Gaining from Grain

MANY FARMERS still do not understand the fundamental drivers of the UK grain market, according to a poll at the Home-Grown Cereals Authority’s recent Market Outlook conference.

A straw poll showed that fewer than half the delegates knew the difference between import parity and export parity, two of the key price-setters in grain markets. “It is critical that people understand this as it has a huge impact on price,” says Alastair Dickie, director of crop marketing. When the UK market switches from export to import parity this can add about 20/t to the grain price.

This year”s wheat crop of 15.7m tonnes is expected to leave an exportable surplus of 3-3.5m tonnes, as domestic buyers cannot use more than 12-13m tonnes a year. The market must therefore be priced competitively enough to attract export demand – at a level known as export parity.

UK feed wheat is currently competitive into Spain, Italy and Portugal as the Ukraine is struggling to fulfil feed sales into these countries. “A lot of the Spanish and Italian demand has switched back to the UK,” says Mr Dickie.

“But later in the year maybe we’ll have to compete with French maize within the EU or maybe even US maize into Asia.” UK prices would then have to match these levels to remain export competitive, so farmers should be aware of any market movements in these countries, he adds.

When the UK has a surplus and prices rise above export parity this is an important signal that growers could sell, says Mr Dickie. Equally, if prices fall below those of our competitors, stocks could be worth holding on to. However, as long as an exportable surplus remains, the UK must stay competitive on international markets.

In contrast to this year”s ample feed wheat supplies, it is not yet clear whether UK milling wheat availability is sufficient to meet domestic requirements. Millers are therefore paying relatively high prices to import some German milling wheat to secure supplies. When prices reach this level it is known as import parity.

“If you”re a grower with, say, Group 1 or 2 milling wheat, and your mill can buy equivalent German wheat at the same price, this is an important signal that you could sell,” says Mr Dickie. Import costs can rise further but this will be driven by freight rates, international market factors and currencies, not domestic factors.

So reaching import or export parities can help farmers with their selling decisions. However, while these signals indicate market thresholds they do not represent absolute price limits and prices can continue to rise or fall. Growers are, therefore, advised, as with any grain marketing decisions, to take price protection against such volatility.

“In my opinion, taking price protection is key – either by getting a minimum priced contract or buying a put option,” says Mr Dickie. “Sitting there crossing your fingers is not a valid strategy. An option will give you a second chance at the market – and you don’t often get that.” Gaining from Grain is a monthly series on business strategies produced by farmers weekly in association with the HGCA.