilians and more oriented toward processors in Sao Paolo or RGDS than millers in their own countries. In northeast Argentina, growers are linked by rail directly to Sao Paolo. In addition, farmers in Argentina and Uruguay are, more and more, planting Brazilian rice varieties which yield better than the Blue Belle traditionally grown in these countries. While making their rice more acceptable to Brazilian consumers, this trend limits their acceptance in foreign markets, reinforcing exporter links to Brazil. Exports from Argentina and Uruguay share enormous institutional advantages in Brazil. Being fellow MercoSur members, 10 percent duties for rough rice and 22 percent duties for milled rice are waived. Additionally, non-MercoSur exporters must pay a merchant marine tax (equal to 25% of freight costs-would add at least $10/ton to the cost of U.S. rice exports). While shipping costs from northeast Argentina to Sao Paolo are extremely high (up to $50/ton) despite direct rail links, lower transportation costs from the U.S. are negated by addition of the merchant marine tax. Uruguay Only two large scale exporters operate in Uruguay. Both of these companies maintain tight links with producers, purchasing rice directly from the grower, milling, processing and marketing the rice. In recent years, an increasing portion of exports are leaving Uruguay for Brazil without passing through intermediary hands. Processors not only own mills and market rice, but also own direct watering systems, dams and drying sheds. It was repeatedly stressed in Uruguay that whereas in the United States producers are fairly independent and able to sell to a variety of processors, in Uruguay producers are closely linked to the local miller/processor. That link would involve a growers dependence on processors for everything from water for irrigation to the drying shed for processing rough rice. Despite this close relationship, large scale processors have been unable to halt the conversion of Uruguayan producers from the traditional Blue Belle variety to new and better yielding Brazilian varieties (principally Paso-144). While Uruguayan processors offer a premium for Blue Belle, it is insufficient to compensate for the lower yield. Uruguay has been active in recent years, searching for marketing opportunities outside of South America. Other markets include diverse destinations such as Cyprus, Iran, Senegal and Peru. The prevalence of these new Brazilian varieties is received unfavorably in some markets, however, and it is unclear what strategies exporters will follow, if any, to promote a resurgence in plantings of Blue Belle. Argentina In contrast to the Uruguayan market, the internal rice market in Argentina is very decentralized. The largest rice processor in the country, La Arrocera Argentina, processes only about 10% of the Argentine crop. Approximately one third of domestic production is consumed in Argentina, with the remainder being exported. The internal market is characterized by a profusion of small-scale producers and mills. This lack of large-scale milling operations combined with insufficient storage and drying facilities has resulted in Argentine rice earning a reputation for inconsistent milling and processing quality. Direct rail links between rice growing areas in northern Argentina and Brazil make marketing of Argentine rice abroad easier than relying on underdeveloped riverine transportation between northern Argentina and Buenos Aires. While Argentine rice exports have expanded beyond Brazil, markets are limited. Exports to Chile and Peru have a reputation for inconsistent quality. If Argentine rice is being handled by a reputable processing firm, the quality is quite good. At present no such firms are operating in the export market on a scale large enough to suit all potential importers. The U.S. Role in the MERCOSUR Rice Market Possibilities for Increases in U.S. Exports to Brazil Despite the fact that export prices for U.S., Argentina and Uruguay are very competitive, the U.S. is unlikely to ever be competitive in this market. Unlike other competitors, Argentina and Uruguay have no quality disadvantage when compared to U.S. rice- particularly with both of these nations increasingly turning to production of Brazilian rice varieties. The U.S. has only a 10% tariff on potential exports of rough rice- a market segment in which it has no Asian competitors- but Argentine and Uruguayan willingness to export rough rice make U.S. exports likely only in the event of internal shortages in MercoSur. In August, the cost of Brazilian, Uruguayan and Argentine paddy stood at approximately $200/ton. It was widely believed that paddy prices would be unlikely to rise beyond $250-260/ton under any circumstances. Even at these prices, it would be necessary for U.S. paddy prices to fall to $200/ton (FOB) in order to be competitive. A $200 FOB price in the U.S. would yield a landed cost (including tariff) of approximately $265. As the GOB recently announced its intention to auction significant quantities of paddy stocks during October and November, further