Category: Arable

Global Grain Supply & Demand

Global grain and oilseed markets have continued to fall over the past month.  A large driver of the drop in wheat prices was the renewal of the Black Sea Initiative.  The deal was renewed for a further 60 days on 17th May 2023.  The shorter deal length drives greater uncertainty for the global supply chain.  The deal now runs until 18th July 2023.  There were moments during the last 60-day period where an extension seemed less likely; this resulted in temporary price spikes.

The renewal of the Black Sea Grain Initiative comes at a time when forecasts of Russian wheat production have increased, also pressuring prices.  Whilst the Black Sea Grain Initiative is vital to market direction, we also must pay attention to the underlying supply and demand fundamentals.

In May, the USDA released its first estimates of 2023/24 global grain supply and demand.   In contrast to the International Grains Council (IGC) forecasts, the USDA sees a softening of the grain balance, year-on-year, with significant maize stock growth offsetting a fall in wheat stocks.  The IGC’s updated 2023/24 forecasts show a further tightening of the global supply and demand.  The chart shows the USDA figures with production exceeding consumption.  It also translates this into year-end stock figures.  Whilst, on the headline stock figures, the world looks well-supplied with grain, taking China out of the calculation shows the world is in a far tighter position.  China tends to hold its stocks for strategic rather than trading reasons and they don’t really contribute to the availability of grain to the rest of the world.

The US and Global maize crop are an important element of the softening USDA supply and demand picture.  Maize production is expected to increase by 69 million tonnes globally, and stocks by 15 million tonnes.  The US alone is expected to account for 39 million tonnes of the production increase, while seeing its stocks rise by 20 million tonnes.

The US maize crop is currently 81% planted (week ending 21st May).  Crop conditions will need to be watched closely for their impact, either positive or negative, on crop potential and so, price. At present the outlook for maize in the US remains positive.

In Europe there have been contrasting weather conditions.  Conditions have generally been favourable in Northern Europe, albeit with too much rain during spring planting.  However, prolonged drought in Spain is causing concern.  Grain yields in Spain are forecast to be down by 30-40% against the five-year average, by the EU Joint Research Centre.  This may support demand for UK barley exports.

UK Grain Markets

UK cereal and oilseed pricing continues to face pressure from global market conditions.  Ex-farm feed wheat (nearby) was worth £179 per tonne in May.  This is down £9 per tonne on the April average price.  The price of feed wheat has now fallen more than £40 per tonne since January.  Milling wheat continues to hold a strong premium over feed wheat, extending to £70 per tonne on average in May.  Feed barley prices averaged £165 per tonne in May, with the discount to wheat narrowing.

AHDB published its latest UK supply and demand estimates for the 2022/23 season. The estimates highlight the increased ending stocks for both wheat and barley. Large cereal crops from harvest 2022, have been met with weak animal feed demand. The ongoing challenges for the pig and poultry sector resulted in a further cut to wheat demand of 130Kt.

The challenges for animal feed demand will carry into the new season. With large carry-in stocks and crops generally looking healthy, domestic prices will need to remain export competitive.

The value of Oilseed rape has fallen to the lowest point since October 2020, at £345 per tonne ex-farm in May.  Prices have continued to fall throughout the month, reaching £330 per tonne, delivered into Erith, on 24th May.  Oilseed rape prices are being undermined by large EU carry-in stocks for the new season, with the EU expected to harvest its largest OSR crop since 2014 (20 million tonnes).  Wider oilseed market fundamentals are also pressuring OSR prices, with the USDA forecasting a 40 million tonne increase in soyabean production in 2023/24.

Bean and Pea prices have bucked the trend of other combinable crop markets, with both commodities gaining £7 per tonne, month-on-month.  Feed beans were quoted at £228 per tonne and peas £234 per tonne.

Potato Roundup

A reduced area and late planting means a very small 2023 potato crop is expected this year.

Potato growers have probably planted the smallest crop on record this year, with most of that crop going in very late.  The total GB area is forecast to be around 100,000 hectares, which would be 5% less than last year, according to World Potato Markets (WPM) estimates.  Low prices and high costs means that planting of pre-packed potatoes is likely to be the smallest ever at 36,000 hectares; similar to the area for processing potatoes, which growers have favoured more because of higher contract prices – up by 30% in many cases. The area of bagged potatoes for chipping is also down, as is the seed area.

The lack of AHDB area data makes it difficult to give more precise figures, but WPM estimates that there is a total GB area of 101,723 hectares; 13.4% less than in 2020 when the last AHDB data was published.  The pre-pack area is down 18% on 2020 to 36,342 hectares, processing potato area down 8% to 36,019 hectares, fresh chipping area down 15% to 12,005 hectares and the seed area also down 15% to 12 912 hectares.

If there is a repeat of the average 2020 yield of 46.7 tonnes per hectare then production would be 4.750 million tonnes.  However, achieving such yields might be difficult as a wet and cold spring have delayed planting by at least a month – some growers will not finish planting until the first week of June.  The planted crop is now vulnerable to extremes of weather including hot and dry or wet conditions.

