1 December 1995

Grain prices: A warning

By Philip Clarke

GRAIN markets are set to become increasingly unstable and growers need to develop a marketing strategy in order to protect their returns.

That was the message from Dalgety grain trader Trevor Harriman at the "New market factors for grain" farmer forum at Smithfield FarmTech this week. He also warned that the current period of prosperity could be short-lived.

In particular, he pointed to the increasing access to EU markets, the impending cuts in subsidies and growing competition from central and eastern Europe.

"Ever since the introduction of the MacSharry reforms and the trials of the exchange rate mechanism, commodity trading has become considerably more complicated and volatile," he said.

This volatility has been masked this season by the current world market situation, which has driven UK grain prices steadily upwards, despite fluctuations in sterling.

The reason behind this is the low level of world stocks. With demand outstripping supply in recent years, wheat stocks have fallen from 180m tonnes in 1986 to 92m tonnes this year, explained Mr Harriman. "This takes the stocks to use ratio for all grains to 14-15%, well below the Food Aid Organisations safe level of 17-18%."

Similarly, within the EU stocks have slumped from 33m tonnes in 1993 to just 5m tonnes this year, (most of it rye). "This dramatic drop is a direct consequence of Brussels strategy to release intervention stocks into the market to dampen internal prices," said Mr Harriman. "As we all know, this strategy was particularly ineffective."

As stocks have diminished, world wheat prices have rocketed from $137 six months ago to a recent peak of $210, though this has since dropped back a bit. "In effect we are now trading at world market prices and hence we are open to the inherent volatility this infers."

Compounding this is the developing situation in the Central and Eastern European Countries (CEECs) and the Commonwealth of Independent States (CIS). These two blocs have been moving in opposite directions, with Russia recording its worst harvest for 30 years, while Romania and Hungary have emerged as net exporters.

Romania recently sold 500,000t of wheat to Morocco – a traditional French market – at a large discount to the world price. "While this might just be a reflection of a desire to access hard currency, it must nevertheless be viewed as a long- term threat and a further undermining of any market stability," warned Mr Harriman.

"Without access to vital market information, you cannot expect to maximise your returns in such a competitive and unpredictable marketplace."

A show of hands at the seminar showed that less than 40% of the growers present knew where their grain went once it left the farm.

Trevor Harriman believes greater market volatility is just around the corner.