Global grain prices head higher

International grain prices have put on another surge in recent days with Chicago futures hitting an eight-month high in response to the weakening US dollar.

Nearby wheat futures topped $247/t (£150) on Monday (1 July) on the Chicago Board of Trade – a gain of more than $13/t (£8) over the previous week. And maize and soya also hit eight-month highs of $175/t (£107) and $446/t (£272) respectively.

According to HGCA economist David Eudall, it is the weaker dollar that is the biggest driver. Earlier this week it hit a seven-month low against sterling of $1.64, and a six-month low against the euro of $1.42, lifting the value of US export earnings.

Normally the weaker dollar would have a detrimental impact on UK and EU grain prices, as they lose competitiveness in the international market. But, as Mr Eudall explains, the “bull run” in Chicago has had a knock-on effect on the Paris MATIF and the London LIFFE futures exchanges, pushing new crop values higher.

Another big factor in the USA has been the re-emergence of speculators and fund managers, who have moved back into the commodity markets during May. Many have been active buyers, anticipating a market upswing, which in turn has helped to drive prices higher.

Weather concerns in the USA are also coming into play, according to food and agribusiness researchers at Rabobank, with severe flooding in some parts leading to reduced wheat plantings.

“North Dakota and Minnesota have been the worst affected states with only 69% and 71% planted (as of 24 May) versus their five-year averages of 94% and 96% respectively,” says the group in its monthly agri-commodities report.

North Dakota typically produces around 50% of the US spring wheat crop.

The slowdown in US plantings has led to speculation that US farmers will switch up to 1m acres of the spring area into soybeans this season, tightening the supply of wheat, says Rabobank..

More generally, there is a feeling that last year’s near perfect growing conditions across the world are unlikely to be repeated in 2009.

Dry conditions in parts of the EU have led to some downward revisions in yield estimates, with Hungary, Bulgaria and Spain raising particular concerns. Output falls of 20% are on the cards in these regions.

And, despite May rainfall easing crop concerns in much of the UK, soil moisture deficits remain high in the all-important eastern counties, says the HGCA. With wheat plantings estimated to be 9% down, the UK is certainly looking at a smaller crop.

In the Black Sea region too, consultant UkrAgroConsult is pointing to a smaller Ukrainian grain crop in 2009 of just over 39m tonnes – almost 25% less than last year – with wheat 5m tonnes down at 19m tonnes.

A major factor here is a reduction in fertiliser applications and crop protection products which will act as a brake on crop quality as well as quantity. Recent poor weather, (cold April, dry May), has also damaged some spring crops, according to the HGCA.

Despite this, the Black Sea region overall is likely to be a major player on world markets this year, with a bigger grain crop in Kazakhstan and, in particular, larger stock holdings in Russia.

According to the Rabobank report, the Russian government is currently sitting on wheat stocks in excess of 7m tonnes, which is leading to a tighter market in the short term and helping to support prices for the remainder of the old season.

Turning to the southern hemisphere, it’s obviously extremely early days yet, though the message so far seems to be that the Australians could produce a decent harvest this year, but the Argentineans will not.

Long-term forecasts put the Australian wheat 2009/10 crop at 22m tonnes – up 6% on 2008/09 – with recent rains helping plantings of the winter crop in the east and south-west of the country.

But the situation in Argentina is more downbeat, with low soil moisture holding back plantings. More significantly, heavy losses sustained by farmers this season and lack of credit in the current market place, mean that the country could be heading for its lowest ever planted area.

The Buenos Aires Grain Exchange has recently suggested a wheat area of just 3.7m tonnes – a drop of 19% from last year.

In the other two key regions – India and China – the messages are more positive. Following an active government procurement programme in India, there are suggestions that the country could emerge as a net exporter again this year – especially if the wheat harvest meets the USDA’s projection of 78m tonnes.

And in China, the winter wheat crop is fast approaching harvest, with the USDA predicting a 4% increased harvest, taking the country closer to self-sufficiency.

Overall, therefore, the global picture still seems quite bullish for the approaching season. Global grains output is expected to be down on last year, but still the second biggest crop on record. The weaker dollar is driving prices in the USA market, and this is spilling over into EU markets.

There are still question marks over consumption levels, though increases in demand for grain in biofuels and the relentless growth in population are expected to offset the effects of the credit crunch.

Certainly there is still a decent spread (of around £9) between old season and new season prices, which is encouraging many UK farmers with the storage capacity to hang onto any crop they have left from 2008 and run it into the new season.