Category: Arable

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.

UK Grain Market Update

UK feed wheat prices followed European grain markets in February.  Values increased through the first three weeks of the month, before falling on weak EU import demand.  UK ex-farm feed wheat was quoted at £224 per tonne, on 24th February 2023.  This is up almost £11 per tonne on the end of January, but down £9 per tonne on the week ending 17th February.  Milling wheat continues to attract a strong premium of £57 per tonne.

The discount of barley has extended further.  Feed barley was quoted at £203 per tonne on 24th February, an increase of just £2 per tonne on the month.  Demand for barley for both feed and export remains poor.  Data from AHDB shows that animal feed production in July to December 2022 was down more than 5%.  Larger declines were seen for pig and poultry feed, down 12% and 9% respectively over the same period.  Usage of barley was down nearly 23%.

The value of oilseed rape was supported by rises in the value of wider global oilseeds throughout much of February.  Whilst prices fell towards the end of the month, ex-farm oilseed rape was quoted at £463 per tonne on Friday 24th Feb.  Prices are up on values at the end of January, but £30 per tonne down on the beginning of 2023.

The price of feed beans has continued to fall in February, at £243 per tonne, with poor demand.  One merchant commented on the difficulty in establishing new crop values also, given lack of trading activity and demand.  Pea prices have remained stable month-on-month, at £249 per tonne.

While output prices have fallen towards the end of February, so too have costs.  The price of ammonium nitrate for March delivery was quoted at £460 per tonne; a significant fall from the £700 per tonne quoted in January.  The impact of this on arable businesses will clearly vary greatly for the 2023 harvest, depending on the level of cover.  However, it is a promising sign for harvest 2024.

Rainfall in February was below average in many parts of the UK.  Whilst there is evidently ample time between now and harvest, there are have been some concerns expressed about these drier conditions, particularly given the droughts of last summer.

 

 

Global Grain Market Overview

UK grain pricing is fundamentally linked to that of EU grain markets and this has been the same as ever this season.  The EU is the top consumer of UK grain, with 88% of wheat and 85% barley exports going to the EU on average between 2017/18 and 2021/22.  This season, demand from the EU, relative to non-EU destinations has increased.  In the year to December, 94% of UK wheat exports and almost 100% of UK barley exports have gone to the EU.

The main reason for the uptick in trade with the continent is the sharp drop in EU grain production, primarily maize.  Output of maize was challenged by the hot, dry summer – falling by 28%.  The result of the drop in production is the need to import 51% more grains.  This is not new news, and as such not that important to current or future price direction.  But the pace of EU imports is.

According to EU Customs surveillance data, with just over half of the marketing year gone (to 5th February), the EU has imported 86% of its forecast requirement of wheat, 84% of barley, and 73% of maize.  The fast pace of imports has, in part, been driven by the volume imported from Ukraine.  With the Grain Corridor agreement due to end, unless it is renegotiated, in March, traders have been moving tonnages beforehand.  It is worth highlighting that there is a key uncertainty around how much Ukrainian grain will be re-exported from the EU to third countries.

However, with a large proportion of imports already done for the EU, prices are coming under pressure.  This has been seen towards the end of February, with a sharp drop in EU wheat prices dictating a £9.25 per tonne fall in nearby UK feed wheat prices.  The pace of EU trade will need to continue to be watched for the remainder of this season.

Below we set out some of the factors that could drive global markets as we move towards harvest 2023;

  • Geopolitics remains a key uncertainty; the 24th February marked one year since Russia invaded Ukraine.  Any significant escalation in the conflict or challenges in renegotiation of the Grain Corridor will support prices.
  • Brazilian maize production is also a key watch point.  Brazil remains forecast for a record maize crop.  With global grain supply and demand tightness underpinned by a lack of maize in the US, Ukraine, and Europe, a further tightening would also offer support.  If the Brazilian crop comes to fruition, prices ought to move lower.
  • Black Sea planting.  Around 44% of Russia’s wheat area was spring planted for the 2022/23.  Add to this the large volume of maize and sunflowers produced in Ukraine in recent seasons, and it is evident how important the weather (and conflict) in the Black Sea region is.
  • US maize and soyabeans areas.  The USDA is currently forecasting an increase in maize planting with soyabean area to remain unchanged.  There is still plenty of time for this to change.
  • EU weather.  Large parts of the EU have experienced warmer and drier winters than normal.  While crops generally looked healthy through winter, prolonged dryness is clearly concerning.  The same is true for parts of England, water levels have not returned to normal in some parts of the country following last years drought.

Sugar Beet

British Sugar (BS) is forecasting UK 2022/23 beet production to be the lowest for 47 years.  The processor has reduced its production forecast for the current campaign down to just 740,000 tonnes from 1.03 million tonnes in the previous year.  We reported in a previous article that the frost industry insurance had been triggered and that loads had been rejected due to damage.  Even though average UK yields look similar to the poor campaign in 2020/21, production is set be 18% lower due to a smaller planted area.  This year circa 87,000 hectares of sugar beet have been planted compared to about 104,000 hectares in the 2020/21 campaign.

