Category: Arable

Loam Farm Figures

Arable profits look set to remain solid for the coming harvest, and even the one after, as long as Brexit does not cause too much upheaval.  These are the results of the latest update of Andersons Loam Farm model, prepared for the Cereals Event.

Loam Farm is a notional business, located in East Anglia, which has been running since 1991 and tracks the fortunes of arable farming.  It comprises a 600 hectare (1,480 acre) combinable crop farm running a simple rotation of milling wheat, WOSR, feed wheat, and spring beans.  Of the cropped area, 240 Ha are owned and 360 Ha rented on FBTs.  There is a working proprietor plus one full-time man and harvest casual.  The table below shows the results for the 2017 and 2018 harvests, a budget for the upcoming 2019 season, and a forecast for 2020.

Loam Farm Model – source The Andersons Centre
£/Ha           Harvest Year –

2017

 2018 2019‚

2020ƒ
Output

1,205

 1,205 1,243

1,287
Variable Costs

395

 403 439

449
Gross Margin

810

 802 804

838
Overheads

413

 421 442

443
Rent & Finance

243

 242 238

238
Drawings

77

 79 79

79
Margin from Production

77

 61 45

78
Basic Payment

228

 228 226

219
Business Surplus

305

 289 271

297

The 2017 harvest delivered robust profits with both prices and yields good – this was an improvement on 2016 when a negative margin from production was seen.   Variable costs were at low levels for 2017 because fertiliser was bought well.  In 2018, yields were affected by the drought, but higher prices compensated for this.  Extra costs meant that returns declined slightly.

For the upcoming 2019 harvest, yields from the wheat and beans are forecast to revert to normal levels. However, output of the oilseed rape is set to fall due to poor establishment and pest problems. With reasonably robust crop prices, output is up a little on 2018 but overall profitability falls as costs, once again, increase.

The current budget for harvest 2020 is based on prices remaining around current levels (this is heavily dependent on the outcome of Brexit and/or movement in exchange rates).  Output increases because it is assumed that oilseed rape yields will recover – it is not yet clear whether the 2019 season was just a ‘blip’ or heralds a fundamental issue with the crop.  Overall, profit remains positive, and similar to the relatively stable situation seen for the previous three years.  However, this is contingent on an ‘orderly’ Brexit, should there be a ‘No Deal’ outcome, then the prospects would be reduced.

The Loam Farm figures show that combinable crop farming has had a run of good profitability, that could well continue in the short-term.  However, this is more to do with external factors, not least the weakness of Sterling, rather than the fundamental strength of the business.  With the phase-out of the BPS over the next decade, and any market changes that Brexit might bring, the longer-term outlook is far more uncertain.

France Bans Epoxiconazole

The important fungicide epoxiconazole will no longer be available in France.  The French regulator ruled that it was an ‘endocrine disrupter’ and posed a risk to human health and the environment.  Although, not of immediate impact to UK farmers, this could set a precedent.  The EU is due to review the authorisation of epoxiconazole in April 2020.  The active ingredient could be lost to all EU farmers if the EU regulator agrees with the French assessment.   

Corteva Launches

A major new player in the global agro-chemical sector was formally created on the 1st June.  Corteva completed its separation from the merged Dow-DuPont business.  This creates a new business with a turnover of €14bn focused on crop protection and seeds.  It operates in more than 140 countries worldwide and has a workforce of over 21,000.  It continues the trend of consolidation in the agricultural supply chain, and especially in crop protection, with Bayer’s takeover of Monsanto and ChemChina’s purchase of Syngenta.

Global Grain Stocks

According to those who keep track of such numbers (in particular the US Department of Agriculture and the International Grains Council) the world has plenty of grain in store.  At 640 million tonnes of year-end wheat and feed grains, that is nearly as much as the world has ever had.  That sounds rather bearish for prices.  However, there are two points worthy of note.

The first point to consider is where those stores are being held.  In essence it matters not whether grain is in exporter’s barns or importers silos; it is all available to supply consumers.  But if something is thought likely to remain in store for a considerable time, then its impact becomes significant only at the time of its sale, not whilst it is squirreled away in a barn.  There are more consumers in China than in any other country in the world.  China therefore gets through more grains than any other country; in fact, consuming about half as much grain again than the Americans, the second most hungry nation.  China also produces more grain than any other country, this time by a margin of about 20% over its nearest rival, again the USA.  China has not historically been a large player in the global market apart from topping up their wheat reserves from time to time.  However, it has, in recent years, started importing various grains, including barley and maize as well as more tropical crops like sorghum.  And, as it happens, over half of that 640 million tonnes of grain carry-over stock is held in this one country.  That is equivalent to nearly 10 months supply.  One would assume it will be used one day, as long as it is being properly stored, but it also means that whilst it is locked up like that, the rest of the world has to operate as if it wasn’t there.  Clearly if it is sold and Chinese stocks fall one day, as has happened in the past, it could lead to low grain prices for some time, but in the meantime, stocks, excluding those in China are relatively tight at 300 million tonnes.

