1 March 2002

Black Sea grain pushes wheat price to new low

By Robert Harris

NEW season wheat prices hit fresh lows this week as cheap Black Sea grain and updated forecasts of a big EU crop undermined the market.

Barring a disaster, prices will struggle to break out of their tight price range, say some merchants. But, while bullish sentiment is hard to find, the 2002/03 season has a long way to run.

Black Sea wheat set the tone for international trade this season and its effect is continuing into the next, says Glencore Grain trader, Robert Kerr.

Although the regions plantings are 10% down, a likely 8m carryover could create a 14m tonne surplus, he adds. "Black Sea sellers, who require hard currency and movement, are continuing to market aggressively."

Wheat recently traded into the Mediterranean at k118/t for October-March, priced to suit Black Sea origin. This has already affected domestic values, as the UK faces a potential record crop and a 5m tonne surplus.

The low Black Sea price equates to a UK price of just £55/t ex-farm near a port. Markets slipped another £1 to £60/t ex-farm for UK homes for November. Further inland, prices have dropped to the low £50s/t at harvest.

"There is also a massive wall of wheat waiting to hit the market across the EU," says Mr Kerr. Latest estimates from EU grain trade body Coceral put 2002 EU soft wheat production at 95.8m tonnes, 15% higher than 2001 (UK – 17.6m tonnes, France 35m tonnes and Germany almost 24m tonnes).

To compete with other exports, the UK needs good quality wheat to secure the £2/t premium already factored in for soft milling types and to avoid having to compete with cheap US corn, says Dalgetys Trevor Harriman.

He believes Black Sea wheat could set world prices for some time. "The international benchmark used to be US soft red winter wheat valued in dollars in Chicago. Is it now the same quality, but a Black Sea $ price?"

But farmer-owned Centaur Grain blames low prices on general uncertainty, rather than specific factors. "The season is hardly done with 18 months to go," says trading director, Graham Lacey. "When there is uncertainty, you do not see a strong market."

Mr Lacey reckons the UK will harvest about 16.5m tonnes, leaving just 4m tonnes to export. "That is more manageable. We are also about £6/t cheaper than French wheat, and France is only £3-£4/t above intervention. So the downside is not great, though we could be trading at poor values for some time to come."

Gerald Mason of the Home-Grown Cereals Authority agrees if the Black Sea region has a good harvest, it could be a tough season.

"But six weeks ago, the world price was quite firm. The reasons have not gone away, though people are now focusing on Black Sea and French markets.

"Although the forecast is for a world crop of 600m tonnes, 15m up on this year, it is a forecast. The US has the lowest winter wheat area since 1971, it has not even started planting maize yet, Canada has been hit by drought and yields in the Black Sea can vary by 50-60% around the trend."

One unknown is China, a new World Trade Organisation member. Traders say it could take a huge volume of grains off the world market – or very little. &#42

Further pressure on old crop

Old crop prices have also come under renewed pressure, losing a further £3/t during the week and plumbing new lows.

Depending on location, ex-farm feed wheat was worth £66-£70/t on Wednesday, according to farmers weeklys UK spot prices (see p29), £5/t less than a month ago.

Glencores Robert Kerr blames a selling glut by some co-ops and grain groups who missed the early market, as well as too few buyers and falling French prices.

After talk of a shortage earlier in the season, UK consumers have taken up to 80% cover for the January-March period. French wheat also slipped £1.50/t recently following a 200,000t sale to Algeria priced to compete with Black Sea supplies. The UK has a small exportable surplus (875,000t according to latest DEFRA figures), so the lower French price has had an effect, says Mr Kerr.

But the balance sheet could tighten. The UK should ship half the surplus, a delayed livestock turnout could add another 200,000t to demand, and DEFRA could lower its estimate again. Buyers also need grain from April to June, says Mr Kerr.

"But I still believe the market is a sell. A July call option is worth considering."