Tag: wheat

November Arable Update

There have been few major fundamentals at play over the last month in the grain markets resulting in small fluctuations.  For example, the wheat futures price for May 2019 has fluctuated between £171 and £174.50 per tonne over the whole month, due to various minor factors. This is often the case in the build up to Christmas, when business from millers, maltsters, compounders and other grain users becomes settled, and there are no new surprises in terms of production.

The closure of the two bioethanol plants in the North of England over the last 2 months (reported on in October) means the market place has had to re-calculate the trade balance expectations. Going from a considerable net import requirement for wheat, to a situation of an exportable surplus, impacts UK grain prices and, importantly,  logistics. Not only did wheat prices fall, but also, the availability of grain haulage vehicles dramatically rose. The bioethanol plants had been taking large tonnages of grain meaning the haul was, on occasions over long distances, meaning less grain was delivered. Now, the marketplace for hauliers is much looser, and haulage companies have less chance to dictate terms or prices. Where some delivery slots were being missed when the plants were operational, these are now being delivered to.

Before the closure of the Southampton Hovis flour mill (also reported last month), the UK milling industry was, it transpires, considerably over capacity. It seems Hovis may be able to increase its milling volume in its remaining mill in Wellingborough, to still meet some of the contracts it was supplying from Southampton. Furthermore, other firms have some capacity to increase throughput without building any further mills, meeting any other surplus flour demand. We can conclude that the Hovis closure will not affect total UK bread-wheat consumption, whereas the bioethanol plants will affect feed wheat demand.

It is also still not clear whether the Ensus and Vivergo bioethanol plants are closed for good or just for a while. Neither statements were clear, although we understand that the Vivergo plant has taken its staff of 400 down to about 40.

TRADE

China has bought about 60,000 tonnes of French wheat. The volume sold is less relevant than the trade itself. Whilst the business takes some of the EU surplus out of the local marketplace, which is inevitably bullish for EU grains, this is the first Chinese business for EU grains for apparently as much as 5 years. That is more significant, especially as China, according to the International Grains Council and the USDA owns about half of all global grain reserves. It poses questions about the Chinese grain holding strategy and their attitude to purchasing EU grains.

Barley

Very little has happened in the barley market this month either. As Adam Smith pointed out in the 1700’s, when not much interferes with the marketplace of a commodity, its price tends to head towards the lowest cost of production. Perhaps this suggests if you can’t produce it for the current price, note that somebody else clearly can. Last month we reported that barley had, for a while, been higher in value than wheat (which has a higher nutritional value). Barley is normally about 10% lower in value than wheat and this price spread has started to correct itself .

OSR

The oilseed rape market has also been relatively slow, moved more by currency fluctuations than the fundamentals of supply and demand. Note the Southern Hemishphere crop will start going through the combines within a month and might then have an impact on EU values.

Pulses

The very small and poor quality crop from 2018 is not attracting overseas buyers to our marketplace this year. Despite this, Pulses are comparatively well priced compared with other proteins. These two points suggest pulse prices have more downside than upside (compared with the combinable crop benchmark of feed wheat). The low quality and availability of seed means the 2019 crop is going to cover a smaller area than usual for both winter and spring crops.

October Crops Update

Growing crops are generally in good condition throughout most of the UK, having had a moderately good start to the season.  Recent rains have been welcomed and will help establishment across much of central England before winter dormancy sets in.  In Scotland, winter crops are looking about as well as they have in recent memory, sowing conditions have generally been excellent and recent weeks of warmth and sunshine have allowed everything to establish and grow on well, with any autumn herbicides and fertiliser applications required being easy to achieve.

Cereal prices have been lacklustre at best, bearish at worst this month with wheat falling more than barley. Domestic values have suffered from the UK wheat processing closures (see other article).  Globally, prices took a hit towards the end of October when the International Grains Council updated its grain supply and demand figures, adding 12 million tonnes to global wheat production, but only 6 million to consumption. Stock levels are now seen 12 million tonnes higher than thought in September, making overall year-end stock levels only slightly lower than last year.  Black Sea supply has remained strong, with high wheat and coarse grain exports, pressurising the entire EU feed grain marketplace.

Despite that, the UK feed barley market has been underpinned with export deals beyond the EU border. This not only bodes well for post-EU trading prospects but also changes the dynamics of UK trade.  More distant exports tend to be larger volumes and therefore bigger vessels requiring deeper ports, most of which are in the south of England, conveniently, closer to the South Mediterranean destinations.  Also, most surplus barley is in the south, far from the northern maltings.  Demand for malting barley samples from UK maltsters has slowed pre-Christmas now.

