12 May 2000

A waiting game for wheat

New crop wheat prices in the low £60s/t mark a fine line

between profit and loss for most farmers. This grain

marketing special focus aims to help growers squeeze the

best returns from crops. Gerald Mason of the HGCA starts

with a timely look at why prices have fallen so far,

and what the future holds

LOWER EU cereal support prices are the key reason for the poor forward values currently available. In March 1999, EU farm ministers agreed to cut intervention prices by 15% over two years. The first cut is due in the coming season, taking November support prices down from around k120/t (£72/t) to k111/t (£67/t).

Most consumers also seem relaxed about securing supplies next season. The UK wheat crop will come from a record area, with the prospect of a crop 1-2m tonnes bigger than harvest 1999. Wheat areas in most other European countries have also climbed. All these factors point to a significant export challenge for both the UK and EU in coming months.

And, of course, the k remains weak. Repeated forecasts of a recovery in the value of the new currency have failed to materialise.

The impact of currency on cereal prices has possibly been overstated in the past. But there is no doubt that the k consistently touching new lows against sterling adds to price pressure in a UK market already facing a potential record crop and support price reductions.

What has driven prices down? Unfortunately, we are still suffering from our own good fortune. When world prices peaked back in 1995/96, wheat became an attractive crop for farmers all round the world. The fall-out was two successive huge world wheat crops, reaching a record 610m tonnes in 1997.

Stocks built up as consumption growth failed to absorb the extra production. World wheat reserves climbed from 111m tonnes at the end of 1996, peaking at 134m tonnes at the end of 1998.

Since then, low world prices have begun to solve the problem, but the going is slow. Values have fallen from a peak of over $240/t (£152/t) to below $90/t (£57/t), forcing the EU commission to give export refunds and leaving both EU and UK markets at support levels.

Two successive world harvests, in 1998 and 1999, have been below consumption, helping to reduce global stocks to a forecast 121m tonnes at the end of this season. And early forecasts by the International Grains Council for next season suggest consumption growth could reduce stocks to just 111m tonnes.

However, the location of these stocks is becoming more important. In 1996, when world stocks were the same as those expected in 2000/2001, the five major world wheat exporters held only 29m tonnes. This time, the same countries are forecast to hold 51m tonnes. This is likely to keep price competition on world markets fierce.

What are the prospects for the future? It would be wrong to suggest that prices will soon return to the peak they reached in 1995/96. But the next few years should see a steady improvement in world wheat values.

Consumption is expected to grow, with usage put at a record 600m tonnes next season. This increase is taking place in developing countries as populations increase, incomes grow and urbanisation continues.

Meanwhile, demand for feed grains and vegetable oil in general is also set to improve. This was principally hit by Asias economic problems, which reduced the market for meat in that region.

But most Asian economies are once again growing strongly, which should lead to extra import requirements for feed grains and vegetable oils, supporting world farm commodity prices in general.

This, coupled with falling support prices in the EU over the next couple of years (see graph) means UK farmers can reasonably expect to be selling wheat and possibly barley onto the world market without the need for an export refund. This brings new challenges and opportunities.

UK farmers will undoubtedly face more volatile markets as world prices directly drive our markets, much along the lines of the UK oilseed rape market. Here, Chicago oil and meal prices are the principle price driver, and the $ and k relationship directly impacts on UK prices. The same will be true of wheat. But this volatility will also provide opportunities for farmers. Those with a good marketing plan, including sound price objectives, will be able to take advantage of forward prices over a number of seasons when world markets peak.

A good recent example has been the rise in world prices driven by dry weather in the US.

Many Australian farmers took the opportunity to make sales at seemingly unsustainable prices, given the record Australian crop this season and ideal planting conditions for the next.

So, the future may be uncertain. But the expected modest rise in world prices and a sound marketing plan should help farmers in the UK tackle the challenges. And hopefully, fairly soon, there will be a crop problem somewhere other than here. &#42

WHEATPRICES

&#8226 Steady improvement expected.

&#8226 More volatility.

&#8226 Opportunities ahead.