17 October 1998

What price recovery?

With grain prices so low, marketing strategies come to the fore. Gilly Johnson heard the experts advice at an HGCA marketing conference.

A SINGLE crucial question topped the agenda for growers attending the HGCAs recent marketing conference at the Barbican: will the grain price recover? Expert economists say it will. And growers can expect some of the recovery in time to boost returns from crops now being drilled.

With cereal revenues now "the lowest in most farmers working lifetimes", Gerald Mason, economist with the HGCAs market information department, said only area aid was keeping the average grower from losses in 1998.

But for 1999, Mr Mason offered some hope. Forced to put a figure on the market signals, he predicted a possible £10/t rise by harvest 1999 if UK cereal quality is good. And prices could come back up another £5/t or so in 2000, he suggested, thanks to world markets becoming tighter. Inevitably, theres a health warning attached to his forecasts, which involve USDA estimates of supply and demand.

But key influences will be Russia and China, both of which may be forced into purchasing grain after problem harvests. World wheat prices have fallen well below those in Europe; Brussels is having to subsidise wheat by £23/t in order to compete on world markets. Barley is selling for just £30/t outside Europe, he added. But the knock-on effect of this is a reduction in world wheat plantings, which will reduce supply and help lift the market, eventually.

Price movements

"The significant price movements will come from the world supply and demand situation," said Mr Mason. "Thats where you should watch for market signals. Keep an eye on the world market reports in HGCA publications."

Equally positive was Gary Hutchings, of Dalgety Group. The excellent quality of the UK harvest will help export prospects and so boost prices, he said. Though the strong pound was often cited as the cause of low grain prices, in reality supply and demand are mainly responsible, he argued.

In the oilseed sector, the signals are difficult to read, said Mike Stubbs of Soufflet Agriculture. With rape prices now holding firm, Mr Stubbs was unable to predict whether they would go up or down. "No-one really knows," he said.

The rape market is more complex than wheat, because it is affected by substitute sources of oil – soya and palm oil. Although world oilseeds consumption is rising, world stocks are also rising and this could keep the lid on any price gains. That said, Asian demand for oil could lift the market.

By planting more rape this year, growers are reacting to the collapse in grain prices, rather than making assumptions about the oilseed market, Mr Stubbs pointed out.

"With oilseed rape selling at more than twice the price of wheat, growers are switching to rape, despite the cuts in oilseed area aid payments."

Record high for stocks

INTERVENTION stocks are set to rise within Europe to near-record levels by 1999, according to forecasts from Brussels. Increasing efficiency of production is partly responsible. Average wheat yields, now at 5.6t/ha (2.3t/acre) within Europe, are increasing by 1-3%/year, but demand is static.

The rise and rise of intervention stocks is causing concern to both MAFF and Brussels. Although Agenda 2000 addresses the problem, the reform proposals "dont go far enough", said Kate Timms of MAFF.

Even with Agenda 2000 in place, stocks could rise to three times todays level by 2010, according to MAFF projections. But despite this frightening scenario, other member states are still strongly objecting to the Agenda 2000 proposals, fighting to keep the current support system, said Ms Timms. "MAFFs view is that the status quo is not an option."

On set-aside, Ms Timms predicted that this production management tool would be needed in future years to keep stocks under control – so growers should not bank on a zero set-aside rate after Agenda 2000 kicks in. But she added that given the difficulties in agreeing the 10% rate for this season, putting the rate up further might not be acceptable to other member states.

Ms Timms could not give delegates a clear view of what Agenda 2000 might end up as. "But I anticipate that when an agreement on Agenda 2000 is reached, it will contain less than these initial proposals – thats the nature of compromise."

Ms Timms outlined MAFFs position on the Agenda 2000 discussions:

Should the intervention price be reduced by 20%?

Yes, and cuts should go further – the alternative is high intervention stocks or high set-aside.

How should exports be managed under reformed regime?

Market management instruments such as export refunds and set- aside should ideally be rendered redundant, but not abolished.

Should compulsory set-aside be retained?

Yes, as a potential tool.

Should voluntary set-aside be retained?

Yes – because it can be linked with environmental benefits.

Should there be a single basic aid rate for both oilseeds and cereals?

Yes. The value of oilseeds as a break crop in the UK means that oilseed rape would still be worthwhile.

Should base area limits (modulation) be retained?

Not without careful consideration of these proposals. MAFF has reservations about modulation.

Do the proposals simplify the regime?

No.

Will the proposals foster a more competitive cereals market in the EU?

To a degree, but we could go further towards this goal.

Will the proposals provide a sound basis for EU enlargement?

Not really – but it would give new members an idea of what lies ahead.

Will the proposals provide the EU with a sustainable position in the forthcoming World Trade Organisation negotiations?

No. Its going to be difficult to defend Agenda 2000 in WTO discussions. Would it be in the interests of the US to allow the direct aid payments to continue? Or would the US only tolerate these payments, in order to use them as a bargaining lever to allow greater access to EU markets?

New look for bulletins

THE HGCAs market information publications have been undergoing a make-over. Latest addition to the stable is mi prospects, a fortnightly eight-page analysis on grain markets and prospects. This replaces the old HGCA weekly digest.

The new look information is available by fax, post or e-mail. mi prospects costs levy-payers £40 a year.

Other publications include mi Saturday, a weekly two-page concise summary of key market developments (£35 a year); mi oilseeds, a weekly market information publication which includes a monthly analysis supplement (£65 a year); mi bulletin – the round-up of weekly market prices with specialist trade in mind (£50 a year); and the growers more concise version of the mi bulletin (£35 a year). More details from MI on 0171-520 3918.

Market information is also available daily from the HGCA by fax-back (0171-520 3951) or on the web (www.hgca.co.uk).