increases in Brazilian paddy prices beyond the current $205-215/ton appear unlikely. While U.S. bulk rice exports appear unlikely on a regular basis, there is the possibility for export of value-added rice products. The common perception among industry people in Brazil is that the government's success in implementing the Real Plan and consequent curbing of inflation has led to an increase in consumer purchasing power. This increased purchasing power has led to rapid dietary diversification and dramatically slowed national growth in rice consumption. Increased buying power and diet diversification may increase demand for these value added products. Additionally, while the markets of southern and central Brazil are sufficiently supplied by domestic and MercoSur production, northeastern Brazil may provide opportunities for future bulk rice exports. Economic growth in central and southern Brazil has led to dietary diversification. In northeast Brazil increased spending power can be expected to foster rising consumption of rice. In Recife, Uruguay's Saman has established a branded presence. The U.S. enjoys a slight freight advantage to this region, and in the event of price parity between U.S. and Uruguayan exports- a very possible scenario- U.S. exports would be possible. Supporting this possibility is the chance that declining production in Southern Brazil may cause more local demand for Uruguayan rice, constraining availability for the northeast. Potential Competition: Uruguay In meetings with several industry analysts, it was stressed that Uruguay is actively seeking out new foreign markets (such as Turkey and Iran) but that they recognize that their main market is and always will be Brazil. They see Brazilian rice production as being in the midst of a long term and irreversible decline. A growing need for imports by Brazil is expected to support continued growth in Uruguayan rice cultivation. Outside of Brazil, Uruguay maintains a strong market presence in Chile. Due to the small size of the Chilean market and the institutional advantages conferred on Uruguay and Argentina by MercoSur membership, it is likely that these two nations will completely dominate Chilean imports. Uruguay also has a strong position in the Peruvian market. It is only in Peru where U.S. and Uruguayan exports compete directly on equal footing. The ability of Uruguay to increase exports to Peru is constrained by import demand from Brazil. Uruguayan exports to alternative destinations such as Mexico Turkey, and Iran, are unlikely to seriously threaten U.S. rice exporters. Potential Competition: Argentina As mentioned earlier, a great deal of preliminary interest has been expressed by foreign firms in the Argentine rice sector. Due to the large potential for production increases in Argentina, the high quality of Argentine rice and the technological development of rice production in Argentina, potential for emergence as an important regional supplier is almost limitless. These advantages are only augmented by Argentine experience as one of the world's largest grain exporters. At the moment, several corporations have undertaken comprehensive sector studies, but no major projects are imminent. In the absence of significant foreign investment in the rice export sector, there seems to be little potential for Argentina to emerge as a major exporter. For further information call Morgan A. Perkins at (202) 720-2231. Mexican Feed Grain Imports Rebound from Peso Devaluation Two years after the December 1994 Mexican peso devaluation, U.S. feed grains (corn, barley and sorghum) exports to Mexico are now exceeding expectations. When the NAFTA accord was enacted many anticipated an increase in U.S. exports of feed grains to Mexico. However, the devaluation of the Mexican peso in December 1994, reversed the early momentum and anticipation turned to trepidation as analysts wondered if the Mexican economy could recover in the near term. In 1995, total agricultural trade between the U.S. and Mexico declined and the peso continued to fluctuate wildly. But in 1996, the peso has stabilized around 7.2 to 7.5 pesos/US dollar and the government has steadfastly maintained strict economic policies. Now, nearly two years after the peso's devaluation, the Mexican economy has recovered significantly and U.S. agricultural exports are back on track. In reality, the track record differs for bulk versus intermediate or consumer-ready goods. Bulk commodities, including corn, barley and sorghum, suffered less under the peso crisis than did value-added products which confronted consumers with a greater "sticker shock". U.S. exports of bulk commodities to Mexico actually began to pick up in mid 1995. The speedy recovery of corn, barley and sorghum exports can be attributed to growing consumption and reduced domestic production. A severe drought afflicted major grain producing areas of Mexico, and caused a reduction in sorghum and corn production. In 1996, tight domestic supplies and strong demand led the Government of Mexico (GOM) to revise its import quotas for both corn and barley. With