Category: Arable

The proposed merger between the agri-input giants Bayer and Monsanto has moved a major step closer with the deal gaining approval for US competition authorities.  As part of the approval, Bayer will be forced to sell around $9 billion in assets including its cotton, canola, soybean and vegetable seeds businesses, its digital farming unit, as well its Liberty herbicide, which competes with Monsanto’s Roundup.  The merger has now gained approval from most jurisdictions, but still needs authorities in Canada and Mexico to agree before the merger can be finalised.  The combined firm will be the world’s largest seeds and pesticides business, with sales of around €20bn per annum (after the divestments).  This compares with around €12bn for DowDuPont’s new Corteva Agriscience division, €11bn for ChemChina (Syngenta) and €8bn for BASF.

Andersons updated its Loam Farm Model for the 2018 Cereals Event.  The table below shows that returns from the 2017 harvest were very good – in fact, the highest seen since the 2012 harvest.  Prospects for the upcoming 2018 harvest are not quite as good, but the businesses still delivers a reasonable return – once subsidy is included.

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 2016 and 2017 harvests, a budget for the upcoming 2018 season, and a forecast for 2019.

Loam Farm Model – source: The Andersons Centre
£/Ha           Harvest Year –	2016	2017	2018	2019
Output	1,061	1,205	1,147	1,187
Variable Costs	421	395	403	427
Gross Margin	640	810	744	760
Overheads	394	413	421	441
Rent & Finance	242	243	242	240
Drawings	77	77	79	79
Margin from Production	(73)	77	2	0
Basic Payment	213	228	219	221
Business Surplus	140	305	221	221

The improvement in output seen in 2017, compared to 2016, was largely due to higher selling prices (yields were at average levels).  Variable costs dipped for 2017 largely due to a fall 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 (which has not always been the case for Loam Farm).  Add in a very favourable BPS payment, and the total business surplus is very good

The prospects for the upcoming 2018 harvest are not quite as good – projected yields have been trimmed due to the late, wet spring, notably for the spring beans.  However, forward prices are still reasonable (Loam Farm has already committed some sales) which sees output hold up.  Variable costs have risen.  This is largely due to fertiliser price increases, but these have been partially offset by lower spray usage this spring.  Higher fuel prices are contributing to the rise in overheads.   Overall, the farm is forecast to  just about break-even from its cropping operation.  Once the predicted Basic Payment is added-in, a reasonable business return is seen.

The budget for 2019 shows little change in the overall results.  However, it can be noted that costs have risen (mainly fertiliser and machinery depreciation).  This has been offset by budgeted yields reverting to normal levels.

Whilst the budgeted business surplus for 2018 and 2019 shows a decent return to the proprietor of Loam Farm in the short term, it is also obvious how dependent the business is on the Basic Payment for overall profitability.  With changes coming under a Domestic Agricultural Policy, Loam Farm, and many businesses like it, will have to reassess their operations.

 

Global Cereals

It is very early to spot anything serious in terms of new crop price movements: So much market ‘noise’ is centred around forecasts of weather changes or even current weather.  So currently, there are bulletins of dry conditions in the US, in Australia and South America (e.g. Argentina and Uruguay) and, if these trends continue, there could be problems.  It is this risk that global market traders, mostly speculators are building into their trading positions.  It also makes markets very volatile as forecasts change quickly.  Also, most of these trades are paper trades of futures contracts, not physical sales to millers or feed compounders which means they can be easily cancelled out.  The thing about risk, is that, by definition, it might not happen.

The USDA (US Department of Agriculture) published its first thoughts (forecasts) in May for the forthcoming cropping season (2018 harvest for the Northern Hemisphere and 2019 for the Southern).  The headline figures are reproduced in the table below.  It demonstrates that for all-grains, whilst production is seen rising on 2017/18, consumption shows a larger increase, leaving a reduction of overall grain stocks for the second year (but still the fourth highest ever).

Global all-Grains Supply & Demand at 10 May 2018 (Mt)
	Production	Total use		Cl. stocks*
2016/17	2,606	2,577		654
2017/18 estimate	2,563	2,580		637
2018/19 forecast	2,578	2,621		594
Global Wheat Supply & Demand
2016/17	750	739		256
2017/18 estimate	758	744		270
2018/19 forecast	748	754		264
Global Coarse Grains Supply & Demand
2016/17	1,369	1,356		261
2017/18 estimate	1,317	1,355		223
2018/19 forecast	1,341	1,378		185
*closing stocks     Source: USDA

Taking wheat alone, then we also see a reduction in stocks.  This would be the first year that global wheat stock levels have declined since 2012/13 so whilst it is a small change, might be significant for that reason. Clearly it is early days yet, particularly in reflection to the points about weather above.  For coarse grains (feed grains, mostly combined maize), stocks will not have been so low since 2012/13.  Curiously, at this time in 2012, the feed wheat futures price was around £170 per tonne and then went on to comfortably pass £200 per tonne.  Clearly, there are other factors at play at the moment, but it’s worth watching: A predicted stock decline of 76 million tonnes, equivalent to a 29% decline in two years, in physical terms represents a decline as a proportion of use of almost a third.