Oilseed rape has been a concern in much of Central and Eastern England because of a high prevalence of flea beetle.  Currently, we are working on a planted area the same as last year, but with 5-7% of the crop being written off.  It appears this has been caused by the dry soil conditions, and warmer than usual temperatures this autumn.  Temperatures have fallen at the end of the month and rain has also been persistent, so this might help curb the problems.  Yet many parts of Northern Europe, including France, Germany and Poland have also reported lower germination levels because of the dry warm weather conditions.  OSR prices are holding relatively steady in the light of the crop establishment issues.

 

Wheat Processor Closures

Within 6 weeks, there have been announcements of 3 major wheat processing plants closing in the UK. Last month, we reported on the closure of Vivergo, one of the two very large bioethanol-manufacturing plants. The other bioethanol plant, Ensus, has now also announced similar plans, to close at the end of November. The third closure is of the Hovis mill in Southampton. The three locations between them have purchased and processed as much as a million tonnes of UK-grown wheat each year they have been operational.

The Ensus announcement suggested the plant would remain closed but ready to become operational again but did not state when that might be or how long they might remain in that limbo before decommissioning the site entirely. It claimed the closure was down to low bioethanol prices. Bioethanol production has always been a tight-margin and high-risk business, with both the raw materials and the finished products (including livestock feed), all being commodities, giving the manufacturers little control of input costs or output price. Furthermore, the commodities are all valued independently. When grain prices have been high and oil prices low in the past, then these facilities have had extended closed periods for maintenance or been mothballed. Ensus for example has had 4 extended closed periods in its short life. The other risk associated with biofuels is the dependence on government subsidies; both the capital required for their establishment and the ongoing per-litre support. Ensus opened in early 2010 and Vivergo followed in July 2013 meaning one was only 8 and the other 5 years old.

Hovis is closing its Southampton mill at the end of this year and is also selling its Selby and Manchester mills to Whitworth Brothers, leaving only one remaining mill in Wellingborough. Whilst a considerably smaller loss than 2016, Hovis lost almost £12 million in 2017. This closure means it is not just feed wheat in the north of England that is being lost but also milling wheat demand in the south of England.

The impact on the price of wheat in the UK has already been felt with a £5 per tonne reduction in domestic values in the week. What was initially expected to be a year with a wheat deficit in the UK, making the UK a net wheat importer once again has now, within the space of just over a month changed totally. After several years of gradually rising wheat processing capacity in the UK, coupled with declining wheat production, the closure of these three sites means that a surplus is likely again most years.

Vivergo Closure Proposed

Vivergo has announced a proposed cessation of production as of the 30th September.  Vivergo is the UK’s largest manufacturer of bioethanol, a biofuel made mostly from domestic (UK-grown) wheat.  Its announcement implies it is a permanent cessation and therefore presumably firm closure, although the wording it not very explicit.

The company blamed the UK Government’s ‘lack of pace to introduce E10 biofuel’, a bend of between 9% and 10% biofuel in petrol.  The regulations currently encourage fuel manufacturers to incorporate 5%  biofuel into their fuels, although Department of Transport data from August 2018 shows total ‘renewable fuel’ accounted for 3% of road fuel in 2017/2018.  Most of this is biodiesel from waste vegetable oils.

The Vivergo website states that the firm uses 1.1 million tonnes of feed wheat per year, but other sources have suggested the plant has seldom operated at full capacity, for example having had a 4-month closure from December 2017 to April this year.  Notwithstanding this, the closure, if permanent, would have a depressing impact on the price of wheat in the Yorkshire/Humberside area.

 

 

August 2018 Arable Update

The Wheat Market

Wheat price this morning (24th August) is a hefty £15 lower than at its high point of the season on the 8th August.  It is easy for sellers to become disheartened when they realise that they have missed the best prices.  However, only one trade is ever made at the very top of the market, and prices are still very good when looked at with a more long-term perspective.  This morning’s wheat price for nearby delivery has only been seen on 6% of the trading days since 2007; that is equivalent to one day out of three weeks.  Moreover, prior to this August, today’s nearby wheat price had not been achievable at all for over 5 years, so in fact, maybe it is a great price for sellers.  The chart below demonstrates that, since June, prices have risen by £40 per tonne; faster than at any time since the same period in 2010.  There are farmers selling grain forward who have never sold grain at this time of the year before and some selling next year’s harvest, before having drilled it. But probably not enough.

