Wheat margins warning as higher costs bite

Wheat profitability for 2012 is looking increasingly tight as prices weaken against a high cost base, said HGCA senior market analyst, Jack Watts at the HGCA agronomists’ conference.

“There could even be negative margins for some in 2012, depending on the business,” he warned.

“The big challenge for growers is to identify their costs, find a marketing plan that delivers a price which keeps them in business for next year.”

Variable costs, with fertiliser being the main driver, had risen from around £40/t in 2010 to a predicted £53/t for 2012 for an 8.9t/ha wheat crop, according to the latest figures from the Agricultural Budgeting and Costs book put together by consultant Andersons, he said.

Fixed costs were also rising, by £7/t to £77/t, on the back of higher fuel prices and increased machinery depreciation costs, following reinvestment in the industry.

“Against that rising cost base we have weakening prices. At current futures prices of around £135/t there isn’t much of a gap.”

And there was no linkage between how much it cost a grower to produce a tonne of wheat and the price he would receive, he stressed. “The market does not respect costs of production.”

With wheat in relative plentiful supply, it was maize production that was underpinning wheat prices. Tight maize supplies together with increasing demand, particularly from Asian markets, had led to wheat being fed to livestock to help satisfy demand.

But with maize prices strong, there was likely to be increased plantings in the Northern Hemisphere as there has been in the Southern Hemisphere, which would put downward pressure on wheat prices, he said. “And if we get a worldwide recession, it could weaken grain demand from Asia.”

However, forecasting prices was only possible if you could forecast weather. “The one saving grace is if we see some miraculous weather event, hopefully in Russia, we could see prices improve. That’s a bit of a hope and we need to prepare for the worst.”

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