Plans to build a new sugar beet processing plant in Yorkshire have stalled. As reported in our article last May, the Dubai based company Al Khaleej Sugar planned to construct a plant larger than British Sugar’s Wissington facility on a site near the A1 between Harrogate and York. Talks between Al Khaleej and North Yorkshire Council have now broken down over terms for the site. It is reported that the company is now looking at other sites outside of the UK.
Last July, nearby and forward prices of UK wheat on the futures market converged to within £1 per tonne of each other at a spike of £157 per tonne; £15 per tonne higher than the market had been only 3 months earlier. It looked like the start of a bull run. Since then, the market has slipped back nearly £20 per tonne for old crop and about £14 for new crop. Prices for harvest 2019 are somewhere between the two. There is lots of talk of currency causing movements in the value of grains and other commodities, but, back in July, the pound was worth €1.13 (€1 = 88p) and today the exchange rate is the same. In fact the Pound has been relatively steady at these levels of between 88p and 90p since September, and in a slightly larger range since last June. Plus, the independent movement in futures positions clearly cannot be a function of currency as it would affect them both equally, but is therefore a series of grain fundamentals moving separately for each crop. The movements, whilst adding up, have been gradual but consistent. Without much grain crop production news at this time of year and ample supplies to keep the consumers out of the news, price movements are often gentle and less noticeable. But it is still a £20/tonne fall since last summer.
A gentle but persistent underlying bearishness in the market is borne out by the UK futures. This can possibly be explained by the chart below. It shows how the USDA’s monthly expectation (forecast and then estimate) of the 2017 global wheat harvest has changed since the first estimate in May 2017. Its estimate of global production has risen by 20 million tonnes to 757 million tonnes. Whilst this doesn’t sound particularly much, it is approaching a 3% increase in global output expectation; considerably more than the UK produces in total. The USDA’s consumption figures have increased but by much less (6 million tonnes), meaning considerably more crop is now available than was initially thought.
USDA Monthly Global Wheat Production and Consumption Estimates – Harvest 2017
Whilst anything can happen, it does appear that downside currently exceeds upside in the wheat market. We are aware that any information that is reported on (including USDA statistics) is built into the market immediately meaning forecasting further moves is not possible from public information, but a heavy surplus is likely to slow any future bull runs. Indeed, wheat has fallen more than barley this month, and the difference in some regions is now small. We might see some feed consumers switching from barley into wheat.
Global soybean trade can be simplified as either a) from USA or Brazil to China or b) any other trade. Between them, the USA and Brazil account for 83% of global exports, and China alone accounts for 65% of imports. Whilst exports in both countries have been rising, Brazil now outstrips the USA as the major soybean supplier for the world. Indeed, China has been favouring Brazilian beans this year. This is possibly a price issue, with the Brazilian Real weakening making them more competitive, but also as their protein is consistently higher. China buys soybean, primarily for the meal, not the oil. We would generally expect a weakening of US prices to have a greater impact on EU oilseed (and pulse) values than Brazilian, being more closely connected to the EU marketplace, however, the overall balance between supply and demand is the ultimate arbiter of the base price for commodities.
Whether higher protein adds value in beans is a moot point: A recent seminar on pulses held in Peterborough, was told by a prominent pulse buyer that whilst higher proteins is preferable to lower proteins in beans when it comes to securing export outlets, protein levels do not attract higher payments and growers would not receive more. In other words, the key in the UK when growing pulses is to go for yield, and not protein. At least not until the buyer recognises it as preferable by way of price differentiation.
The 2017 beet harvest is looking set to deliver a sizeable crop. However, it seems set to fall short of the 1.4m tonnes of sugar that was predicted when the harvest began (see September article). Whilst deliveries of beet to British Sugar’s four factories will continue until mid-March, the latest estimate of adjusted yields is that the average is likely to be a bit under 85 tonnes per Ha. From this year’s harvested area of 107,000 Ha, it is forecast that this should deliver 1.38m tonnes of sugar – a little below September’s forecast of 1.4m tonnes.
AHDB figures released in December show that the output from the 2017 potato crop was up by around 15% compared to 2016. This puts total volume at 6.04m tonnes – the highest production since 2011 and only the third time more than six million tonnes have been produced since 2005. The additional output comes from a combination of area and price. Plantings, at 122,779 Ha were up by 5.1%. Average net yields for the 2017 crop are forecast to be 49.3 tonnes per Ha, up by 9.6% on the disappointing 2016 year. Given the jump in output, it is not surprising that prices have suffered. However, average prices have not fallen by perhaps as much as the extra volume might suggest. The AHDB Weekly Average Potato Price, at around £140 per tonne is around £60 below the very-high values seen at this time last year. But this could still be considered within the expected range. Average values are boosted by volumes sold under contract. The free-buy price is currently languishing at below £80 per tonne, compared with almost £250 at the same time last year. There is still some way to go in the season. It is reported that some crops went into store quite wet, and may not emerge in a saleable quality. This could tighten markets later in the season.
