Category: Arable

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.

Crop Areas

The AHDB has now published its Early Birdy Survey of planting intentions at a regional level. The survey is conducted by The Andersons Centre, with the support of the AICC and other agronomists.

The intentions for 2023 show a year-on-year increase the area planted to wheat. UK wheat area is expected to reach 1,821 hectares, an increase from 1,809 hectares in 2022. At a regional level, plantings are seen falling in the key production regions East Midlands (down 0.5%) and the Eastern Counties (down 3.1%)

Wheat area is generally expected to rise in the North of England and Scotland. In Scotland, wheat plantings are seen rising by 8.5% to 116 thousand hectares. While wheat area is up, the high price of nitrogen at planting may have impacted both varietal and agronomic choices. While the price of nitrogen has subsequently fallen since planting, so too has the price of wheat.

The big “winner” is oilseed rape. Plantings of OSR are seen rising in all regions, contributing to a 14.2% rise in the UK planted area, 416 thousand hectares. Of course, pest pressure will be key for the crop, and it remains to be seen how much will be carried forward to harvest.

To accommodate the rise in OSR and wheat plantings, the area of barley and oats has fallen. The barley decline is driven by an expected decline spring barley, down 5.9% year-on-year to 632 thousand hectares. Winter barley is up but by less than the decline in spring barley, showing a 4.0% rise to 450 thousand hectares. The oat area is expected to fall by 4.3%.

UK Grain Production & Markets

Defra have now published official figures for UK grain and oilseed rape production.  Previous figures had only covered England.  The latest figures show UK wheat production, in 2022, at 15.54 million tonnes.  This is 14% above the 2017-2021 average (13.65 million tonnes).  The figures include the second highest wheat production figure for Scotland on record, going back to 1999. The Scottish production figure, 1.00 million tonnes is driven by a record yield of 9.3 tonnes per hectare.

Total barley production is also up despite a fall in overall acreage.  This is driven by an increase in the proportion of winter barley grown versus spring, as well as a rise in average yields.  Total barley production is seen at 7.385 million tonnes.  Oat production is down year-on-year, but remains above 1 million tonnes for the fourth consecutive season.  Oilseed rape saw a resurgence in rotations in 2022, and the resultant production is seen at 1.36 million tonnes.  Production of OSR remains below the 5-year average however.

UK grain markets have followed the free-fall of global prices into December.  Ex-farm feed wheat (spot) was quoted on 16th December at £229 per tonne.  This is down more than £15 per tonne from the end of November.  The price of feed wheat is now only £10 per tonne higher than the same point last year.

Feed barley prices have followed a similar path, and ex-farm barley is now just over £1 per tonne higher than 17th December 2022.  The UK grain market is fundamentally better supplied than it was last season.  There is also the wider factor that global markets seem ‘comfortable’ with the current drivers of supply and demand, despite grain markets being tighter year-on-year.  The milling wheat market continues to hold a premium in excess of £50 per tonne over the feed market, an ongoing reflection of the lower protein crop harvested this year.

Oilseed rape prices also continue to fall, driven by expectations of large oilseed crop globally.  This is especially true in Brazil where soyabean production is forecast to reach a record 152 million tonnes; up from 127 million tonnes last season.  Ex-farm oilseed rape was quoted on 16th December at £463 per tonne.

Pulse markets continue to suffer from a lack of demand and have tracked other commodities lower.  Feed bean and peas are quoted at £255 and £245 per tonne, respectively.

Investors Push Wheat Prices Lower

The value of wheat has fallen considerably over the past month.  A bumper crop in Australia, forecasts for strong South American maize production, and the continuation of exports from Ukraine have all contributed to the slide in prices.

Furthermore, data from the Commodity Futures Trading Commission (CFTC), who monitor the position of traders in futures market, highlights that ‘managed money’ funds have consistently been net-sellers of Chicago wheat futures since the beginning of October.  Fundamentally, this means that those in charge of investment funds expect wheat prices to go lower.  The net position of such funds shows that investment funds are now the most bearish they have been since April 2019.