Drought conditions, it transpires, have clearly impacted on crop sizes throughout the EU, Russia, Ukraine and Black Sea countries (for example, Germany is expecting a wheat crop size 23% smaller than last year). There are concerns, largely by Russian grain traders, that the Russian authorities will impose export restrictions to manage domestic supplies; something they have done several times before.  Whilst nothing has been imposed yet, there are rumours of export limits of 30 million tonnes.  This would be 5 million tonnes lower than USDA export projections for the season, and 12 million lower than last year’s traded volume.  Curiously, Russia is likely to have harvested its third largest ever crop this season, but it is still 17 million tonnes less than last year.  This demonstrates how Russia has emerged very rapidly as a global agricultural power-house and the largest wheat exporter of 2017/18 and 2018/19.  Russian wheat production in 2017 of 85 million tonnes was far more than double their 2012 harvest, and exports were three times higher.  This explains why when a Russian official rumours a chance of trade restrictions, the market panics into an opportunity for sellers. Market fundamentals like this are so fickle and unpredictable, the market becomes highly volatile when they are happening, hence the dramatic price fall mentioned in the first sentence. The world is £15 per tonne happier about the availability of the 2019 harvest, than the current crop, in other words prices for next year are £15 per tonne lower at the moment.

Partly on the back of high feed prices, partly as lots of milling wheat varieties were drilled last autumn, and partly as harvest was gathered early, dry, heavy and bold because there was no rain damage this year, there is ample high specification milling wheat.  Milling premiums have collapsed to almost 30-year lows of sub £9 per tonne for full specification as a result.

Wheat Yields

The UK is likely to have harvested a moderate-to-average yielding wheat crop, possibly approaching 8.0 tonnes per hectare, not far from the national average of the last 5 years of 8.2 tonnes per hectare, when field edges and environmental areas etc. are considered.  We expect the UK to be a net importer of wheat yet again in 2018-19, making it the third consecutive year and fifth out of the last 7.   The UK continues to process more wheat each year, and the area planted is gradually falling, largely of course because of grass weed issues as well as marginal economics unless yields are high and costs low.

UK Wheat Supply & Demand

UK wheat export figures were published last week, confirming the 2017/2018 marketing year (2017 harvest) had the second smallest wheat export figure since winter wheat became the dominant crop in the UK over a generation ago.  The other year of such low wheat exports was in 2013, after the dreadful autumn rainfall, preventing many hectares from being drilled.  In 2017, the crop size was much more ‘normal’; it is just that it didn’t get sold and therefore exported.  Many farmers or traders are therefore still sitting on a considerable tonnage of wheat along the lines of 2.1 million tonnes, which is about 800 thousand tonnes more than is necessary for ‘supply chain continuity’ between harvests.  That might well have paid off this year, with domestic feed wheat values now a comfortable £40 per tonne higher than in the spring when the soils were still saturated.

Barley

Barley harvest surprised many people with positive yields and good quality.  Initial concerns from some of high screenings have been unfounded and nitrogen levels are usable for most requirements.  The UK will have a surplus, and so in the light of concerns of a ‘no-deal’ Brexit, some have considered selling all exportable goods this year.

OSR

The requirement for oilseed rape globally looks set to outstrip production this year, providing support for OSR to gain price lifts above that of the entire grains matrix.  However, it should be borne in mind that OSR accounts for only a small minority of vegetable oils output globally.  Most oilseed price fluctuation is based on political statements about breaking or resolving trade disputes, the outcomes of which simply cannot be known.

Autumn Drilling

Concerning autumn drilling for 2019 harvest, it is too early yet to provide hard evidence but we expect a continuation of the rise of spring cropping and possible continued experimentation with cover crops.  For wheat, the chart demonstrates a continued decline of wheat area since 2012, apart from the dreadful weather year of 2012. Whilst we believe this trend will continue long-term, we would also recognise that a ‘regression to the mean’ (small, 1-year increase) is also entirely possible.

April Arable Roundup

Spring Drillings

Much catch-up has been played in the last week and now most spring crops have been drilled (with the exception of Scotland).  The next task is to spot the dry, non-windy days to follow the agronomists’ instructions.  There will probably be a small increase in fallowed land as a response to the very wet, late arrival of spring, but any more than 30,000 hectares of idle land above last year’s area would surprise us.  Indeed, that would leave fallow land higher than any year since 2007 when set-aside was required.  More likely most spring drilling plans will still be followed, albeit late, potentially into sub-optimal conditions, and yielding less than initially hoped.  The output from these crops may yet be reasonable though, as long as they get the agronomic attention they deserve and favourable weather from here on.  But whilst it is early days yet, it is probably best not plan for record yields this season.  Remember also, autumn crops that emerged from dormancy into cold puddles, their roots sat in cold, saturated soils for many weeks might also demonstrate their discomfort with poorer yields.

