Category: Arable

March Arable Update

At this time of year, global markets tend to get somewhat fixated on the weather, in the absence of more concrete information about supply and demand.  Quite minor events can have a disproportionate effect on prices.  March has seen examples of this.

Grains prices rose in the early part of the month on increasing fears of a drought across the corn belt of the US where precipitation has been low for some months.  Then a band of rain swept across the Great Plains and prices dropped back.  However, it was then found that the rainfall had not been as widespread as had been hoped, and markets bounced back up again.  A similar effect has been seen in Argentina where the soya crop is suffering from a lack of moisture – causing oilseeds prices to firm.  Some rainfall during the month caused markets to have a brief wobble but, again, the subsequent conclusion was there had not been enough rain to materially affect the growing crop.

Despites the ups-and-downs, global markets have firmed overall during March.  As reported last month, current forecasts for the 2018 harvest show a tightening of supply and demand.  The table below shows the latest International Grain Council (IGC) figures.  The projected fall in wheat stocks is not large, but the reduction in maize could serve to tighten all grain markets.

WORLD GRAIN SUPPLY AND DEMAND – Source: IGC (end March 2018)
Marketing year – 2014/15 2015/16 2016/17 2017/18‚ 2018/19‚
UK Harvest Year- 2014 2015 2016 2017 2018
m tonnes WHEAT
Production 730 737 754 758 741
Usage 714 720 738 742 744
End Stocks 207 224 240 256 253
Stocks/Use Ratio 29.0% 31.1% 32.5% 34.5% 34.0%
Stocks in majorƒ exporters* 66 75 78 66
m tonnes MAIZE
Production 1,027 984 1,088 1,045 1,052
Usage 998 974 1,046 1,074 1,094
End Stocks 284 295 337 308 265
Stocks/Use Ratio 28.5% 30.3% 32.2% 28.7% 24.2%
Stocks in major„ exporters~ 59 81 73 58
m tonnes SOYABEANS
Production 320 315 350 341 354
Usage 312 317 335 347 358
End Stocks 37 33 47 42 39
Stocks in major… exporters# 16 23 19 16
2017/18 is Forecast, 2018/19 is a Projection.   *ƒ Argentina, Australia, Canada, EU, Kazakhstan, Russia, Ukraine, US   „ ~ Argentina, Brazil, Ukraine, US   …# Argentina, Brazil, US

Closer to home, the prospects for another large Black Sea crop look favourable with good planting conditions reported in Russia and Ukraine.  As traditional competitors to the EU for export markets, this could pressure European prices post-harvest if the crop potential is fulfilled.

UK prices have firmed alongside the general global market, but some specific issues also apply.  The Pound has strengthened this month as the Brexit negotiations appeared to make some progress (see General/Policy section).  UK wheat was already uncompetitive on export markets with very low levels of trade being seen.  The shift in currency has made it even more so.  Indeed, current relative prices may even encourage imports of grain into the UK.  Weighing against this is strong domestic demand, including an upturn in bioethanol production.

On the farm, many drills are poised for action, simply waiting for the soil to dry out to get spring crops in the ground.  Although planting is now a two or three weeks behind schedule in many places, it is unlikely that the late spring has shifted planting intentions or potential crop yields enough yet to impact on markets for harvest 2018.

Potato Planting Delays

With trade for the 2017 potato crop remaining lacklustre, weather conditions have been significantly hampering 2018 plantings.  According to the Royal Jersey Company it is about three weeks behind schedule.  A combination of frozen ground earlier in the month and rainfall on the slopes has meant as at 19th March just 56% of the export crop had been planted, the furthest behind it has been for 10 years.  In addition, where planting has taken place, frost damage was widespread in the earliest crops that had emerged, although there are signs of recovery.  Indoor crops have started to be lifted, but again sub-zero temperatures have negatively impacted the growth of these.

The conditions are not unique to Jersey, anecdotal reports reveal the situation is similar in Cornwall, with planting progress significantly behind ‘normal’ years.  Even where planting is possible, the cold soil temperature is likely to hamper growth.  With the delays, we could see more earlies coming to market at the same time, which could put prices under pressure.  But the likely delays in the new crop, could help old season prices, particularly salad potatoes.  Reports suggest these have been storing well.