This bearish view for comes despite the global supply and demand balance for wheat being the tightest since 2007/08 and is a potential indicator of recessionary concerns.

The maize picture, which is an underlying driver of wheat markets, has been more positive with prices rising in recent days.  Much still hangs on the South American maize crop.  There are concerns for Argentinian production amid drought, whilst the Brazilian crop outlook is still positive.  The Brazilian crop is typically more than twice the size of the Argentinian one.

May 2023 UK feed wheat futures have tracked the global wheat price decline, falling to around £240 per tonne, a drop of around £20 per tonne from mid-November.  New crop, November 2023, futures have dropped by a similar amount, to just under £228 per tonne, on 15th December.

While the mood is generally negative around grain markets, there are still some potential positive drivers.  In particular, there is much discussion at present about the decline in India’s wheat stocks. India consumes 13% of the world’s wheat, and stocks are expected to hit a six-year low.

UK Grain Markets

UK grain and oilseed markets have, unsurprisingly, continued to follow global trends.  Spot feed wheat was worth £241.50 per tonne in the week ending 18th November 2022; this is £16.70 per tonne lower than at the end of October.  On top of the global grain market falling, there are concerns about the impact of Avian Influenza and the smaller pig herd on feed grain demand.

Feed barley was worth £228.60 per tonne on 18th November.  This is a fall of £9.60 per tonne from the end of October.  The discount of barley to wheat has narrowed over the past month, this is reflective of the first official supply and demand estimates of AHDB, published in November.  The figures show opening stocks of barley at a ten-year low.  Despite this, the surplus available for export remains greater than last season and animal feed demand remains a key watch point.

While milling wheat prices have fallen, the premium of ex-farm milling wheat over feed has grown.  This is driven by reduced availability of high-protein milling wheat (13% protein plus) and the high cost of gluten as an alternative.  Milling wheat is at a near £55 per tonne premium over feed, as at 18th November.

UK oilseed rape prices have fallen in line with global oilseed benchmarks.  Ex-farm oilseed rape is now worth £518 per tonne, spot.  There is less demand in the UK this season with the closure of the Hull crushing facility, announced in June, set to take place in December.

The pulse market continues to suffer from a lack of demand, with the value of peas and beans having fallen to the end of the month.

Global Grain and Oilseed Markets

Throughout November the price of grain has fallen back considerably.  Futures prices were dropping before the announcement of a 120-day extension to the Ukrainian grain export corridor, 17th November.  Global grain markets have softened primarily on expectations of a large maize crop.  The crop underpins global feed and industrial (ethanol) markets.

There are expectations of record maize production in South America, in response to high prices.  Brazilian weather conditions appear well suited to a big crop.  Conversely, Argentina is also forecast for a record maize crop despite currently experiencing a severe drought.  The drought in Argentina has, however, trimmed production outlooks for wheat.  South American weather remains a key watch point for grain markets, particularly with an active La Niña (the third in three years).  La Niña brings dry weather to South America.

Despite forecasts for bumper maize production, the balance of global grain supply and demand remains tight.  This ought to offer some underlying support.  However, concerns about the impact of recession on demand, particularly industrial demand, seem to be outweighing this fundamental tightness.

Demand concerns are also impacting global oilseed prices.  China’s zero-tolerance approach to Covid is driving expectations of reduced palm oil demand.  This, combined with increased palm oil production in Southeast Asia, has depressed prices.  This has impacted rapeseed markets with the underlying value of rapeseed oil falling.  Additionally, a rebound in Canadian canola (rapeseed) production following last year’s disastrous crop is leaving global oilseeds well supplied.

Potato Area and Production

High costs, difficult weather conditions, poor potato prices, and strong cereal markets mean there is great uncertainty about potato plantings for next year.  The lack of information about the size of this year’s crop is not helping.  The disbanding of AHDB Potatoes last year means there is no one collecting national potato planting, yield and production data.