The prospect of a late harvest and a relatively small 2023 crop have pushed prices up in recent weeks.  Old crop white potato prices are double what they were earlier in the season at more than £400 per tonne, while some bagged chipping potatoes are making more than £700 per tonne.

Prices in mainland Europe have risen to record levels driven by a lack of supply, late planting and strong demand.  Free-buy processing potatoes are making almost €500 per tonne; double what they were at the start of the season.  Those very high prices are likely to continue into the new season because of pressure on supply.
The lack of potatoes in the UK means that its imports of frozen fries have soared to more than 810,000 tonnes or the equivalent of 1.6 million tonnes of potatoes.  The market is now the second largest in the world after the US.

No Horticulture Strategy

Defra will not, after all, be producing a strategy for horticulture.  Readers may recall that this was one of the pledges in the Government’s Food Strategy last June (see https://abcbooks.co.uk/government-food-strategy/).   The announcement was made by the Farming Minister, Mark Spencer, who stated that the sector operates in a ‘complex, ever-evolving commercial and political landscape’ and that a comprehensive strategy was not appropriate.  Mr Spencer also stated that the appointment of an industry expert to advise Government on controlled environment horticulture, as promised by the previous Defra Secretary, Ranil Jayawardena, would also not go ahead.  This decision has met with a predictably angry response from the horticulture sector, which believes the Government has little interest in the pressures it is under.

Grain Market Update

In February’s Bulletin we highlighted that the fast pace of imports of Ukrainian crops into the EU was pressuring prices.  This came to a head in April with Poland, Hungary, Bulgaria, Romania, and Slovakia announcing bans on the import of Ukrainian agricultural goods.  The EU has proposed measures to guarantee that crops moving into those nations are re-exported and do not remain in those five domestic markets.  In addition, the EU has proposed the provision of €100m to compensate farmers in those nations.  At present there is no agreement on whether this deal will be accepted.  The news of the bans initially supported prices, but they have subsequently fallen.

Further uncertainty for grain markets has been caused by the 60-day terms the Black Sea grain corridor now operates under.  Comments suggesting the G7 would ban exports to Russia, were reacted to by former Russian president Dmitry Medvedev with suggestions of the Corridor agreement being scrapped in retaliation.  This has served to support grain prices in the short-term.  Overall, the situation in the Black Sea remains a dominant driver for grain and oilseed markets.

Looking ahead to the global supply and demand picture for next season (2023/24), the global grain stocks picture was eased slightly in the latest International Grains Council supply and demand figures, owing to greater maize production, particularly in the US.  That said the overall picture remains tighter year-on-year.  With weather concerns in part of the US, particularly for wheat, any adverse weather would support prices.

UK grain prices moved higher following the uncertainty around Black Sea grain movement.  UK feed wheat (ex-farm, nearby) was quoted at £190 per tonne in the week ending 21st April.  This is up around £8 per tonne on the month.  The milling premium also extended slightly, quoted at £61 per tonne.  Feed barley has struggled to find demand in 2023 but has been able to compete into export markets recently.  The feed barley price was quoted at £170 per tonne, on 21st April.

Oilseed rape prices have fallen since the start of the year.  However, concerns around dry weather in Argentina has continued to cut soyabean production forecasts supporting the wider oilseed complex.  Oilseed rape prices have risen by nearly £30 per tonne, month-on-month, to £380 per tonne.  That said, expectations remain for bigger global rapeseed crops in 2023/24.  Also, a bumper Brazilian soyabean harvest is expected which adds pressure vegetable oil markets.  Oilseed rape prices may be supported in the longer term with the EU Parliament backing a ban on imports linked to deforestation, including palm oil and soya. Companies selling into the EU will now have to provide verifiable information that goods were not grown on land which has been deforested after 2020.

Pulse prices have been stable month-on-month, with pea and bean prices unchanged at £226 and £220 per tonne, respectively.

The last month has been a busy one for the majority of arable farmers, the wet conditions of March have led to a backlog of planting and spraying.  While April conditions have not been ideal they have at least allowed field work to continue.

Spray Import Ban

There is concern that UK farmers will soon face higher costs and less choice when it comes to plant protection products (PPP).  The Health and Safety Executive (HSE) has announced that sales of ‘parallel products’ will end from the 30th June this year, with all sprays having to be used by the 30th June 2024.  Parallel products are PPPs that are imported from other EU countries.  Permits for their import have been allowed if they have the same composition as a product authorised for use in the UK and have been approved in their home market.  This has meant that UK prices have, generally, been kept close to those on the Continent, as the parallel import price puts a base in the market.  It has also increased availability, as imports have provided an additional source when product has been in short supply domestically.  The HSE has been using EU data to assess whether products are identical.  Following Brexit this data is no longer available to the UK authorities.

Black Sea Grain and Global Markets

UK feed wheat futures contracts for May-23 and November-23 delivery dropped by £31 and £20 per tonne respectively between 1st March and 23rd March.  Declines have been driven by the renewal of the Black Sea grain corridor and good prospects for EU crops.