In November last year, the expected area to be drilled this spring, particularly with barley but also wheat was high.  In the last three years, the total spring combinable crop area in the UK has covered over a million hectares.  The AHDB’s Early-Bird Survey of planted area and planting intentions suggested 778,000 hectares of spring barley; potentially the highest area in 17 years and second highest in 30 years.  This is a big-ask in a tricky season and the drilling window is ending for most crops in England, and despite more summer daylight, Scotland will not be far behind.

In amongst the kerfuffle of trying to drill and apply plant protection, it is now also time to plan the forthcoming grain marketing year.  The realistic ambition should be to sell at a price that is a good average (and covers costs of production) rather than hit all the market peaks.  How much will be marketed ahead of harvest, at harvest and afterwards?  With a potentially lower overall crop-size, it might be prudent to sell slightly less ahead of harvest.

New Crop Markets

Over the last month, UK new crop wheat markets lifted by £4 per tonne, reaching 6-month highs.  This is largely to do with new global projections for wheat production being slightly lower than consumption and therefore potentially a small decline in global stocks.  Clearly this is all based on average yields and harvested area calculations, but if true, this would be the first decline in stocks for five seasons.

The Pound, which strengthened in the light of a glimmer of Brexit clarity, rose to exceed €1.15/£1, for the first time in almost a year.  A stronger Pound lowers grain and other domestic prices.  But the market fundaments outweighed the currency movements.

Furthermore, the Vivergo bioethanol plant at Hull that has been closed for four months now has reopened in the light of rising oil prices.  This could help mop up the year-end surplus ahead of harvest.  This time last year, UK Brent crude oil was valued at $55 per barrel, and it fell to $45 last summer.  Now, because of the recent airstrikes and other political shenanigans, Brent has risen to over $70 per barrel; surely good for the bioethanol industry.

Several boat loads of oilseed rape will be entering the UK in the coming month, with the southern Hemisphere harvest now available and some EU surpluses having been purchased for processing here too. That is likely to flatten the market, possibly until harvest now.  The bean market is following a similar set of fundamentals, with pressure from Australian exports to Egypt making our exports less competitive.

 

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.

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.

Arable Markets

In commenting on current grain markets, similar factors continue to prevail as the last couple of months and the market is still comparatively flat.  The November 2017 UK wheat futures contract, which ended on 23rd November, showed a total price variation over its total 2 years and 4 months of being open for trading of £32 per tonne.  For 94% of the time it traded within a tight £20 per tonne range of between £125 and £145.  There have been single weeks in previous years when markets have moved by £20 per tonne.

For old crop grains, the International Grains Council (IGC) has increased its estimate of 2017 harvested grain crop, increasing wheat by 1Mt and maize by 6Mt.  Wheat consumption also rises leaving no net change but maize consumption increases by 2Mt, meaning a small rise in stocks too.  We note that whilst half of all global grain stocks are in China, the rest of the world also has ample for now and consumers are not concerned about the whereabouts of their next purchase.

The Black Sea has been, and remains, more competitive for business to North Africa, and so exports from the EU have been slow so far this season, leading to reductions in export expectations and therefore higher carry-over predictions.  UK wheat exports have also been considerably slower than last year but with potentially less to export (higher consumption, far smaller opening stocks).

Early indications suggest the US winter wheat area is likely to be down yet again in 2018 and autumn crop establishment conditions are not great (it is too early to make yield judgements but planted areas and write-offs might have a small impact on cropsize).  A smaller US wheat area would mean the third consecutive area decline.  Also, it follows a massive switch away from wheat in the US last season and a halving of its area since it peaked in the early 1980’s as the chart shows. This can only be bullish for our new crop values but is also fueled by the fact that other countries are fulfilling the demand.

Soybean stocks at the end of the 2017/18 seasons are seen by the IGC as rising, by 2Mt, to 41Mt, largely from slippage in usage figures. Markets have been relatively quiet with little market movement (as per the grains). The next big opportunity for large price movements will probably be in the spring when the spring crop area is established (in the UK, EU and elsewhere).

UK malting barley premiums remain firm, especially for pre-Christmas, as sellers have dried up.  However, supply and demands remain tight for the season so opportunities for post-Christmas sales are still good. 

Demand for pulses is nearly over pre-Christmas and relatively quiet for the New Year too.  The Southern Hemisphere (Australia in particular) will be starting harvest soon into January so the UK will then have to focus in its competitive advantage of distance to the major markets of North Africa.

US WHEAT PLANTINGS: 1980 to 2017 – Source: USDA