Category: Arable

BPS or June Survey Areas, which are Correct?

Since the revision of the CAP in 2015, when Greening was introduced, the claim form for direct payments has become considerably more complicated. The necessity to record each crop, which was simply not a requirement of the Single Payment scheme is present with the Basic Payment because of the 3-crop rule.

For the second year running, Defra has published a comparison table comparing the June census crop area figures for England against the claimed BPS crop areas. A noticeable difference between the 2 sets of data has emerged, specifically in wheat, with an almost 7% difference in 2018 (BPS lower). This is equivalent to 108,000 hectares which at average yields is over 850,000 tonnes of wheat potentially  missing, certainly enough to have a considerable impact on the market, especially as it would shift the UK’s balance from that of a net exporter to net importer. The market reacted with an assumption the survey was incorrect which may not be the case.

Examination of the other crops suggests the differences between the two data sources have increased this year compared with the previous 3 years. As the tables below show, considerable differences  of the magnitude experienced in wheat (as a percentage of each other) are also seen in oats, beans and fallow land.

There were no differences to the forms this year, so whilst it is possible that claimants entered field edges and environmental scheme information differently, or entire field versus cropped field areas, one would expect the differences to be consistent year to year. It is barely possible that the different date of each form made any difference (even with the extreme weather conditions) as crops would have been planted for both dates; 15 May and 1 June. Defra is examining the discrepancy and we will report of the outcome when we know it.

Arable Market Commentary

New Crop

In terms of growing conditions, little could be more extreme than the temperatures recorded this month compared to last February.  In the February 2018 bulletin we cited the ‘Beast from the East’ delaying drilling.  This year, spring drilling is well ahead of normal with almost 25% of spring barley already in the ground.  A word of warning though; early drilled spring crops are not always the highest yielding, and there is time yet for very cold weather.  We reserve any judgement on harvest yield potential.

The USDA makes its first prediction of US wheat area every February, this year suggesting decreased plantings, in a falling area trend.  Indeed, if correct, it would be smallest US wheat area for 110 years.  This identifies the changing demands for grains, shifting to maize, for pig and poultry feed, biofuels and indeed even human food.

The International Grains Council’s first expectations of the forthcoming 2019/20 year are for a rise in global wheat production, of about 1%, a similar magnitude to the annual rise in demand so no substantial changes in year-end stocks.  This seems to contradict the findings of the USDA, but theirs, of course is USA only.  An increase in coarse grain harvests are also foreseen by the IGC, with maize and barley both up about 1%.  This is in line with the rise in demand so is no more than trend demand.  Much of the coarse grain increases are predicted to occur in the USA and China; the two biggest grain producers, so a small proportional change in these countries will be noticed.  However, there are also rumours that China is considering rolling-out a major expansion to its bioethanol inclusion policy, which would have a considerable impact on feed grain demand in the coming few harvests.

Of course, much of these crops that have been forecast have not yet even been drilled; all maize, and soybeans are spring crops and Canadian, Russian and half of the US wheat is also spring varieties.  Therefore, these projections are statistical analyses coupled with a smattering of planting intention data, not hard evidence of plants sprouting from the ground yet.

Old Crop

In the EU wheat market, a gradual decline in values this month (making European grain cheap compared with American grain) led to Europe and Russia winning some large export contracts to Saudi Arabia, boosting the export figures and balancing the supply and demand books.

The demand for ruminant feed is currently slipping away as cattle venture into the fields and sheep have grass to eat; leaving a lack of demand for feed barley, which has fallen to a £25 per tonne discount beneath feed wheat (which is primarily fed to housed chickens).  Barley is being included at maximum rates in rations now for this reason.

Oilseed rape prices have taken a tumble, based on the arrival of a large vessel loaded with Canadian canola, and the reduction of the rapeseed crush volumes in the UK.  This time of year is often difficult for European rapeseed (and pulses) as harvests from the Southern Hemisphere become available and start putting pressure in markets.  The Old Crop pulse market is increasingly thin and new opportunities will become rarer now, despite a healthy premium over feed wheat for pulses.

Potato Roundup

It is not shaping up to be such a high-priced season as many in the potato industry might have been expecting, but there is still time for further price increases.

The UK may have had its fourth smallest crop ever in 2018, but many growers will be surprised that prices have not been higher in response.  Average free-buy prices in February were at £250 per tonne, which was more than double the year before, but still below two years ago and £60 per tonne off the values of the rain-affected 2012/13 season.

Final estimates from the AHDB put the 2018 GB crop at 4.887 million tonnes, 24% lower than the bumper 2017 harvest and the lowest figure since 2012.  Only that year and the mythical drought years of 1975 and 1976 saw harvests of less than five million tonnes.  But there is evidence that buyers are using potatoes more sparingly, with November stocks higher than those in 2016.

Quality in store has also been better than many expected and most buyers were still finding it relatively easy to secure the stocks they needed in February.  There is an expectation that the market will tighten once stocks of contract material have been used.