The chart demonstrates the grain stocks held in China compared with the rest of the world, and the amount eaten in China compared with the rest of the world. it demonstrates they are holding quite a bit.

Grain Stock and Consumption Globally; China and the rest.

The second point is, we are consuming more grain than we have ever done so as well.  So as a proportion of consumption, 300 million tonnes is not that much.  Of wheat, the closing stocks is about 23% of consumption, almost a quarter of a year, but of feed grains, its 13%, about 6 weeks.  This is about equivalent to ‘pipeline stock’ requirements in the UK and many other countries as the end of the season is June and harvest begins in August.  All of a sudden, its starting to sound a little more bullish.

Arable Event for Scotland

The AHDB, the James Hutton Institute and Scotland’s Rural College have come together to launch a new arable based event in Scotland.  Arable Scotland will take place on 2nd July at Balruddery Farm, Invergowrie, Dundee and aims to bring together key players in the food production industry from farmers to distillers to look at new innovations and discuss sustainable farming.  This event will focus on spring barley, whilst future events will concentrate on other crops and their markets.

Grain Market Commentary

Everything grain marketing is focused on new crop by this time of the year, even the remains of the old crop.  However, this year there is a problem.  Without knowledge of a Brexit outcome, exporters have no idea what they can afford to pay, not knowing whether there will be any kind of trade deal meaning a transition to Brexit and therefore whether they will have trade tariffs to pay to send grain to the EU-27 next year or not.  Furthermore, importers are in the same position.  Trades for the new crop are just not taking place, at least not until after Halloween.  A likely wheat surplus for the UK this coming year is compounding the problem.

The domestic marketplace is far less impacted by Brexit and theoretically not at all, however, the traded tonnes are those that set domestic prices.  Buyers at the grain processing and milling firms are dealing with this mainly by carrying-on as normal – all their competitors are in the same position, and unless any take any speculative positions, they will all experience the same price shifts simultaneously.

The weakening of Sterling as a result of political uncertainty has given a small boost to grain prices.  Barley prices have lifted in recent days as well as wheat, albeit by less than the rise of wheat prices.  This might seem a worse outcome for barley, but the potential barley surplus and uncertainty over the export of the crop from November might actually mean this is a good opportunity to sell.

The weak Pound has boosted the oilseed rape price in Sterling terms during May.  Oilseed rape does not have a trade tariff on it, so the complications from Brexit are less significant.  However, the US government has announced substantial support in terms of additional grants for soybean growers in the USA, in a bid to compensate them for the US-Chino trade spat that they have become embroiled in.  This does not seem to have had a major impact on EU oilseeds as yet.  One might assume a high global oilseed crop this year, considering the Brazilians have also been producing lots of soybeans to steal the US business to China; it all has to go somewhere.

Beans do have trade tariffs, but only small ones.  The new crop is in very good condition at the moment, a rather different situation to their final condition last harvest.  Again, it is new crop that the markets are focused on, and currently, other proteins such as rape meal and soybeans are comparatively cheaper than pulses so their incorporation into feed rations is likely to be relatively small.

In the field, growing crops are looking good throughout the UK, that is with the exception of oilseed rape.  Grains and pulses are growing well, and reports of serious disease issues are rare.

Glyphosate

Bayer is to appeal the decision of a US court that the herbicide glyphosate was responsible for a gardener’s cancer.  We reported back in August that a Californian court had awarded £290m to Dewayne Johnson.   The award had already been reduced to ‘only’ £78.5m on appeal.  However, Bayer has now asked a Appellate Court to quash the original verdict.  If this does not happen, it will press for a retrial – stating that the original judge did not allow all relevant evidence to be heard.  In a development that may be helpful to Bayer, the US Environment Protection Agency (EPA) issued a statement on the 30th April affirming that glyphosate ‘is not a carcinogen’ when used in line with label recommendations. 

GM Camelina

Defra has approved a five-year trial of genetically modified camelina.  The work, to be undertaken by Rothamstead Research, is testing the modified crop in field conditions.  It builds on previous work undertaken by the institute which is looking to breed a commercial crop that can produce a replacement for fish-derived omega-3 oils.  A plant-derived source of this important component of diets would reduce pressure on wild fish stocks.  It could be used directly in human diets and also in food for farmed fish (which are currently often fed on caught fish).  The trials will also be looking at other elements of modified camelina such as increased oil content and altered oil composition.

