Tag: wheat

Grain Market Commentary

Everything grain marketing is focused on new crop by this time of the year, even the remains of the old crop.  However, this year there is a problem.  Without knowledge of a Brexit outcome, exporters have no idea what they can afford to pay, not knowing whether there will be any kind of trade deal meaning a transition to Brexit and therefore whether they will have trade tariffs to pay to send grain to the EU-27 next year or not.  Furthermore, importers are in the same position.  Trades for the new crop are just not taking place, at least not until after Halloween.  A likely wheat surplus for the UK this coming year is compounding the problem.

The domestic marketplace is far less impacted by Brexit and theoretically not at all, however, the traded tonnes are those that set domestic prices.  Buyers at the grain processing and milling firms are dealing with this mainly by carrying-on as normal – all their competitors are in the same position, and unless any take any speculative positions, they will all experience the same price shifts simultaneously.

The weakening of Sterling as a result of political uncertainty has given a small boost to grain prices.  Barley prices have lifted in recent days as well as wheat, albeit by less than the rise of wheat prices.  This might seem a worse outcome for barley, but the potential barley surplus and uncertainty over the export of the crop from November might actually mean this is a good opportunity to sell.

The weak Pound has boosted the oilseed rape price in Sterling terms during May.  Oilseed rape does not have a trade tariff on it, so the complications from Brexit are less significant.  However, the US government has announced substantial support in terms of additional grants for soybean growers in the USA, in a bid to compensate them for the US-Chino trade spat that they have become embroiled in.  This does not seem to have had a major impact on EU oilseeds as yet.  One might assume a high global oilseed crop this year, considering the Brazilians have also been producing lots of soybeans to steal the US business to China; it all has to go somewhere.

Beans do have trade tariffs, but only small ones.  The new crop is in very good condition at the moment, a rather different situation to their final condition last harvest.  Again, it is new crop that the markets are focused on, and currently, other proteins such as rape meal and soybeans are comparatively cheaper than pulses so their incorporation into feed rations is likely to be relatively small.

In the field, growing crops are looking good throughout the UK, that is with the exception of oilseed rape.  Grains and pulses are growing well, and reports of serious disease issues are rare.

Grain Crop Commentary

Old Crop

Towards the end of the wheat marketing season, the impact of the fundamentals of grain supply and demand change, with some taking on greater impact, others less.  Firstly, the increasing amount of information over the emerging new crop overtakes the dwindling and ageing information about the remaining old crop, increasing the impact from new crop fundamentals.  Secondly, the volume of new crop wheat being traded, which is rising all the time surpasses the declining volumes traded of old crop.  This accelerates when the last old crop futures market expires as is the case now as we enter May (having entered the notice period for physical delivery of the underlying good).  Market fluidity also declines considerably when futures markets are not available.  The technicalities of closing the held contracts becomes a physical issue either having to physically deliver them or close the position.

This year, domestic wheat consumers are buying no more than ‘pipeline stocks’, as they are fully aware of the considerable discount (£16 per tonne) that exists between old crop and new crop, and that the price between the two crops must converge at some point.  On the back of the previous paragraph, they are aware of the forthcoming downside to the grain market; if physical grain will have to come out of the stores to honour the futures contracts already held, then this will prove a bearish factor on a thin and technical market meaning prices are likely to fall from here.  Indeed, the value of wheat has fallen over the month and this will probably continue.  It could well be time for long-holding farmers to sell the remainder of what they have in their barns.

New Crop

Rain in the UK has been gratefully received, but for most parts, its not enough.  However, analysts are reporting good crop conditions throughout the world and large global areas of wheat.  High levels of planted wheat in Canada and the US, and rainfall in the EU has raised crop expectations this month compared with last.  Speculators and funds are holding a considerable short position (i.e. the have sold what they don’t own, expecting the value to fall so they can buy them back cheaper).  It is maybe no surprise that the new crop is considerably lower priced than old crop.

Demand for feed barley has faded since Easter as the warm weather has provided a welcome burst of grass for the livestock farmers.  Coupled with this, many farmers have used Easter to clear their remaining unsold grain, placing downward pressure on feed barley values.  Volumes of export sales are small, and short term, as nobody is clear what tariffs will be charged on sales after Brexit.