respect to corn, the tariff rate quota (TRQ) established under the NAFTA accord was revised upward four times from a CY96 initial level of 2.65 mmt to 9.3 mmt by July 1996. In recent months, the outlook for Mexico's sorghum and corn crops has improved and the TRQ for corn has been revised down to 7.1 mmt. Nevertheless, Mexico is expected to import 6 million tons of corn in 1995/96. With a larger corn crop, imports are expected to drop to 4 million tons in 1996/97. Similarly, strong demand from the brewing and livestock sectors led the GOM to revise the barley TRQ. The fourfold increase raises Mexico's NAFTA import commitment to 545,000 tons, most of which will have U.S. origins. In the past three years U.S. barley sales have nearly tripled. For 1996/97 barley imports are forecast at roughly 350,000 mt, of which U.S. barley is expected to make up the lion's share. In 1994/95 Mexico's barley imports were close to 110,000 mt. With respect to sorghum, imports are forecast at 1.8 mmt for 1995/96, down more than 700,000 mt from 1994/95. However, imports are expected to rebound to around 2.5 mmt in 1996/97 as a large U.S. sorghum crop makes prices favorable relative to corn. The same factors that made Mexico an attractive market for U.S. feed grains export prior to 1994 -- a growing population and middle class with a preference for U.S. products and a food production sector unable to meet domestic demands -- will continue to support exports in the future. Furthermore, the economic recovery in Mexico is an additional factor that indicates a bright future for U.S. feed grains exports. For further information please contact Deanna M. Johnson at (202) 720-4204. Ukraine Encounters Difficulties in Efforts to Regain "Breadbasket" Status The grain trade on Ukraine's new Agricultural Commodity Exchange came to an abrupt 12-day halt at the end of the summer, prompting traders to charge that the government had ordered state-owned elevators to hold stored grain there until all state grain purchasing contracts had been filled. Although the government earlier had vowed to take measures to ensure that state grain reserves are maintained, officials were quick to dispute the traders' charges of involvement, noting that a formal order by the national government to restrict the movement of grain would violate agreements made with both the World Bank and the International Monetary Fund. However, some restrictions on the grain trade were acknowledged to exist and it was noted that such orders indeed may have been informally issued by some governments at the oblast (regional) level. Most of the grain affected had been purchased in May and June as forward contracts of up to 10,000 metric tons. Brokers unable to deliver on their contracts faced liability for breach unless they could furnish written government orders as a demonstration of force majeure. Although the order ultimately was lifted and trading resumed, traders privately still insist that Kiev has quietly banned all exports until its reserves are filled to the government's satisfaction. This controversy comes in the midst of a disastrous 1996/97 grain harvest, crippled by early drought and now expected to be the worst in 50 years. Currently forecast at just 24.4 million tons, this season's disappointing grain crop is a far cry from the Ukrainian government's initial official forecast of 39 million tons just five months ago and a steep decrease from the 33.9 million tons officially reported to have been brought in last year. The short crop comes as quite a blow to a government which has stated its objective to restore Ukraine to its former position as the breadbasket of Europe by increasing grain exports from the approximately 700,000 ton annual average of the 1990's to between five and 10 million tons annually within the next five years. While there is no doubt that the poor 1996/97 grain crop is primarily a result of bad weather, the Ukrainian agricultural sector has been in decline ever since the collapse of the Soviet central government five years ago. Once the source of a quarter of the Soviet Union's grain and producer of over 47 million tons of grain annually in the years just prior to its 1991 independence, Ukraine must now discover a way to meet its performance objectives without abandoning its publicly-committed process of reform from a command to a market economy. One of the most significant and painful agricultural reforms taken so far has been the removal of government subsidies which had traditionally been provided to both producer and consumer. The result of the sudden withdrawal of these dual subsidies, in an agricultural sector which remains grossly inefficient, was an immediate and severe constriction of producer profit margins. The price of inputs (which had received a larger subsidy than the crop) adjusted upward at a faster rate than the market price c ommanded by the crop they were used to produce. At the same time, a nationwide liberalization of prices triggered a powerful surge in the retail price of meat and other livestock products. Reductions in consumer subsidies