There could also be export demand, with the German and Belgian potato industries at least one million tonnes each short of the stocks they need.  Free-buy prices in most Northern European countries are at the highest they have ever been for the tine of year.  So far it has been France which has benefitted from its neighbours’ shortages.  It had a relatively normal harvest and its proximity to where the demand is means that it has been shipping large volumes of potatoes.  UK potatoes have not been at a large enough discount to French stock to make it worth shipping material, but that could change in the coming weeks.

A messy Brexit could damage hopes of late-season export demand, but if there are restrictions on trade or tariffs then it would be EU suppliers to the UK who would suffer the most, facing an €110 million in tariff duties on potatoes and potato products shipped to the UK, compared to €27 million for British suppliers.

At home the potato industry will be relieved that higher grower prices this season have not led to reduced consumer demand.  Latest figures from research company Kantar Worldpanel show that sales of fresh potatoes have held steady along with consumer prices, while sales of frozen chips have actually increased.  In the 2012/13 season much higher consumer prices led to reduced sales.  However, there will be concern about who is bearing cost of higher grower prices, with retailers still selling some potatoes at 50 pence a kilo.

The drought-affected 2018 harvest has limited the 2019 seed choice of some growers, although, again, the UK has not been so impacted as the continent because of a good supply of Scottish seed.  There is little expectation of a significant increase in the potato area this year.  A very dry winter on top of last year’s drought is causing concern among growers that they will not be able to get the water they need to irrigate, but there is a nagging fear that after so many months of dry and warm weather we could be due plenty of rain, which could be just as damaging.

Potato Production Falls

AHDB estimates put the 2018 GB potato crop at the lowest level since 2012.  Provisional figures, released before Christmas, put total output at 4.89 million tonnes.  This is a 19% drop from the 6,043 m tonnes seen in 2017, and 13% below the five year average.  Whilst the planted area dropped by 4%, it was low yields that really hit production, caused by the weather during 2018.  Late plantings and the hot dry summer took their toll on crops.  Average yields fell to 41.7 tonnes per Ha, down 12% on the five-year average.  The AHDB points out that there were also quality issues this season, which means that not all of the crops harvested may be marketable.  This has the potential to keep prices firm for the rest of the season.

Beet Harvest

The 2018 beet crop looks set to be better than forecast following the hot dry summer.  Within a trading update by British Sugar’s parent company, ABF, the processor outlined that it now forecasts total sugar output to be around 1.15 million tonnes rather than the 1.05 m tonnes stated in the autumn.  This is largely due to higher-than-expected sugar content.  The increased figure is still well below the record 1.37 m tonnes seen from the 2017 crop.  Factories are expected to shut in the next few weeks, after which the final average yield for the year will be published.  The average will hide more than usual as there has been great variability between crops.  On the lightest land, some producers almost saw a crop write-off, whilst those on stronger soils will often have achieved very good yields.

Fengrain and Frontier

The cooperative Fengrain has announced that it has entered into ‘exclusive negotiations’ with Frontier regarding the latter taking on the grain trading and grain marketing activities previously carried out by Fengrain Services Limited.  In an increasingly consolidated and volatile grain-trading marketplace, Fengrain has decided to concentrate on its core grain storage and grain handling activities.  A report on the outcome of the negotiations is promised by mid February.

 

Gleadell Ownership Change

The Lincolnshire-based grain trader Gleadell is to become a wholly-owned subsidiary of the giant US-based trader, Archer Daniels Midland (ADM).  Previously, Gleadell was a 50:50 joint venture between ADM and the French co-op Invivo, which is now selling its stake.  ADM will merge Gleadell with its existing UK operations, including ADM Direct, to form ADM Agriculture.  The deal is expected to conclude sometime in the first quarter of 2019.

Combinable Crops: January Update

Sterling is at its strongest point against the Euro for almost a year and a half (which lowers grain values), yet it is still only 4% stronger than it was when it started rising in early January. This means it has taken approximately £7.00 off the price of a tonne of wheat, and £13.00 from oilseed rape.  For many, this is the difference between a profit and a loss, but, equally, is not such a violent swing as we have seen in previous marketing years, when wheat price has shifted by far more in single days.

The grain market is relatively quiet; surprisingly high amounts of wheat remain unsold, despite some predictions from the trade that farmers would be sold ahead of Brexit.  In fact, the farming community being pro-Brexit on balance might see opportunities from selling later this year.  However, long-holders should be aware that the spread between old crop and new crop wheat currently sits at just under £20 per tonne, ex-farm.  Large price spreads like this have to close at some point which suggests either old crop is too dear or new crop is cheap.  The chart below shows the big step in prices as we look ahead to 2019-crop.

The discount from feed wheat to feed barley currently sits at about £10 per tonne, a comparatively small 6% of the wheat value.  Yet despite this, the discount is attractive to feed compounders.  Good quality malting barley retains a comfortable £30 per tonne premium over feed barley, but the market is currently thin with small volumes of new business being done.