Oilseed Rape prices have held up well in the UK this month partly on the back of a weakening Sterling. The underlying market, the US soybean market has fallen sharply, despite reduced forecast crop areas, and expectations of a resolution of the US/Chinese trade dispute that has been taking place in recent months.  Despite the UK OSR crop looking pretty poorly (see other article), globally the oilseed crops are in better fettle.  OSR is not a price setter itself as volumes are comparatively small compared with other vegetable oils such as soy bean oil.

The old crop Pulse market is now effectively over, and thoughts are now on the emerging new crop in the ground.

International Grains Council Figures

The International Grains Council (IGC) has released its first full supply and demand projection for the 2019/2020 year, showing 50 million tonnes more grain production than last year with a 34 million tonne rise in consumption.  Consumption goes up every year as we might expect simply as population rises and each person is consuming more than consumers in previous years.  This means that production should be a record each year, simply to keep pace.  However, this coming year, despite production clearly rising faster than demand, the stock level is thought likely to fall.  This is because the stock level was already falling and simply to keep pace, production would have had to rise further.  This is demonstrated in the table.  The level of year-end stock has fallen from over 30% three years ago to 26% now.  This is what has underwritten improvements in grain prices in the last year.  China is ever-increasing its holdings of grain stocks, with over half of wheat and possibly as much as 65% of global maize grains being held in its stores.  This potentially means there is much less grain available than these figures suggest as Chinese stocks are not generally available for the wider market.

All Wheat and Coarse Grain (Million Tonnes)

2016/17

 2017/18 2018/19

2019/20
Production

2187

 2142 2125

2175
Consumption

2126

 2153 2170

2204
Carry over

659

 648 604

575
Stock as % of Demand

31%

 30% 28%

26%

For wheat specifically, the picture is reversed.  The stock level is seen rising, with a greater rise of wheat production for harvest 2019, resulting in production remaining well ahead of consumption.  In terms of physical tonnes, there was more wheat stock in 2017 but as consumption was lower in those days, the stock level as a percentage of demand was lower.  This is shown in the chart below.

Wheat (Million Tonnes)

2016/17

 2017/18 2018/19

2019/20
Production

757

 763 735

759
Consumption

735

 741 742

752
Carry over

248

 271 264

270
Stock as % of Demand

34%

 37% 36%

36%

Overall, the figures suggest a strong level of support for grains overall, but there is ample wheat, suggesting the price premium that wheat tends to carry over maize and other feed grains, might be rather slim for a year.

UK Arable Viewpoint

There have been some healthy volumes of wheat export sales from the EU in March, especially from France to third countries, helping to clear out the overall EU surplus.  Whilst it might seem that France is a competitor to the UK and so French business is not good for UK sales, it is still the same Single Market that volume is being taken from, reducing any surplus and a rising tide lifts all boats in the same harbour; at least for now.

The increase in wheat area in the UK this coming year will be the first rise for five years, and, even then, primarily because 2013 was fraught with drilling problems leading to a very low drilled area.  The prospect of a large 2019 harvest is contributing the sharp decline in grain (wheat values) for new crop in the UK just now.  It is also possible that the market has started making an adjustment to partially build-in the cost of tariffs for new crop exports, should we leave the EU without a deal.  The UK has a feed wheat surplus most years, the majority of which has been exported to Iberian customers for decades.  This would be one area where the impact of Brexit would be felt by the farming community relatively quickly.

Old crop feed barley values are still discounted against their calculated feed-value equivalent to wheat, but still higher than new crop in a similar fashion to the wheat prices.  New export business for malting specifications has temporarily slowed whilst traders are unsure of whether or how much tariffs they are likely to have to pay.  It is much easier once they know what to tap into their calculators so they know the relative costs of grains around the world.

Spring drilling conditions have been good to excellent throughout Britain, it’s just that there’s not so much land available to drill as conditions were so good in the autumn, with more land was drilled then as well.  We would assume there will not be much fallow land this year for that reason.  The area of spring wheat has fallen dramatically this year according to anecdotal reports, partly because the favourable drilling conditions last autumn left little space for spring wheat.  Similarly, spring barley area is thought lower than last year too.

The pulse market is just about finished now so anybody with beans still unsold should think about what they plan to do with them.

In Leicestershire’s heavy soils, the damp footprint beneath the boot suggests a good seedbed and ideal growing conditions. However, dig a spade’s depth into the soil and it becomes evident the soil is still rather dry as a result of last year’s drought.  In fact, this winter has also been a relatively dry few months.  The crops survived last year’s drought because of the very wet spring, this year, the soil moisture is far lower than this time last year so crop will rely on reasonable rains this year to reach harvest safely.