quickly followed as soaring prices rendered untenable the effort to keep the already heavily-subsidized livestock products affordable for the masses. Demand for meat plunged in the face of the higher prices, leading to a 30 percent liquidation of the nation's livestock sector and a consequent drop in feed grain consumption as well. As the demand for livestock products (and, by extension, grain) ultimately stabilizes at a level which is more consistent with what the national economy can support, and the cost of inputs settle at free market prices, farmers are seeing the difference in their returns as the market refuses to support the higher prices farmers are accustomed to receiving for their crops. Producers, as major beneficiaries of past dual subsidy programs, have acutely felt the effects of the programs' removal as the more realistic farm income they now receive, while still profitable, is no match for what producers had come to expect in the days before independence. Following an era in which the government provided all the inputs and purchased all the crops, a Ukrainian farmer's success is no longer guaranteed but soon may begin to rise and fall on the new farming decisions he must now make. Farmers view this lost guarantee and the lower profits earned in the freer market environment as a distressing drop in income. The government seems to agree and supports a policy of high procurements and other subsidies. However, this simply postpones the application of free market disciplines such as asset allocation among inputs, planting decisions, crop rotation and, on a larger scale, the creation of a functional national infrastructure, a stable financial system and an efficiently operated agricultural sector. Despite an inclination to the contrary, tight budgets have forced the Government of Ukraine (GOU) to reduce the substantial national procurement as well, an action that would be expected regardless in a time of declining demand. Although last year's reported grain procurement of 5.8 million tons represented just 54 percent of the government's target, it was still enough to cover demand (although small amounts of imports were required to supplement the poor quality of the domestic crop). This year's planned procurement of five million tons (comprised of 4.5 million tons of bread grain and 500,000 tons of seed) represents a further overall decrease in the target amount. The partial collapse of the state procurement has provided an opening for the development of alternative, market-oriented channels such as commodity exchanges, private traders and barter. Still, the transition, particularly considering the lack of stable financing to help the farming sector adapt to the sweeping economic changes, has been wrenching. Although farmers have enough seed for a normal planting, purchases of tractors, harvesters, fertilizers, fuel and lubricants have dropped dramatically. Sowing, tending and harvesting the crop has become increasingly difficult as equipment wears out and spare parts prove too expensive to obtain. The supply of fuel goes largely unused, its cost prohibitive. Meanwhile, grain yields and quality have dropped due in part to poor land management and a marked decrease in the use of fertilizers and plant protectants. As much as 25 percent of the 1994/95 crop is estimated to have been left in the fields due to the dearth of operational harvesters, while the poor quality of the wheat brought in over the past few seasons even prompted Ukraine to seek 1995/96 purchases of U.S. hard red winter wheat under the PL-480 Title I program for the first time. For further information, please contact James Gartner on (202) 690-4130. SITUATION AND OUTLOOK: COMMENTARY AND CURRENT DATA WORLD WHEAT SITUATION AND OUTLOOK The 1996/97 forecast for world wheat trade has been increased by 2.2 million tons from last month to 90.8 million tons, primarily due to a two million ton increase in the projected imports of feed-quality wheat by South Korea. Still, this represents a drop of nearly 1.2 million tons from the previous year and the lowest level of international wheat trade since a mid-1980's dip. Generally favorable weather among importers has combined with a greatly expanded planted area in the major exporting countries to provide a world wheat production increase of 45 million tons over last year's crop. For the first time in four years global production will exceed consumption, allowing for some rebuilding of severely depleted reserves. Nevertheless, stocks are not expected to return to levels carried in the 1980's when government inventories were extremely large. Prices may remain volatile throughout the trade year due to the low level of global carry-in stocks. Exporters With 28 million tons -- 63 percent -- of the 1996/97 global production increase concentrated in the world's five largest wheat exporting nations, competition is likely to intensify as the world's traditional exporters vie for market share. In August the European Union, enjoying the largest wheat crop in its history, resumed the awarding of export subsidies, a practice