Furthermore, due to the reduced production, it is reported BS is having to look at alternative sources of sugar from around the world, suggesting it has already sold more sugar than it is expecting to produce; this however, is likely to cost much more than what it will have contracted to sell it for.  The problem is European supplies are also very tight due to the area there also declining; this will be the fifth consecutive year of decline and although the frosts were more of a problem in the UK, yields on the continent have also been impacted.  Spot prices across the continent are around €1,000 per tonne with duty-paying sugar having to be imported.  BS is unlikely to be able to source enough sugar from Europe, and world market white sugar, with £350 per duty on top of any freight costs is likely to cost well in excess of €1,000 per tonne, meaning any imported sugar BS has to buy to service contracts already agreed for 2022/23 is likely to cost substantially more than the processor will have sold it to customers for.

Grain Market Update

Grain and oilseed markets have continued their decline through January.  Any uncertainty or risk premium associated with Russia’s invasion of Ukraine, almost a year ago, is priced in.

Combinable crop pricing is now very much centred on the balance of supply and demand at a global level.  Whilst grain markets are tighter year-on-year, expectations of large maize production in Brazil are pushing prices lower.  There may be some support going forwards, although this will depend on the extent to which dry weather impacts Argentinian maize and soyabean production.

Crops in the Northern Hemisphere are developing well.  A generally mild winter across Europe and the Black Sea has aided crop development.  That said, close attention will be paid to Ukrainian output, particularly of maize.  North America had been an area of concern with drought in key production regions but recent rainfall has contributed to the decline in prices.

UK markets have, unsurprisingly, followed the trends of global combinable crop markets.  Ex-farm UK feed wheat was quoted at £213  per tonne on 27th January 2023, down more than £15 per tonne on December levels.  Milling wheat prices have shown more resistance to the decline in global grain prices.  Ex-farm milling wheat premiums are approaching £57 per tonne.  With expensive nitrogen, and a lack of recommended Group 1 milling wheat varieties, there is a challenge for 2023 milling wheat supply.

Feed barley prices have also declined by less than feed wheat, down more than £8 per tonne from December levels, at £201 per tonne on 20th January 2023.  For domestic grains there will be demand concerns; poultry placings in November and December were noticeably down on year-earlier levels.  Additionally, the breeding pig herd is reduced following the last two years of challenging margins.

In the UK, ex-farm oilseed rape was quoted at £434 per tonne in January, around £134 per tonne behind January 2022 levels.  The decline has been driven by larger oilseed crops globally and reduced crude oil prices.  Soyabean production is forecast to be up almost 30 million tonnes year-on-year; largely driven by South America.  Argentinian dry weather may offer some support.  Additionally, large biodiesel mandates in Brazil and Asia could offer long term support, if unmatched by oilseed production increase.

Other protein prices have been stable.  Feed bean prices have fallen by £7 per tonne month-on-month, to £248 per tonne.  Feed pea values increased by £3 per tonne, to £248.

Sugar Beet

Due to the cold snap in December, NFU Sugar and British Sugar have confirmed the 2022 frost insurance policy has been triggered, although growers do not have to do anything to claim it.  All those eligible have had a claimed lodged by NFU Sugar.  All growers of sugar beet for British Sugar are covered (British Sugar pays the insurance premuim) provided a crop declaration was submitted before September 2022 and unless a growers’ entire crop had been delivered by 15th December.

All calculations for compensation will be carried out at the end of this year’s campaign as compensation is based on the Adjusted Tonnes delivered by a grower at the end of harvest.  Growers are insured based on their anticipated production, which equals Area multiplied by 5-year average yield, less 7% this year to take account of the state crops were in at the end of the summer due to drought or CTE if that is lower.  Compensation payment is calculated as follows:

First 15% loss – No Payment – effectively the policy excess

Losses between 15% and 30% – Paid at full contract rate – £27 per tonne

Losses over 30% – Paid at half contract rate – £13.50 per tonne

The policy is triggered if the average minimum temperature is recorded at -4°C or lower for a rolling 10-day period up to and including 30th  January.  The frosts in December have damaged crops, loads are being rejected by the processing factories and those that are accepted are likely to have reduced sugar content.  This is the first time the industry insurance has been triggered since it was set-up after the 2010/11 crop was hit by early frosts.  The frost damage follows a difficult year for growers who have seen their crops affected by drought and virus yellows.

Neonicotinoid Sugar Beet Seed Treatment

Defra has approved an emergency authorisation for the use of a nicotinoid seed treatment on the 2023/24 sugar beet crop.  However, Syngenta’s Cruiser SB, which is used to protect crops from virus yellows, will only be allowed under strict conditions.  This includes if independent modelling predicts a virus incidence of 63% or above, which will be known on 1st March.  If the threshold is reached, further conditions will be applied to the use of the seed treatment to minimise the risk to the environment.  This includes a maximum number of seeds planted per hectare and restrictions on farmers planting flowering crops in subsequent years in any field where treated seed has been used, allowing time for the chemical to break down.

Defra has confirmed the overall ban on the use of neonicotinoids remains in place, but recognises the potential danger of an outbreak of beet yellow viruss poses on the production of UK sugar.  In 2020, 25% of the national sugar beet crop was lost, according to Defra this cost the industry £67m of total economic loss across the whole industry that creates nearly 10,000 jobs.  This is the third year the emergency authorisation has been approved.  Last year the threshold was triggered, although it was only 19% compared to this year’s 63%, however modelling predicted the virus incidence to be 68% on 1st March in 2022.