World Potato Markets has estimated that the 2022 area was down 5% on the official Government UK estimate of 134 900 hectares in 2021.  That area includes all four countries of the UK – England, Scotland, Wales and Northern Ireland plus some land associated with potato production that is not actually planted with the crop.

In terms of yield, in 2018, when the UK suffered a similar drought to this year, the average was 35.9 tonnes per hectare (6.8% lower than in 2021).  The result is a crop of 4.845 million tonnes – down 11.4% on last year; the smallest since 2012 and only the third time on record that the volume has fallen below 5 million tonnes.

The lack of potatoes has not fed into much higher prices for free-buy potatoes.  Newsletter Potato Call reports that good quality Maris Piper for packing is making £255/  per tonne; not much more than a year ago.  Some of the very best is being secured for pre-Christmas delivery at £300 per tonne.  There is some strength for bagged potato prices for fish and chip shops, but growers have reported concerns that some stocks are deteriorating because of high temperatures in stores.  Growers will welcome the colder conditions that have arrived recently.

The first processing contracts for 2023 are being offered and are up on last year which has prompted some seed buying.  However, there is still an expectation among many that the area of potatoes could be down another 10% on last year as growers react to the lack of demand for their 2022 crops, the high cost of inputs and strong and stable cereal prices which can be secured through the futures market.  A 10% reduction in area would mean the smallest area ever at 121 500 hectares, while a 10-year average yield of 39.4t per Ha would deliver a crop of 4.787 million tonnes.  As recently as 2017 the UK produced a potato crop of 6.218 million tonnes.  It looks like it will struggle to achieve 5 million tonnes in the foreseeable future.

Wheat Market Moves from West to East

Over the past twenty years both Russian production and exports of wheat have grown to a point where Russia is the leading exporter of the grain. There has been similar growth in Ukraine, albeit to a lesser degree.

Exports of Wheat from Top Five Exporters and Ukraine

Source: USDA

While the area of wheat planted to wheat in Russia has grown by almost 6.2 million hectares since 1991, it is growth and stability of yield which has done much of the heavy lifting. At the breaking of the Soviet Union, Russian wheat yields were around 1.7 tonnes per hectare, now they are nearer three tonnes per hectare.

In Ukraine, excepting 2022, the area of wheat is broadly similar to 1991, as with Russia yields have grown.

The increasing importance of Russia and Ukraine on global wheat prices should be of little surprise. This is especially true given the impact of the last eight months on grain prices.

Beyond Russia and Ukraine, the shift to the East is evident.

The closest rival for Russia’s export crown is the EU. The same pattern of movement in key exporting nations from West to East is happening in the EU

In 2003/04, Central and Eastern Europe[1] accounted for 24% of total European wheat production. Twenty years on, the same block of countries is expected to account for 38% of production in 2022/23, an increase of twenty-seven million tonnes.

Share of EU wheat exports from Central and Eastern Europe

Source: Eurostat (EU Commission)

The same block is also seeing vast growth in its exports. Using a similar timeframe to the one above, over the last nineteen years (2003/04 to 2021/22) Central and Eastern Europe has grown its share of wheat exports from 13% of the EU (exc. UK) total to 52%. It is worth highlighting that the export figure is somewhat inflated by poor production in West Europe. That said, the direction of travel still holds.

So, why does this matter?

While anything remains possible, it seems likely that EU wheat supplies are safe from conflict, even with Romanian and Bulgarian wheat needing to pass through the Black Sea to the Bosporus Straight.

With the three key wheat futures markets, Chicago, Paris, and London, clearly not moving, crop conditions in the US and Western Europe are still key to sentiment.  But we need to pay increasing attention to conditions in Eastern Europe.

The Paris futures exchange is based on a specification of wheat delivered into one of five locations on the west coast of France. Traditionally, we would consider our price relative to Paris futures as a marker of how competitive UK grain is on the world stage.  France is still the top EU exporter, and comparisons to French prices remain important.  However, it is now as important to consider the competitiveness of our export prices relative to Eastern Europe nations.

The UK has an exportable surplus of wheat this season, and the UK price will have to compete with EU values to find a home.

[1] Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, and Slovenia