The days of wheat at more than £200/t already seem like a distant memory. Since the highs reached towards the end of 2012, prices for both old and new crop have generally been on a downwards trajectory.
At the time of writing, there was very little difference between July and November 2013 wheat futures prices, which were both hovering around £20/t off their peak at close to £180/t.
There will always be the usual daily price fluctuations, but the current feeling among merchants and analysts is that the bearish sentiment is here to stay for the foreseeable future.
A number of factors are driving this (see table on p30), but the underlying factor this season is that wheat and maize (corn) areas around the world are forecast to be at, or close to, all-time highs, which given reasonable weather should result in record cereal production in 2013-14.
Commissioning of the Vivergo bioethanol plant in Hull continues, despite hopes that it would be up to full production by the first quarter of this year.
Frontier supplies grain to the plant through its Humber Gold club and the firm’s Jon Duffy says the facility is operational and is taking a “substantial amount of wheat” already. But he acknowledges it is still in the final commissioning stage and nowhere near full capacity yet. It is likely to be late summer before production starts to ramp up, he suggests.
The Ensus bioethanol plant on Teesside recently closed due to “adverse market conditions” but Mr Duffy insisted that the delays at Vivergo were entirely down to the technical commissioning process.
Around 1,000 growers have signed up to the Humber Gold club, although not all have yet sent wheat into the plant. “We will still be signing up more members throughout this year,” Mr Duffy says.
Feed grain supply pressure
The latest US Department of Agriculture report in May forecast world wheat production would increase from 655m tonnes in 2012-13 to 701m tonnes this season, putting global stocks 6m tonnes higher at 186m tonnes. It also predicted a world maize crop of 966m tonnes, up from 857m tonnes last year. However, this assumes all the crop gets drilled and yield potential isn’t too badly affected.
“The general feeling is that the market has a bearish sentiment,” says AHDB market intelligence senior analyst for cereals and oilseeds, Jack Watts. “If we get close to realising the USDA forecasts, prices will react quite negatively.
“But we were in a similar situation this time last year until drought hit crops in the US. Late drilling can make maize crops more vulnerable to heat stress, so the key driver is what happens during July and August, which is the main yield-building month for maize.”
Wheat is trading at a premium to maize on world markets (around £38/t for UK feed wheat at the time of writing), whereas in previous years it has been nearer parity, so this may temper any impact of issues with the maize crop on wheat prices, he notes.
Frontier trading director Jon Duffy says that if the weather plays ball and allows the rest of the world to produce a bumper crop, whatever happens with crops here, prices will inevitably come under pressure.
“The fact that the July futures price is virtually the same as the November price clearly tells us that the world’s not expecting to be short of wheat.”
But, and it’s a big but, there is still a long way to go until harvest and the weather will have a major bearing on whether crops fulfil their potential, he says.
“Any weather problems or crop issues will mean that rather than rebuilding stocks, we’ll start eating into them again and prices could equally go back up. There’s a lot of weather to get through still and we’ll only really know once we get nearer harvest.”
One thing that is more certain is that the UK looks like being a net importer of wheat in 2013-14, partly because the UK crop is forecast to be smaller than last year (11-12m tonnes compared with 13.3m tonnes in 2012) on the back of disrupted drilling last autumn.
Manage market risk
Given the background of market uncertainty and the experiences with last year’s washout harvest, Openfield’s James Marshall says the key thing for growers is to take a long-term view and balance risks by committing a proportion ahead of harvest but retaining flexibility by selling some on spot markets when yield and quality is known.
“Once you’ve made a decision for sound reasons that are right for your business, stick to it. Marketing grain is about more than just trying to hit the top of the market all the time.”
Last year’s experiences also highlighted the need to ensure that growers don’t overcommit sales before harvest and can physically deliver what’s sold, he notes. “You also need to look at the bigger picture beyond price. Things like the logistics of moving grain, farm workloads and cashflow all have a bearing on grain marketing, especially as farms get bigger and time pressures increase.”
Indeed, imports for the 2012-13 season have been strong and Defra predicts they are likely to finish the season at the end of June at around 2.54m tonnes.
Much of this has been quality milling wheat bought in to make up for the shortfall experienced during last year’s washout harvest.
“Relative to the rest of the world, UK wheat is quite expensive,” says Mr Watts. UK new crop feed wheat futures remain at around a £5/t premium to Paris milling wheat, compared with a £10-15/t discount normally, which is likely to be supportive of new season imports, he says.
UK new crop feed wheat is also relatively stronger than European feed grains such as maize, which is also likely to be supportive of feed grain imports.
“The nature and scale of these imports will depend on what yields and quality we get this harvest. It’s likely to be mainly feed-type grain. There may still be some export opportunities for quality wheats if we get the quality,” says Mr Watts.
Exports during 2012-13 are estimated at 800,000t, some 69% lower than 2011-12. Defra expects export pace to recover slightly in the final months of the season due to grain availability and more competitive pricing.
Compared to wheat, there is a somewhat different picture for barley markets in 2013-14, especially in the UK where the failure of some winter cropping has been partly responsible for a significant increase in spring barley area.
UK barley production is forecast at 6.8m tonnes (5.5m tonnes in 2012) by analyst Strategie Grains, largely due to a significant increase in spring cropping (spring barley output predicted to increase from 620,000ha in 2012 to 900,000ha). A slight increase in total EU barley output was also predicted to 55.3m tonnes, although Mr Watts says that the European spring barley area is generally down, which could create some opportunities for exports depending on crop quality.
“Depending on the weather, we could see the largest barley crop since 2009,” he says. However, a large proportion of this could be feed quality as much of the spring acreage has gone on to land traditionally used for winter cropping and may struggle to produce crops that meet malting requirements, he notes.
“This will need to find a home, which has traditionally been done by discounting feed barley to feed wheat. However, because feed markets are appealing to imports this year barley will also have to compete against other feed grains, so we could see a broadening of the spread between malting prices and feed.”
Defra forecasts an increase in UK barley availability for 2012-13, at 6.65m tonnes due to a 30,000t increase in imports. Figures suggest there has been a steadying of barley used for malting over the past four years, while animal feed usage in 2012-13 is forecast to be up 16% year-on-year, reflecting the poor weather and increased demand.
Barley exports for 2012-13 are forecast down at 435,000t, due to a lower surplus and limited demand.
|Wheat market drivers|
|Increased grain (wheat and maize) area globally and generally favourable weather in key drilling in key production areas could result in record crops in 2013-14||Weather uncertainty between now and harvest, plus delayed drilling in some areas, could still reduce yields. After several years of tight global stocks, the supply and demand balance is still tight|
|Record US maize crop predicted by USDA at 966m tonnes (857m tonnes in 2012-13)||Delayed planting could still lead to lower US maize yields – by 19 May 71% planted compared with 95% last year. Crops planted after mid-May tend to have lower yields due to delayed pollination|
|Record world wheat production forecast at 701m tonnes (655m tonnes in 2012-13)||Weather – some areas still need more rain (eg Russia/Ukraine), while others need warmer/drier weather for crops to fulfil yield potential. Big doubts over yield potential of UK crops|
|Beneficial rains in Russia, Ukraine and Australia have improved yield prospects||Cereal demand still increasing in China|
|Brazil set for record maize crop||Generally strong maize demand for bioethanol production in US – weekly ethanol production set an 11-month high in mid-May|
|Slowdown of world economy could reduce demand for grain||
Increased bioethanol production at Vivergo could boost local demand for feed wheat in UK later in 2013
|UK wheat imports up (mainly milling wheat). Total imports could reach 2.5m tonnes by end June – will boost new crop balance sheet|
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