The latest figures from Andersons Loam Farm model show that returns from the 2017 harvest are likely to be good for many cropping businesses. The prospects for the 2018 season also currently look reasonable.
To recap, 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 2015 and 2016 harvests, provisional figures for 2017 (some grain is still left to sell), and a budget for 2018.
| LOAM FARM MODEL – Source: The Andersons Centre | ||||
| £ per Hectare | Harvest 2015 (Result) | Harvest 2016 (Result) | Harvest 2017 (Budget) | Harvest 2018 (Forecast) |
| Output | 1,048 | 1,061 | 1,215 | 1,161 |
| Variable Costs | 431 | 421 | 395 | 408 |
| Gross Margin | 617 | 640 | 772 | 753 |
| Overheads | 404 | 394 | 414 | 418 |
| Rent and Finance | 243 | 242 | 243 | 242 |
| Drawings | 75 | 77 | 77 | 77 |
| Margin from Production | (105) | (73) | 86 | 16 |
| Basic Payment | 179 | 213 | 228 | 219 |
| Business Surplus | 74 | 140 | 314 | 235 |
Yields were at average levels for Loam Farm in 2017. But, due to higher selling prices, the output was much improved on the previous two years. Variable costs were down largely due to a dip in fertiliser prices. Overhead costs rose – partly as a result of higher fuel costs, but also because the cost of machinery has moved upwards. Even so, the business made a profit from its farming activity for the 2017 harvest. Add in a very favourable BPS payment, and the total business surplus is very good. In fact, this is the best overall return Loam Farm has seen since the 2012 year.
Whilst Loam Farm will not reflect the results of all businesses, it will be broadly indicative of the profitability of the sector. It is interesting that the figures paint a more positive picture than is found when talking to those in the cereals sector – very few are ‘talking up’ 2017 as being a particularly good year.
As the table shows, the prospects for 2018 currently look quite good, albeit down somewhat on 2017 largely as a result of cost increases.
Those watching the global wheat supply and demand tables will easily be able to see that global stocks are higher than they have ever been. They will also readily be able to appreciate that wheat production has been hitting a series of highest-ever tonnages, including for harvest 2017. However, what is often missed out is that consumption continues in an almost unavoidable manner to reach heady record levels too. This is of course because population is still going up. Having said that, the wheat stocks are comfortably high at nearly 19 week’s supply.
The discussion about DEFRA’s provisional estimate being rather high continued through November and early December within the trading sector, with many not able to replicate the sums. Certainly, the market was not responding in as bearish a manner as if there was such a large surplus as the DEFRA figures indicated. The milling premium has come down this month to about £12 in many regions; depending on location and quality. Some feel that despite the large headline area of milling wheat, many farmers have grown high-yielding Group 1 varieties (such as Skyfall) and cultivated them as feed wheat. This means that despite the higher milling tonnage on paper, in reality, it might leave a bigger sorting job for millers and merchants.
It also appears that in the later parts of the autumn, the weather conditions for drilling gradually improved, meaning many growers managed to plant a higher than usual area of late winter crops. This may slightly amend the figures found in the Early Bird Survey (see next article) which has a closing date for responses of early November. It is now looking like the winter wheat area may be very similar indeed to last year’s and, at the moment, a small decline of winter barley.
News published this week by the USDA shows a projected increase in the area of oilseed rape in France, the largest crop in Europe, and, crucially, a rise of soybean area in the US. It might seem miles away and a different crop, but as it accounts for 75% of the global vegetable oil market, it makes an impact to all oilseeds in the world including oilseed rape in the UK.
Overall markets are slow now, most buying completed ahead of the Christmas break, the surge in requirements has died away as bakers and other supply chain grain users are using their last tonnages before the New Year. Pulses are not happening now until the New Year, and then, watch out for new crop supplies from Australia.
Member States have agreed on a criteria for indentifying endocrine disruptors in pesticides. We have written about this topic previously (see articles in May and June). Although very technical, it is important in terms of the toolkit of plant protection products available to farming. Depending on the precise definition, up to 30 currently-available active ingredients could fall foul of the new rules. The agreement by Member States comes after the European Parliament rejected an earlier version which, in its view, left too many looppholes. It is likely that the new rules will come into force somethime in 2018. The actual effect on spray availability is uncertain as the precise technical guidance guidance is still being worked-on, and then individual active substances will need to be assessed on a case-by-case basis.
The EU vote on the use of neonicotinoids has been delayed until March. The proposal would ban all outdoor use of imidacloprid, clothianidin and thiamethoxam – extending the current ban on flowering plants to non-flowering crops such as sugar beet and cereals.
In slightly better news for the crop protection sector, the re-approval of glyphosate for a five year period as been confirmed. The necessary legislation has been included in the Official Journal of the EU with the reapproval running from the 16th December.