BPS or June Survey Areas, which are Correct?

Since the revision of the CAP in 2015, when Greening was introduced, the claim form for direct payments has become considerably more complicated. The necessity to record each crop, which was simply not a requirement of the Single Payment scheme is present with the Basic Payment because of the 3-crop rule.

For the second year running, Defra has published a comparison table comparing the June census crop area figures for England against the claimed BPS crop areas. A noticeable difference between the 2 sets of data has emerged, specifically in wheat, with an almost 7% difference in 2018 (BPS lower). This is equivalent to 108,000 hectares which at average yields is over 850,000 tonnes of wheat potentially  missing, certainly enough to have a considerable impact on the market, especially as it would shift the UK’s balance from that of a net exporter to net importer. The market reacted with an assumption the survey was incorrect which may not be the case.

Examination of the other crops suggests the differences between the two data sources have increased this year compared with the previous 3 years. As the tables below show, considerable differences  of the magnitude experienced in wheat (as a percentage of each other) are also seen in oats, beans and fallow land.

There were no differences to the forms this year, so whilst it is possible that claimants entered field edges and environmental scheme information differently, or entire field versus cropped field areas, one would expect the differences to be consistent year to year. It is barely possible that the different date of each form made any difference (even with the extreme weather conditions) as crops would have been planted for both dates; 15 May and 1 June. Defra is examining the discrepancy and we will report of the outcome when we know it.

Arable Market Commentary

New Crop

In terms of growing conditions, little could be more extreme than the temperatures recorded this month compared to last February.  In the February 2018 bulletin we cited the ‘Beast from the East’ delaying drilling.  This year, spring drilling is well ahead of normal with almost 25% of spring barley already in the ground.  A word of warning though; early drilled spring crops are not always the highest yielding, and there is time yet for very cold weather.  We reserve any judgement on harvest yield potential.

The USDA makes its first prediction of US wheat area every February, this year suggesting decreased plantings, in a falling area trend.  Indeed, if correct, it would be smallest US wheat area for 110 years.  This identifies the changing demands for grains, shifting to maize, for pig and poultry feed, biofuels and indeed even human food.

The International Grains Council’s first expectations of the forthcoming 2019/20 year are for a rise in global wheat production, of about 1%, a similar magnitude to the annual rise in demand so no substantial changes in year-end stocks.  This seems to contradict the findings of the USDA, but theirs, of course is USA only.  An increase in coarse grain harvests are also foreseen by the IGC, with maize and barley both up about 1%.  This is in line with the rise in demand so is no more than trend demand.  Much of the coarse grain increases are predicted to occur in the USA and China; the two biggest grain producers, so a small proportional change in these countries will be noticed.  However, there are also rumours that China is considering rolling-out a major expansion to its bioethanol inclusion policy, which would have a considerable impact on feed grain demand in the coming few harvests.

Of course, much of these crops that have been forecast have not yet even been drilled; all maize, and soybeans are spring crops and Canadian, Russian and half of the US wheat is also spring varieties.  Therefore, these projections are statistical analyses coupled with a smattering of planting intention data, not hard evidence of plants sprouting from the ground yet.

Old Crop

In the EU wheat market, a gradual decline in values this month (making European grain cheap compared with American grain) led to Europe and Russia winning some large export contracts to Saudi Arabia, boosting the export figures and balancing the supply and demand books.

The demand for ruminant feed is currently slipping away as cattle venture into the fields and sheep have grass to eat; leaving a lack of demand for feed barley, which has fallen to a £25 per tonne discount beneath feed wheat (which is primarily fed to housed chickens).  Barley is being included at maximum rates in rations now for this reason.

Oilseed rape prices have taken a tumble, based on the arrival of a large vessel loaded with Canadian canola, and the reduction of the rapeseed crush volumes in the UK.  This time of year is often difficult for European rapeseed (and pulses) as harvests from the Southern Hemisphere become available and start putting pressure in markets.  The Old Crop pulse market is increasingly thin and new opportunities will become rarer now, despite a healthy premium over feed wheat for pulses.

