The recent drop in oil prices combined with uncertain global economics could produce some interesting export opportunities for UK and EU markets, says Nidera’s David Eudall.
Export sanctions, changes in exchange rates and freezing weather in key grain-producing continents have unsettled a market previously defined by abundant world supplies as result of 2014’s large global harvest.
This unusual combination of dynamics is opening up some valuable export opportunities, but if they are to take full advantage of these UK growers need to get into selling mode and leverage the estimated 1.7m tonnes of UK wheat which could still be exported.
At this time of year, you would expect markets to be focused on existing supply and weather conditions in the US and Russia as new crops develop, but this year some distracting political and fiscal conditions are in the mix too.
Temperatures across Russia did fall sharply at the end of last year when protective snow cover was minimal, causing real concern over the condition of freshly drilled crops and a justified rise in the market.
But it is the combination of Russian politics, world reaction to these and rapidly falling oil prices that have driven the global agenda recently. Shifts in the key exchange rates are adding interest, too.
The Russian rouble relies heavily on oil as a source of income and, in an effort to protect the weakened currency and stop domestic food prices from rising too quickly, the Russian government has imposed a tax on grain exports from February onwards.
News of the tax, released before Christmas, had the immediate effect of making global investors nervous and causing global markets to firm – although the general feeling is that prices have now moved as high as they can as a result of this.
There are, however, signs of importers who would naturally turn to Russia as a first source now seeking alternatives and, while there is undoubtedly enough wheat in the world balance sheet to accommodate this, it does mean some consumers – customers in North Africa, for example – will have to switch to other exporters to fulfil their needs.
Egypt, historically a large buyer of Russian wheat, bought 180,000t of French wheat in the first full week of trading in 2015, and others will follow.
Just this week the US Department of Agriculture reduced its estimate of Russian exports this season by 2m tonnes to 20m tonnes. However there were increases for Europe, Ukraine and Canada, which offset the anticipated fall for Russia.
While export restrictions from Russia are a barrier to trade and the world is an unsettled place politically and economically at the start of 2015, the UK is in a strong position to be a key player in the fallout from this.
Effect on UK
It is thought that the UK had exported 1m tonnes of wheat so far this season to the end of December, leaving approximately a further 1.7m tonnes available So as 2015 gets under way, the UK market is in a position where there is a significant amount of business left to write.
As well as the potentially beneficial effects of the Russian export ban, UK and European producers in general have seen a pick-up in demand recently from exchange rate movements.
The weaker euro, and to a lesser extent sterling, against the US dollar has made the EU and UK more attractively priced into export markets such as Korea, Bangladesh and Thailand.
The first part of 2015 might, therefore, be characterised by greater export opportunities to more distant destinations, but this may not directly benefit UK prices. The UK feed wheat surplus still has to compete with European corn into feed rations and as this is currently more competitive, feed wheat prices may need to move lower to find demand.
Global events have given a supportive tone to markets late in 2014 and into the early new year, but the market has quickly digested these and prices have drifted lower in a period with little fresh information.
The bottom line is that, if you’ve got to grain to sell, it might be better to consider your options sooner rather than later as the market will soon start taking a steer not just from the old-crop supply pressure but from new crop expectations too.
Grain market drivers
A summary of the current main price factors and their probable influence.
Corn remains the cheapest feed grain into European feed rations, with wheat needing to compete. With the UK still having a surplus to export, the need for prices to remain competitive may keep domestic values on the back foot. Overall the world balance sheets still show increases in stocks with the global perspective year-on-year staying bearish as a result.
Amber Watch this space – 30%
As we move further into 2015, the market will lose interest in old-crop as the supply and demand balances resolve and will, instead, take direction from developing new-crop condition. Until winter is over and spring growth starts there is little evidence to base yield projections on, but weather shocks could impact markets, with Russian and US winterkill a more critical issue than in recent seasons.
Green Factors exerting upward pressure on prices – 30%
For the short-term demand from both domestic consumers and global trade will give markets an undercurrent of support. Concerns over winterkill in the US and Black Sea, as well as investor reaction to any developments to the Russian export ban and shifting trade patterns, could also lift prices.
Nidera UK is part of global grain trader Nidera, which operates in 22 countries. One of the UK’s key grain exporters, it is based at Ipswich, Suffolk, with regional offices in Yorkshire, Norfolk and Hampshire.