AHDB Cereals and Oilseeds has published its provisional results for their annual Early bird Survey, undertaken for them by The Andersons Centre. Planting intentions for the GB 2018 harvest suggest a small decline in wheat area. Spring barley and oilseed rape are expected to rise in area from the 2017 harvest, with a fall in area forecast for winter barley and pulses. The area surveyed this year has nearly doubled to just under half a million hectares.
| EARLY BIRD SURVEY (EBS) ESTIMATES OF GB CROP AREAS FOR HARVEST 2018 | |||
| ‘000 hectares |
DEFRA June Survey 2017 |
EBS Forecast Harvest 2018 |
Change |
| All Wheat |
1,791 |
1,752 |
-2% |
| Winter Barley |
424 |
388 |
-9% |
| Spring Barley |
754 |
773 |
3% |
| Oats |
161 |
160 |
-1% |
| Other Cereals |
52 |
52 |
1% |
| OSR |
563 |
616 |
9% |
| Other Oilseeds |
27 |
27 |
1% |
| Pulses |
232 |
219 |
-6% |
| Arable Fallow |
241 |
247 |
3% |
| Other Crops on Arable Land* |
431 |
438 |
2% |
| Total |
4,676 |
4,671 |
|
| Source: AHDB /The Andersons Centre * Sugar beet, potatoes, maize, vegetables, roots & other stock feed | |||
The provisional results have been used to extrapolate from the 2017 UK June Survey to produce forecast crop areas for the 2018 UK harvest. The wheat area is seen down year on year by 2% which, if correct, would result in 1,752,000 Ha, making the fourth consecutive decline in area; but still within the range of recent years. Winter barley area is seen declining by 8.5%, with the spring barley area continuing its rise, forecast to rise by 2.5% in 2018 to 773,000 Ha (its fourth consecutive area increase).
The oilseed rape area is forecast to see a strong rebound by 9%, bringing it back over 600,000 Ha, following the three consecutive declines in recent crops. Pulses are predicted to fall in area by 6%, probably mostly due to the ban on pesticide usage in Nitrogen Fixing Crops used for Ecological Focus Areas.
The trend of greater inclusion of other crops on arable land (e.g. crops for AD and livestock) is thought to rise by 2%. This is also likely to include an increase in the area of sugar beet as a result of a rise in the amount of Contract Tonnage Entitlement being offered for 2017 and 2018 crops.
In commenting on current grain markets, similar factors continue to prevail as the last couple of months and the market is still comparatively flat. The November 2017 UK wheat futures contract, which ended on 23rd November, showed a total price variation over its total 2 years and 4 months of being open for trading of £32 per tonne. For 94% of the time it traded within a tight £20 per tonne range of between £125 and £145. There have been single weeks in previous years when markets have moved by £20 per tonne.
For old crop grains, the International Grains Council (IGC) has increased its estimate of 2017 harvested grain crop, increasing wheat by 1Mt and maize by 6Mt. Wheat consumption also rises leaving no net change but maize consumption increases by 2Mt, meaning a small rise in stocks too. We note that whilst half of all global grain stocks are in China, the rest of the world also has ample for now and consumers are not concerned about the whereabouts of their next purchase.
The Black Sea has been, and remains, more competitive for business to North Africa, and so exports from the EU have been slow so far this season, leading to reductions in export expectations and therefore higher carry-over predictions. UK wheat exports have also been considerably slower than last year but with potentially less to export (higher consumption, far smaller opening stocks).
Early indications suggest the US winter wheat area is likely to be down yet again in 2018 and autumn crop establishment conditions are not great (it is too early to make yield judgements but planted areas and write-offs might have a small impact on cropsize). A smaller US wheat area would mean the third consecutive area decline. Also, it follows a massive switch away from wheat in the US last season and a halving of its area since it peaked in the early 1980’s as the chart shows. This can only be bullish for our new crop values but is also fueled by the fact that other countries are fulfilling the demand.
Soybean stocks at the end of the 2017/18 seasons are seen by the IGC as rising, by 2Mt, to 41Mt, largely from slippage in usage figures. Markets have been relatively quiet with little market movement (as per the grains). The next big opportunity for large price movements will probably be in the spring when the spring crop area is established (in the UK, EU and elsewhere).
UK malting barley premiums remain firm, especially for pre-Christmas, as sellers have dried up. However, supply and demands remain tight for the season so opportunities for post-Christmas sales are still good.
Demand for pulses is nearly over pre-Christmas and relatively quiet for the New Year too. The Southern Hemisphere (Australia in particular) will be starting harvest soon into January so the UK will then have to focus in its competitive advantage of distance to the major markets of North Africa.
US WHEAT PLANTINGS: 1980 to 2017 – Source: USDA
European farmers will continue to be able to use the weedkiller glyphosate for 5 more years. This comes after a vote by technical experts from Member States on the 27th November finally agreed to re-authorise the active substance. The key breakthrough was the switch in the position of the German Government. After previously abstaining, it decided to support the proposal. It is believed the change is related to the breakdown in coalition talks in Gemany, in which Angela Merkel’s CDU party were previously courting the anti-glyphosate Greens. Although this is good news for the farming industry, the saga is not over. Both the French and Italian Governments, which voted against the proposal, have stated they will impose national bans on glyphosate. And of course, the issue will all come around again in five years time.