from which they had refrained for 15 months. Argentina and Australia, each forecast to harvest their second-largest crops on record, are expected to be especially aggressive as well. Exports from Canada are projected to increase in anticipation of additional sales of feed-quality wheat to South Korea. Among the world's major suppliers, only the United States is forecast to export less wheat in 1996/97 than in 1995/96, when the U.S. reliably satisfied high global demand. In India, five consecutive years of record harvests and a liberalization of the domestic grain trade allowed the nation to emerge as a major exporter last year. However, soaring internal wheat prices and rapidly diminishing stocks have put an end to India's wheat exports for the current year. Poor harvests and low reserves have also caused most Eastern European countries to switch from net exporters to significant net importer positions. Importers Most traditional wheat importing nations are anticipated to enjoy their own ample harvests and as a result are not expected to support the level of international wheat trade in 1996/97 as has been experienced in the past. An anticipated shift in feed grain use from corn to wheat prompted a two million ton increase in forecast imports by South Korea, while high internal prices have added 550,000 tons to the import estimate for Poland, as that country goes into the less expensive world market to meet domestic demand. Despite another two million ton increase in projected production, the forecast for wheat imports by China remains unchanged from last month at seven million tons, an amount considered to be close to the bare minimum. The additional production is instead forecast to be absorbed into domestic consumption and stocks. WORLD RICE SITUATION AND OUTLOOK International rice prices weakened substantially during the month of September and into the opening days of October. Export price quotes in Thailand, after holding steady through the first three weeks of September, fell 10% during the subsequent three weeks. Price quotes in the U.S. fell as well, declining steadily during the month by up to $15/ton for #2/4. Price quotes in Pakistan also fell sharply as new crop supplies hit the market, with quotes for 15/20 falling by as much as $50/ton. Among major exporters, only Vietnamese price quotes remained steady, bolstered by strong exports to date and heavy outstanding commitments. Export quotes in India were stable, but at relatively uncompetitive levels as the pace of exports by India continued to slow. Exporters: Global rice trade during calendar year 1996 is now forecast at 18.8 million tons, down 100,000 tons from the previous months estimate, but still the second highest level of trade ever. Meanwhile, forecast 1997 world trade remains unchanged at 18.3 million tons. The calendar year 1996 export forecast for Thailand was cut this month from 5.5 to 5.25 million tons. While ample supplies exist for continued exportation, import demand has slackened recently and January-September exports reached only 4.0 million tons, 540,000 tons behind Thailand's 1995 export pace. The forecast of 1996 exports by China was raised this month from 200,000 to 300,000 tons. After starting slowly the pace of China's exports has increased in recent months, with heavy shipments to South Korea and North Korea in August and September. Late 1996 and CY 1997 exports are expected to be modest, however, as China's stocks have yet to fully recover from depletion during the 1993/94 and 1994/95 seasons. The 1996 export forecast for Uruguay was increased this month from 500,000 to 550,000 tons following an increase in estimated 1995/96 production by Uruguay, from 825,000 to 950,000 tons (rough basis). Exports during CY 1996 by Burma are now forecast at 350,000 tons, down from the September forecast of 400,000 tons. Importers: Other Asia Forecast 1996 imports by the Philippines were reduced this month from 1.2 million tons to 900,000. Following extremely heavy Philippine imports during the first half of the year, the Government of the Philippines has reportedly made the decision to bolster stocks through domestic procurement. Additionally, following a 500,000 ton increase (rough basis) in forecast 1996/97 rice production, the CY 1997 forecast of Philippine imports was reduced from 1.0 million to 300,000 tons. The forecast of CY 1996 imports by China was raised from 750,000 to 850,000 tons while the 1996 import forecast for Malaysia was increased from 400,000 to 450,000 tons. Both adjustments were made on the basis of heavy shipments to date. Following an increase of 450,000 tons (rough basis) in the 1996/97 production forecast for South Korea, the CY 1997 forecast of South Korean was cut from 350,000 tons to South Korea's minimum access commitment of 77,000 tons. Other Africa The CY 1996 rice import forecast for Nigeria was increased this month to 500,000 tons, up from 350,000 as Nigerian imports have increased rapidly of late. Additionally, following a decrease in forecast 1996/97 production, Nigeria's forecast CY 1997 imports were raised to 