Grain Crop Commentary

Old Crop

Towards the end of the wheat marketing season, the impact of the fundamentals of grain supply and demand change, with some taking on greater impact, others less.  Firstly, the increasing amount of information over the emerging new crop overtakes the dwindling and ageing information about the remaining old crop, increasing the impact from new crop fundamentals.  Secondly, the volume of new crop wheat being traded, which is rising all the time surpasses the declining volumes traded of old crop.  This accelerates when the last old crop futures market expires as is the case now as we enter May (having entered the notice period for physical delivery of the underlying good).  Market fluidity also declines considerably when futures markets are not available.  The technicalities of closing the held contracts becomes a physical issue either having to physically deliver them or close the position.

This year, domestic wheat consumers are buying no more than ‘pipeline stocks’, as they are fully aware of the considerable discount (£16 per tonne) that exists between old crop and new crop, and that the price between the two crops must converge at some point.  On the back of the previous paragraph, they are aware of the forthcoming downside to the grain market; if physical grain will have to come out of the stores to honour the futures contracts already held, then this will prove a bearish factor on a thin and technical market meaning prices are likely to fall from here.  Indeed, the value of wheat has fallen over the month and this will probably continue.  It could well be time for long-holding farmers to sell the remainder of what they have in their barns.

New Crop

Rain in the UK has been gratefully received, but for most parts, its not enough.  However, analysts are reporting good crop conditions throughout the world and large global areas of wheat.  High levels of planted wheat in Canada and the US, and rainfall in the EU has raised crop expectations this month compared with last.  Speculators and funds are holding a considerable short position (i.e. the have sold what they don’t own, expecting the value to fall so they can buy them back cheaper).  It is maybe no surprise that the new crop is considerably lower priced than old crop.

Demand for feed barley has faded since Easter as the warm weather has provided a welcome burst of grass for the livestock farmers.  Coupled with this, many farmers have used Easter to clear their remaining unsold grain, placing downward pressure on feed barley values.  Volumes of export sales are small, and short term, as nobody is clear what tariffs will be charged on sales after Brexit.

Oilseed Rape prices have held up well in the UK this month partly on the back of a weakening Sterling. The underlying market, the US soybean market has fallen sharply, despite reduced forecast crop areas, and expectations of a resolution of the US/Chinese trade dispute that has been taking place in recent months.  Despite the UK OSR crop looking pretty poorly (see other article), globally the oilseed crops are in better fettle.  OSR is not a price setter itself as volumes are comparatively small compared with other vegetable oils such as soy bean oil.

The old crop Pulse market is now effectively over, and thoughts are now on the emerging new crop in the ground.

International Grains Council Figures

The International Grains Council (IGC) has released its first full supply and demand projection for the 2019/2020 year, showing 50 million tonnes more grain production than last year with a 34 million tonne rise in consumption.  Consumption goes up every year as we might expect simply as population rises and each person is consuming more than consumers in previous years.  This means that production should be a record each year, simply to keep pace.  However, this coming year, despite production clearly rising faster than demand, the stock level is thought likely to fall.  This is because the stock level was already falling and simply to keep pace, production would have had to rise further.  This is demonstrated in the table.  The level of year-end stock has fallen from over 30% three years ago to 26% now.  This is what has underwritten improvements in grain prices in the last year.  China is ever-increasing its holdings of grain stocks, with over half of wheat and possibly as much as 65% of global maize grains being held in its stores.  This potentially means there is much less grain available than these figures suggest as Chinese stocks are not generally available for the wider market.

All Wheat and Coarse Grain (Million Tonnes)

2016/17

 2017/18 2018/19

2019/20
Production

2187

 2142 2125

2175
Consumption

2126

 2153 2170

2204
Carry over

659

 648 604

575
Stock as % of Demand

31%

 30% 28%

26%

For wheat specifically, the picture is reversed.  The stock level is seen rising, with a greater rise of wheat production for harvest 2019, resulting in production remaining well ahead of consumption.  In terms of physical tonnes, there was more wheat stock in 2017 but as consumption was lower in those days, the stock level as a percentage of demand was lower.  This is shown in the chart below.

Wheat (Million Tonnes)

2016/17

 2017/18 2018/19

2019/20
Production

757

 763 735

759
Consumption

735

 741 742

752
Carry over

248

 271 264

270
Stock as % of Demand

34%

 37% 36%

36%

Overall, the figures suggest a strong level of support for grains overall, but there is ample wheat, suggesting the price premium that wheat tends to carry over maize and other feed grains, might be rather slim for a year.