UK and Europe

Throughout Europe, crops are apparently growing well.  Areas such as the Black Sea region that have experienced dry weather have ample soil moisture (like most UK farms).  As per the UK, the warm weather since mid-May has accelerated growth and both spring and winter crops are in a good state.  Some feel the tillers on spring crops might be fewer this year than usual because of accelerated growth rates.  In the end, it is felt that despite such wet conditions the UK spring drilling, whilst late, largely got done, and few hectares will remain unintentionally fallow.  The market price for spring malting barley is factoring in a lower than usual yield with a higher price despite the crop looking remarkably good.  Old crop markets are now all-but closed.

UK Wheat prices are high compared with other parts of Europe, which is now pulling-in imports from elsewhere.  This suggests UK prices are unlikely to rise short of currency fluctuations or if European values also lift.  The regional imports are being fuelled further by local logistical issues with fewer lorries to move grain this season, partly because of demand from other bulk sectors such as aggregate.  Regional price spreads are larger than usual.

Oilseeds

Oilseed markets are mixed, with reports of smaller crops in local markets (e.g. Germany), and further afield (Argentina and Uruguay).  Yet at the same time the USDA expects Brazil to find 73mt to export this coming year; partly from continued expansion of area helping support a record bean crop and also as its currency, the Real, has been very weak, supporting exports.  Crude oil at $80 per barrel is at a 3½-year high which will support vegetable oil prices.  In the long term, it is notable that China has been encouraging more soybean production because of its trade dispute with the US.  It is important as the US and Brazil are expected to supply 100 million tonnes of soybean to China this coming year.  China expects its (meagre) soybean area to be up by 8.5% this year.

 

Commodity sugar prices have fallen to low levels around Europe.  The latest quoted EU white sugar price (for February) is at €372 per tonne, down from over €500 per tonne as recently as summer last year, and a long way below the prices seen in 2012 and 2013 of over €700 per tonne.   Readers may recall that the BS/NFU beet price calculation requires a price over €475 per tonne for a price bonus to be paid.  Part of the reason for the fall in values is a weak global market (recently hitting 6-year lows).  This has been exacerbated in the EU by an increase in output following the ending of sugar quotas.

It has been confirmed by the UK agricultural departments that the Crop Diversification requirement under Greening will be suspended for the 2018 year.  This comes after a formal request to the EU Commission by the UK was accepted in light of the difficulties many farmers have faced with spring plantings.  It means that farmers’ BPS payments will not be reduced in circumstances where they have not been able to establish the requisite number of crops (three in most cases).  This is likely to be of relevance to a limited number of farmers, as most with land unplanted will just be replacing a crop with fallow (which counts as a crop under Greening rules).  However, some who have been left with only fallow and wheat, for example, will be reassured. 

An AHDB project across its UK network of Monitor Farms has shown a huge disparity in labour and machinery costs.  Across the 21 cereals farms in the study, annual labour and machinery costs ranged from £288 per Ha to £593 per Ha.  The size of farms included in the analysis ranged from 97 Ha (240 acres) to 1,278 Ha (3,150 acres).  The was no correlation between larger farm sizes and lower costs.  For more details see – https://cereals.ahdb.org.uk/press/2018/april/30/farmers’-machinery-costs-are-‘too-high’.aspx

The EU voted on the 27th April to ban the in-field use of neonicotinoid pesticides.  The only authorised use for the active substances will now be within greenhouses.  The restriction applies to clothianidin and imidacloprid produced by Bayer, and Syngenta’s thiamethoxam.  A ban on the use of these products on flowering crops had been in place since 2013, due to concerns over their effect on bee health.  This has now been extended to all crops.  There will be no exemptions to the ban – it was though possible that the use of the active substances in pelleted seed such beet seed might be allowed.  The new rules are set to be formally written into EU-law over the next few weeks.  There will be a phase-out period for products containing these neonicotinoids which is yet to be finalised, but they are likely to disappear by spring 2019.

Following the UK’s imposition of a sugar tax in early April and the EU Commission’s proposal for a sugar-sweetened drinks tax in February, other EU countries are following suit.  In the UK, drinks companies have to pay between 18p-24p per litre on sugary drinks produced or imported, although fruit juices, milk-based drinks and most alcoholic beverages are exempt.  Small companies manufacturing less than 1m litres per year are also exempt.  Some reports claim that 45m kg of sugar per year has already been cut from soft drinks because of these measures.  However, some big players like Coca Cola are refusing to reformulate. With the removal of EU sugar quotas last year and production expansion in several European countries, any policy changes which affect demand need to be closely monitored.