 

Grain Commentary

In the midst of the Beast from the East, the chilling weather has already been cited as probably damaging crops (particularly winter oilseed rape) in Germany, Poland and the Czech Republic.  These countries have very little snow cover on their crops which can act as a protective blanket against very cold weather.  The USDA has also made its first prediction of US wheat area and crop size suggesting a small increase in US wheat production in 2018.  Strategie Grains has done the same for the EU (no change) and Kazakhstan (2% decline).  The Canadians, Ukrainians and Russians have done similar for their own crops (down  3% in Canada, down 4% in Ukraine, and down 9% in Russia).  The International Grains Council (IGC) has made its first global predictions.  Overall, the wheat area is thought to be declining slightly, maize increasing (but by less than the rise in consumption) and barley increasing marginally on the back of current positive prices.  Soybean production is thought likely to increase globally, but stocks fall as consumption continues to rise.

The area of US wheat is forecast to rise because of an increase in spring wheat area.  The overall winter wheat area is seen declining to a 109-year low of 13.2 million hectares with springs making up the difference.  A notable observation is that the overall yield is expected to increase, despite a rise in the proportion of spring wheat, and a write-off expectation of 17% of the planted wheat crop.

Oilseeds tend to take second fiddle in these announcements but are still important.  The main one, soybeans, accounts for 60% of oilseed output.  Whilst a small decline in production is expected in the US, a large carry-over in stocks means the availability of beans from the US is likely to be high.  On a global scale, the IGC suggested the global harvest would increase but with consumption rising, stocks would fall.  This is interesting as the Chinese have bought far less soybean from the US this year and much more from Brazil – which is now by far the largest exporter of soybeans to China.

The projection from the IGC suggests a fall in output of wheat and a continued rise in consumption, leading to the first decline in global stocks of wheat for six years.  The change is expected to be small (short of unforeseen weather extremes).  Global trade is also predicted to rise to a record level.  The Council also assumed an increase in maize consumption, leading to a second consecutive year of maize stock declines.  Whilst the US will be producing less, South America will step up and make up the difference with a small rise in production globally.  The IGC also expects a high barley crop in reflection of the current high prices.

Of course, much of these crops that have been forecast have not yet even been drilled.  From our experience here in the UK, planting intentions are rather different to final planted areas.  Furthermore, using average or trend yields is all a ‘spreadsheet-analyst’ can practically use at the moment which makes the predictions far from accurate.  From now on though, the attention on new crop will far outweigh old crop and so the fundamentals affecting both crops will start shifting.  By next month, the amount of 2017 harvest left un-committed and un-priced in farm barns will be rather small.

Domestic barley prices have been buoyant this winter and are currently as high against wheat as at any time, with feed barley actually priced higher than feed wheat in some UK locations.  This is unusual as it has less nutritional value than wheat.  Wheat milling premiums have come down over the last month.  For a period after harvest, milling premiums remained steadfastly high, but have since fallen as markets realised that the overall tonnage means ample is available for millers to choose from.  The UK pulse market will be slowing down from its current snail’s pace over the coming month as new supplies will be offered to Egypt from the Australian harvest.  Similar might happen with oilseed rape too.

Cefetra Goes Shopping

The specialist arable crops business, Premium Crops, has been sold to the grain trader Cefetra, subject to due diligence.  Premium Crops specialises in alternative combinable crops such as linseed, HEAR oilseed rape, millet, naked oats, and red wheat.  It had been part of the US-based Technology Crops International since 2014.  Cefetra states that the acquisition of Premium Crops will enable it to diversify its business and offer farmers and customers a wider range of products and services.  Cefetra has also taken over the grain trading business of Dalmark Grain.  A relatively small regional player, Dalmark states that it has found trading conditions difficult and is going to concentrate on its seeds business.  Cefetra is growing its operations in the UK, following its purchase of the Wessex Grain cooperative in 2015

Yorkshire Sugar Factory In Doubt

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.

January Combinable Crop Market Update

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.

Beet Harvest

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.

Potato Output Up

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. 

Loam Farm Update

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.

December Arable Update

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.