750,000 tons. Calendar year 1996 import forecasts for Ghana, Guinea and Senegal were increased this month based on heavy shipments to date. Forecast imports by Ghana were raised from 100,000 to 175,000 tons while imports by Guinea are now forecast at 200,000 tons, up from 125,000. The 1996 import forecast for Senegal was raised from 350,000 tons to 550,000 tons while the 1997 import forecast was increased as well, up from 400,000 to 500,000 tons. Middle East The calendar year 1996 import forecast for Turkey was increased this month to 350,000 tons. Recent purchases by Turkey have been extremely heavy, with substantial shipments from exporters which have not historically been major suppliers to Turkey, such as Vietnam and Thailand. WORLD COARSE GRAINS SITUATION AND OUTLOOK Continuing a fifth month of decline, export prices for U.S. corn moderated to average $146/ton in September, and have averaged $132 through the second week of October. 1996/97 corn crop (Sept/Aug) export commitments by the United States stand at 17.4 million tons, with Asian destinations accounting for the vast majority. Prices will likely continue to moderate over the next few months, largely due to expected increases in the availability of feed quality wheat and a larger U.S. corn crop. World trade in corn in 1996/97 is expected to fall somewhat from 1995/96 levels, primarily due to increased competition from feed quality wheat and other feed grains. The United States, beginning the year with extremely low stock levels, is nevertheless forecast to register a respectable export performance in 1996/97, though somewhat diminished from 1995/96 levels. China, once the world's second-largest exporter, and a net importer of over two million tons in 1994/95, is expected to have no net trade effect in 1996/97, as imports are projected to equal exports. U.S. export opportunities in Asia in 1996/97 are expected to remain good, as near-record import levels in the region are projected. World trade in barley is expected to increase significantly in 1996/97. World stocks of barley, while projected to increase from 1995/96 levels, will still be below levels observed two years ago. Projected imports from the largest feed barley importer, Saudi Arabia, are expected to rebound s harply, due increased feed demand. Asia continues to be a significant growth market, primarily for malting barley, as barley imports are projected to increase to record levels in 1996/97. Importers Other Asia Despite the 3 million ton increase in the estimate for China's 1996/97 corn crop this month to a record 117 million tons, officials in Beijing have maintained the export ban imposed in December 1994. While rumors are rife concerning prospects of 1 to 3 million tons of exports, no export licenses have been granted to date. Currently, FOB price quotes in Dalian (the main corn export port for China) are roughly $5-10 higher than landed US corn (basis 1st quarter 1997 delivery to Southeast Asia). However, as new-crop Chinese corn harvest begins to make its way to Dalian, prices can be expected to fall to more competitive levels. ENDNOTES TO GRAIN: WORLD MARKETS AND TRADE REGIONAL TABLES 1) Includes Canada, Mexico, and the United States. 2) Includes Central America, the Caribbean, and South America. 3) Includes Azores, Cyprus, Iceland, Malta & Gozo, Norway, and Switzerland 4) Includes Albania, Bulgaria, Czechia, Hungary, Poland, Romania, Slovakia, and former Yugoslavia. 5) Includes Bahrain, Iran, Iraq, Israel, Jordan, Kuwait, Lebanon, Oman, Qatar, Saudi Arabia, Syria, Turkey, United Arab Emirates, and Yemen. 6) Includes Algeria, Egypt, Libya, Morocco, and Tunisia. 7) Includes all other African countries except North Africa. 8) Includes Afghanistan, Bangladesh, Bhutan, India, Nepal, Pakistan, and Sri Lanka. 9) Includes all other Asian countries except South Asia. 10) Includes Australia, Fiji, New Zealand, and Papua New Guinea. OTHER NOTES Unless otherwise stated, stock data are based on an aggregate of differing local marketing years and should not be construed as representing world stock levels at a fixed point in time. Current and historical data on the European Union in this issue refers to the EU-15. Consumption statistics reflect total utilization, including food, feed, seed, and differences in marketing year imports and marketing year exports. This circular was prepared by the Grain and Feed Division, Commodity and Marketing Programs, Foreign Agricultural Service, USDA, Washington DC 20250. Information is gathered from official statistics of foreign governments and other foreign source materials, reports of U.S. agricultural attaches and Foreign Service officers, results of office research, and related information. Further information may be obtained by writing the division or telephoning (202) 720-6219. Note: The previous report in this series was the Grain: World Markets and Trade Foreign Agricultural Service Circular FG 09-96 September 1996. For further details on the world grain production, see World Agricultural Production, Foreign Agricultural Service Circular WAP 10-96 October 1996.