21 January 2000

Bank rate cut cools grain trade

By Robert Harris

GRAIN markets have reacted quickly to last weeks interest rate rise, with ex-farm values falling by at least £1/t as the £ climbed to a new high against the k.

In most regions, a spot feed wheat price of £70/t was impossible to find midweek, says the Home-Grown Cereals Authority.

The Bank of Englands decision to raise the base rate by 0.25% to 5.75% was described as a pre-emptive step to cool the economy.

As expected, the £ strengthened on foreign exchange markets as a result. By Wednesday, £1 bought just over k1.62, the equivalent of DM3.17. This cut intervention values by almost £1 on the week, to £75.40/t.

However, Dalgetys Gary Hutchings points out that the market this season has not moved down as much as sterling has moved up.

"It is fairly evident that there are quite a few people who believe the balance sheet is still tight and demand reasonably steady. Given that we are still competitively priced we feel the market will consolidate and any reversal in the £s fortunes will cause prices to recover."

As far as the new crop is concerned, help may yet come from an unexpected source, says Gerald Mason of the Home-Grown Cereals Authority.

Recently released figures from the United States Department of Agriculture revised end-of-season maize stocks down by over 7m tonnes, and wheat stocks by 1.5m tonnes, mainly due to higher domestic usage.

The USDA report also suggests that US winter wheat plantings could fall to 17.4m ha (43m acres), the smallest area since 1972.

US wheat futures ended the week over $5/t higher, helping new crop world prices to edge closer to the EU intervention price.

"If we see another price rally, it could drag up the EU grain price complex with it," says Mr Mason.

That could help new crop values rise above current dismal levels, with feed wheat priced at about £60/t ex-farm next harvest. "Continued dry weather in the main wheat growing regions of the US will certainly be worth keeping an eye on over the next five to six weeks."

Brussels took advantage of the lift in the world price to grant 315,000t of free-market wheat export licenses last week. The subsidy needed to make up the difference between the world price and the EU price fell to k37.47/t (£23.40/t), the lowest needed since early November.

"This gives even more confidence that the French market wont fall below intervention, which, sterling aside, has put a fairly robust floor in the UK market," says Mr Mason. "In the past four months, LIFFE (London) futures values have not fallen more than ?13 below the MATIF (Paris) price."