The Black Sea grain deal allowing shipments of grain from Ukrainian ports (mainly Odessa) has now been renewed, but only for 60 days.  Previous extensions have been for 120 days; the shorter agreement length means commodity traders will have to contend with a greater degree of geopolitical uncertainty.  That said, the continued transit of grain through the Black Sea is bearish for grain pricing.

Old crop (May-23) futures rallied by almost £10 per tonne on Friday 24th March, on suggestions that Russia would not grant export licenses for shipments below a certain price.  Theoretically this sets a floor to old crop grain prices.

The International Grain Council (IGC) published and updated forecast for 2022/23, and its first estimates of global grain supply and demand for the 2023/24 season.  In 2022/23 (harvest 2022 in the UK) the supply and demand situation is seen softening, with growth in ending stocks driven by reduced consumption.  However, for 2023/24 the grain market is projected to be tighter year-on-year – again driven by consumption.  The level of global grain ending stocks is forecast to fall by 5.4 million tonne year-on-year.

With concerns already for the lack of rainfall in parts of the USA and the EU any adverse weather for the 2023/24 crop would support prices.  The first wheat condition reports in the USA are due in early April, alongside the first update on maize plantings.  Early yield estimates for the EU suggest a 3% increase for wheat, versus the five year average.

UK Grain Market

Cereal prices in the UK have followed the direction of EU and US markets over the past month.  Ex-farm UK feed wheat was quoted at £182 per tonne, on 22nd March 2023; this is a fall of £36 per tonne from the beginning of March.  All cereal prices will have recovered some of this lost ground to the end of the week, but remain pressured.  The potential for further downside movement will depend on domestic and global crop conditions.  That said, if Russian rumours of a minimum price for exporting materialise there may be a new floor in the old crop market.

The milling wheat premium remains strong, in spite of cheaper fertiliser, at £56 per tonne over feed wheat.  Whilst fertiliser prices have fallen owing to large domestic and EU stocks, many arable businesses will have bought cover for this season months ago, at much higher pricing.  As such, the sharp decline in crop pricing will have a significant negative impact on potential returns for harvest 2023 (as shown by the budget for Loam Farm in the following article).

Feed barley prices continue to decline owing to a lack of demand both domestically and for export.  The value of ex-farm feed barley had fallen by £32 per tonne, from the beginning of March to 22nd March, in an attempt to remain export competitive.

Oilseed rape has seen by far the largest declines in price, since the beginning of the year, the value of ex-farm oilseed rape has dropped by £145 per tonne, to £350 per tonne.

Pulse prices have declined to a lesser extent than cereals and oilseed rape.  Feed beans and peas were quoted at £220 and £226 per tonne, down £32 and £16 per tonne on the month.

Loam Farm Latest

Given declining combinable crop prices, we have reworked the budgets for our model arable business Loam Farm.  The figures show that, after two very good years, the prospects for harvest 2023 look less good.

Loam Farm is a notional 600 hectare business that has been used since 1991 to track the fortunes of British combinable cropping farms.  It is partly owned and partly rented and is based on real-life data. It has one full-time worker and employs harvest casual labour.

The farm is just finishing its sales from harvest 2022.  With lower prices, the last few tonnes at the back of the barn have not generated as much as previously hoped.  However, the incredibly high Business Surplus for the harvest as a whole can be seen – a combination of generally high sale prices likely and (relatively) low costs.  The profit of well over £0.5m is a record for Loam Farm.

For harvest 2023, the significant increase in variable costs can clearly be seen – mainly fertiliser purchased in the summer/autumn of 2022.  Overheads have also risen – partly driven by fuel but also labour, machinery and general overhead costs.  This results in the Margin from Production falling almost to break-even levels.  The fall in BPS is starting to ‘bite’ for 2023, but is mitigated by the farm’s involvement in the SFI Soils Standard (intermediate).

The decline in prices puts cereals businesses in a position where profitability may be marginal for harvest 2023.  The cash situation also needs to be considered with higher working capital requirements and the need to pay tax on the profits from the two previous good years.

 

 

Early Beet Offer

British Sugar (BS) has announced a one-off payment of £3,000 per Ha in return for beet being delivered in early September this year.  The Early Beet Contract for 2023 has been put in place to try and mitigate some of the effects of the poor harvest from the recent campaign.  As we have previously written, poor sugar yields together with a lower planted area means British Sugar faces a shortfall in production compared to its contracted commitments.  The Early Contract should allow the processor to open its Bury factory early and bring in new crop, thereby reducing the amount of imported sugar which would have been required.  NFU Sugar has worked with British Sugar to agree the new contract.  Growers are encouraged to read the full terms and conditions in the contract from BS.  But in summary;

  • payment will be £3,000 per Ha plus any local premium and transport allowance where applicable.  An additional £40 per tonne will be made in the unlikely event a growers yield exceeds 72.5t per Ha
  • growers still need to look after the crop and, in particular, they will need to ensure at least 80,000 plants per Ha have been drilled by April 15th
  • growers will need to order 1 unit per Ha of new seed with the contract; this is additional area on top of existing contracts, so that this does not take from already planned supply.
  • the crop will need to be delivered between 4th to 13th September unless BS agree otherwise.