The pulse market is also thin, with not many beans remaining unsold on farm.  The market is therefore starting to turn to new crop marketing; a difficult one as quality is unknowable at this time of year ahead of harvest.  The market has been strong though, with the price spread of feed beans over feed wheat having risen to over £50 per tonne: a margin not seen since the spring of 2015.  This is largely because of the small and damaged harvest of 2018 following the hot weather, coupled with political complexities within the global vegetable protein market at present.  Many farmers will be looking to secure more spring bean seed, although its availability is not clear, despite a derogation for certified seed to have a lower germination this year than usual.

Arable Market Update

This time last year we took a look at the global grain supply and demand figures supplied by the International Grains Council (IGC).  The IGC is a politically independent body, so therefore theoretically has greater credibility than the US Department of Agriculture, the other major organisation that publishes global grain statistics.  The only issue is that the IGC has a secretariat of about 20 economists, and the USDA, some thousands, with people on the ground in every region of the world.  In any event, the figures from the two organisations are often relatively similar!

Twelve months ago, we discussed how wheat stocks were at their highest ever, in physical terms.  This year, running at 38 million tonnes (or 5%) less, the fundamentals are looking more positive for grain long-holders (farmers).  Furthermore, as can be seen from the change in pre-harvest expectations back in March 2018, to the last set of figures in November, the reality of what has been harvested in the 2018 year (and continues to be cut in the Southern Hemisphere) is lower than initial estimates; again, bullish for price.  The stocks to use ratio is lower than last year at 35.4%, but still considerably higher than the previous two years, suggesting accessing the right specification and location of wheat by consumers is unlikely to be challenging to buyers in the coming season.  A lower level of stocks held by exporters offers a glimmer of hope to those waiting for prices to rise, but it also suggests that importers have more stocks so might buy less.

 

17/18 figures forecast; 18/19 estimates   1 Argentina, Australia, Canada, EU, Kazakhstan, Russia, Ukraine, US    2 Argentina, Brazil, Ukraine, US    3 Argentina, Brazil, US

A look at the maize figures shows a different story; one of rising stocks and increasing availability.  This indicates that crops grown for energy alone (animal feed and bioethanol purposes primarily), are in relatively bounteous supply.  It suggests that the premium for milling varieties might benefit in the coming year.  However, in another interesting twist to the story, as stock levels are expected to be so much lower this year than for the last few (because of rising usage), the stock:usage ratio is seen falling.  Furthermore, the Egyptians (the world’s largest wheat importers) have been buying Russian wheat at prices above anything they have paid for 4 years.  This, coupled with a weakened Sterling because of recent political shenanigans, supports UK wheat prices.  We are still a long way from harvest 2019 (the IGC hasn’t even started to forecast supply and demand for it as yet).  There was a view that, barring major weather events, as we approached harvest 2019 there would be a downwards ‘correction’ in wheat prices as availability rose.  There is now perhaps a lesser chance of this happening. 

Barley markets are quiet ahead of Christmas, with few buyers or sellers, including no new export business. Premium samples of malting barley retain a good premium for those still unsold.

The oilseed marketplace has seen prices move a little more than grains this month, partly because of the Chinese/US politics which affect soy beans but also as the southern hemisphere crop is being harvested and some is already sold and loading for delivery into the EU.

Loam Farm Update

Despite the summer drought, many cereals businesses will have returned solid profits for the 2018 harvest.  The outlook for the 2019 crop looks reasonably good too.  These trends are illustrated by Andersons Loam Farm model which has just been updated ahead of LAMMA 2019.

Loam Farm is a notional business, located in East Anglia, which has been running since 1991 and tracks the fortunes of combinable crop farming.  It comprises 600 hectares (1,480 acres) in 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 2016 and 2017 harvests, an estimate for the 2018 season, and a budget for 2019.

Loam Farm Model – source The Andersons Centre
£/Ha           Harvest Year – 2016 2017 2018 2019
Output 1,061 1,205 1,214 1,283
Variable Costs 421 395 403 443
Gross Margin 640 810 811 840
Overheads 394 413 421 441
Rent & Finance 242 243 242 240
Drawings 77 77 79 79
Margin from Production (73) 77 70 77
Basic Payment 213 228 228 221
Business Surplus 140 305 298 298

The output from 2018 harvest has increased slightly from previous budgets.  Reduced yields have been more than offset by strong prices.  With a BPS now confirmed at the same as last year’s levels, overall business profitability is not far short of the 2017 year, which itself was favourable.  As we always reiterate, whilst Loam Farm is representative, every business is different.  Some farms (especially with light soils) will have seen yields more adversely affected by the drought, and thus will not be showing such good returns for 2018.

Looking to 2019, the budget has improved compared to previous versions.  This is largely due to better prices which are still available in the market for harvest 2019 (Loam Farm has already sold some grain forward).  It will be noted that costs, both variable and overhead, have increased compared to 2018.  With a high-cost year in prospect it will require both decent yields and decent prices to maintain the high level of profitability seen for the last two harvests.