Analysis: Which way will wheat prices go by June?

A larger than usual gap of about £20/t between old and new crop wheat prices is causing a headache for arable farmers pondering their marketing strategy.

Futures prices currently stand at around £173/t for July 2019, the last month in which wheat harvested in 2018 is usually traded, while the November 2019 futures price is closer to £153/t.

The end of the grain season in late June usually sees near convergence between prices for the two crops.

See also: Russian dominance over world wheat markets slows

However, this year there are some added complications which make it a particularly difficult call as to which way things will go.

First, Brexit has stalled post-29 March grain export trade until it become clear on what terms that trade will be done.

This means that although demand has not necessarily fallen, trade has certainly been curtailed.

Cropping area confusion

Second, there is a marked discrepancy between the English crop areas shown by the Defra census for 2018 and what the BPS data says for that year.

This means that traders are less certain of how much wheat is left in the country and therefore how narrow the gap between supply and demand is.

The census showed a 1% rise in wheat area, to 1.668m ha, while the BPS figure recorded a drop of almost 3% to 1.56m ha – a 108,000ha difference.

Based on the estimated wheat yield of 7.8t/ha, this gap would account for 842,000t of wheat.

There are doubts about the reliability of both sets of data and AHDB Cereals and Oilseeds says Defra is carrying out an internal investigation into the June Survey and BPS data and methodologies.

However, prices have moved little over the week. Grain traders are sceptical on both numbers and prefer to go on their gut instinct, having a good idea what is left in store on farm, a feel for how well-supplied their domestic customers are and what is in merchants’ stores.

Effect of ethanol plant closures

Third, there are significant changes in demand for grain compared with last year, due to the closure of the two north-eastern bioethanol producers and high use of grain for animal feed because of the dry summer and poor forage stocks.

Alongside this, use for poultry feed has regularly been growing to new record levels.

AHDB has created three scenarios using the two crop figures and its own views of stocks and likely use.

1. If the BPS figure is right

Using the BPS figures would lead to end-of-season wheat stocks of 1.278m tonnes.

“Worryingly, this will be below the minimum stock requirement used in the balance sheet (1.55m tonnes),” says analysis by AHDB’s head of arable market specialists David Eudall and senior analyst James Webster.

If realised, this could force certain deficit areas of the UK to import price parity towards the end of the season and keep cash prices supported, they say.

2. If the June survey figure is right

Using the June survey production figure gives an end-of-season stock figure of 2.127m tonnes.

This may be overstating stocks slightly, says AHDB, as if we do have the larger production figure we may be able to move more exports.

“But as we are currently uncompetitive on price, values in the far south-east of England would need to move lower to find competitiveness.

“The current market situation with stronger delivered premiums in the centre and North is not necessarily reflective of this outcome.”

3. If AHDB is right

The third scenario uses AHDB’s planting and variety survey areas, giving a theoretical end-of-season stock level of 1.758m tonnes, just above the minimum stock requirement and similar to last season’s closing stocks of 1.755m tonnes.

With the current ‘feel’ of the market, this last scenario is most appropriate at the moment, says AHDB.

Given discussions with the trade over the last week and current market expectations, a final stock range between the BPS scenario and that of AHDB is deemed most likely, say the AHDB analysts.

Future factors that could influence the market

Price-increasing factors:

  • Wheat users have a lot to buy to see them through the April-July period.
  • Fresh data emerges that shows supplies in the UK are lower than traders are currently estimating.

Price-decreasing factors:

  • There is an increased wheat area compared with last year. If expectations continue to build that this will yield well, the old-crop market will struggle to climb higher.
  • There is a risk that old-crop stocks left in the middle of July will have to be discounted to compete with new-crop when the European harvest begins.

The AHDB warns that more certainty is needed in predicting crop sizes in order to avoid price volatility and ascertain the requirements to trade.

“Now is the time for the industry to work together with Defra and AHDB to develop a more structured and detailed review of how we compile and distribute our production surveys. If we have any kind of confusion in the future, we will create more waste and inefficiency,” it says.