Combinable Crops: January Update

Sterling is at its strongest point against the Euro for almost a year and a half (which lowers grain values), yet it is still only 4% stronger than it was when it started rising in early January. This means it has taken approximately £7.00 off the price of a tonne of wheat, and £13.00 from oilseed rape.  For many, this is the difference between a profit and a loss, but, equally, is not such a violent swing as we have seen in previous marketing years, when wheat price has shifted by far more in single days.

The grain market is relatively quiet; surprisingly high amounts of wheat remain unsold, despite some predictions from the trade that farmers would be sold ahead of Brexit.  In fact, the farming community being pro-Brexit on balance might see opportunities from selling later this year.  However, long-holders should be aware that the spread between old crop and new crop wheat currently sits at just under £20 per tonne, ex-farm.  Large price spreads like this have to close at some point which suggests either old crop is too dear or new crop is cheap.  The chart below shows the big step in prices as we look ahead to 2019-crop.

The discount from feed wheat to feed barley currently sits at about £10 per tonne, a comparatively small 6% of the wheat value.  Yet despite this, the discount is attractive to feed compounders.  Good quality malting barley retains a comfortable £30 per tonne premium over feed barley, but the market is currently thin with small volumes of new business being done.

The pulse market is also thin, with not many beans remaining unsold on farm.  The market is therefore starting to turn to new crop marketing; a difficult one as quality is unknowable at this time of year ahead of harvest.  The market has been strong though, with the price spread of feed beans over feed wheat having risen to over £50 per tonne: a margin not seen since the spring of 2015.  This is largely because of the small and damaged harvest of 2018 following the hot weather, coupled with political complexities within the global vegetable protein market at present.  Many farmers will be looking to secure more spring bean seed, although its availability is not clear, despite a derogation for certified seed to have a lower germination this year than usual.

Arable Market Update

This time last year we took a look at the global grain supply and demand figures supplied by the International Grains Council (IGC).  The IGC is a politically independent body, so therefore theoretically has greater credibility than the US Department of Agriculture, the other major organisation that publishes global grain statistics.  The only issue is that the IGC has a secretariat of about 20 economists, and the USDA, some thousands, with people on the ground in every region of the world.  In any event, the figures from the two organisations are often relatively similar!

Twelve months ago, we discussed how wheat stocks were at their highest ever, in physical terms.  This year, running at 38 million tonnes (or 5%) less, the fundamentals are looking more positive for grain long-holders (farmers).  Furthermore, as can be seen from the change in pre-harvest expectations back in March 2018, to the last set of figures in November, the reality of what has been harvested in the 2018 year (and continues to be cut in the Southern Hemisphere) is lower than initial estimates; again, bullish for price.  The stocks to use ratio is lower than last year at 35.4%, but still considerably higher than the previous two years, suggesting accessing the right specification and location of wheat by consumers is unlikely to be challenging to buyers in the coming season.  A lower level of stocks held by exporters offers a glimmer of hope to those waiting for prices to rise, but it also suggests that importers have more stocks so might buy less.

 

17/18 figures forecast; 18/19 estimates   1 Argentina, Australia, Canada, EU, Kazakhstan, Russia, Ukraine, US    2 Argentina, Brazil, Ukraine, US    3 Argentina, Brazil, US

A look at the maize figures shows a different story; one of rising stocks and increasing availability.  This indicates that crops grown for energy alone (animal feed and bioethanol purposes primarily), are in relatively bounteous supply.  It suggests that the premium for milling varieties might benefit in the coming year.  However, in another interesting twist to the story, as stock levels are expected to be so much lower this year than for the last few (because of rising usage), the stock:usage ratio is seen falling.  Furthermore, the Egyptians (the world’s largest wheat importers) have been buying Russian wheat at prices above anything they have paid for 4 years.  This, coupled with a weakened Sterling because of recent political shenanigans, supports UK wheat prices.  We are still a long way from harvest 2019 (the IGC hasn’t even started to forecast supply and demand for it as yet).  There was a view that, barring major weather events, as we approached harvest 2019 there would be a downwards ‘correction’ in wheat prices as availability rose.  There is now perhaps a lesser chance of this happening. 

Barley markets are quiet ahead of Christmas, with few buyers or sellers, including no new export business. Premium samples of malting barley retain a good premium for those still unsold.

The oilseed marketplace has seen prices move a little more than grains this month, partly because of the Chinese/US politics which affect soy beans but also as the southern hemisphere crop is being harvested and some is already sold and loading for delivery into the EU.

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.