Tight grain market predicted for 2011/12


The world produces just about enough wheat to satisfy demand these days. But production and stocks are not always in the right place to meet that demand. The result is price volatility.




Add to that the fact that growing demand for maize is the main factor in higher wheat prices, plus weather and political risks, and predicting the market for the 2011 and 2012 crops and inputs becomes a risky business.


One scenario envisaged by the International Grains Council is another tight market in 2011/12:
• IGC forecasts world grain production will grow to 1,805m tonnes in 2011-12, a 79m tonne increase on 2010-11 and just above the 2008-09 record of 1,802m tonnes
• Largest increases forecast for Russia, US and EU, with gains also expected in Canada, Kazakhstan and Ukraine
• Some recovery in feed grain exports from Black Sea region
• This assumes a 4% rise in the global grains area, to 537m ha, the largest area since 1998
• A significant upturn will be required compared with what is expected in 2011-12 to prevent another fall in end-of-season stock, says IGC
• High maize price likely to encourage some switching of feed grain buying to wheat and barley


Despite the estimated 4% increase in area, this outlook would leave world grain production 3m tonnes lower than consumption, leaving no room for stock building. World wheat stocks at the end of the current cereals year were predicted in April at a comfortable, but not overstocked, level of just over three months’ supply.


However, maize stocks at the end of this cereal year will be lower than three weeks’ average use and IGC suggests that further maize price rises may limit industrial demand, particularly for ethanol production. Demand is nevertheless set to grow by more than output.


Most are agreed that continued high prices will see crop areas increase across the world. In the EU wheat and oilseed rape are likely to continue to expand at the further expense of barley, pulses and other crops.


In the US, the long-term trend is for the wheat area to lose ground in the battle with soya and maize for area.


By mid April, firm prices for the 2011 wheat crop had encouraged most growers to take some cover.


“We are relatively optimistic about the 2011 crop,” says Strutt & Parker’s Richard Means. “The fundamentals all point to a tight market.”


If we get a light harvest and there are significant shortages, then hold onto your hats for next year, says Andrew Wraith of Savills. Like many he has sold some of the 2011 crop for £150-155/t ex-farm.


While world stocks probably would not build as a result of the 2011 harvest, perfect crop conditions all round would take some heat out of the market and then it could drift, he suggests.


“We don’t know where things will go – all we can work with is what we know now. The general feeling is that the 2011 harvest is very finely balanced with very little margin for a crop issue anywhere in the world, so the potential for big movements is still there.


“How we deal with it shouldn’t be new. First, know your cost base and try to use the market to ensure you have a margin. When the numbers look right, taking a profit isn’t normally a bad decision.


“We all spend a lot of time looking at different trials results and various chemistry to try and improve yield by 0.4t/ha. On a 9t crop at £150/t that’s a £60/ha benefit, which is not to be ignored. But with the spread of prices for 2011 harvest having already ranged by £40/t, that’s a £360/ha difference just on managing the sale of the crop.”


A light harvest would have a significant impact on prices, but the quality issues it could bring mean the trade may not find homes for everything as swiftly as it did this season.


“We’ve probably sold more forward than we typically would do across a range of strategies,” says Tom Brunt of Smiths Gore.


Minimum price contracts are worth considering, he says, but check the terms carefully – they vary and sellers need to understand what they’ve committed to – for example does the contract give an average uplift or is it down to the seller to call the price when he feels the market has got to the right level?


Farm owners and managers need to assess the risks to the business, says Bidwells’ head of agribusiness Nick Tapp. “For example, if your business is in a weak position, in that it is heavily borrowed, then you need to lock into grain prices when they can secure a profit. You may miss out on the highs, but sometimes having the cash in the bank is better for the business.”


Just as Russia’s withdrawal from international grain markets last August caused extreme volatility, its return is likely to have a dramatic effect. Russia will be exporting grain again as soon as it possibly can, says Mr Tapp.


“Its farmers cannot afford not to. It doesn’t suit the Russian government not to export, it didn’t take that decision lightly.”


Price movements in the internal Russian market this spring suggested there may be significantly more grain about than the wider world had assumed, said Mr Tapp.


The outlook for 2012 is more variable. Continued high prices are likely to encourage significant changes in planted areas. This means there would be an expensive crop in the ground with a relatively high risk of a price tumble, as in 2008.


Limiting factors include tight funding for crops in some east European and former Soviet Union countries.


While the cost of growing the 2011 crop is pretty well known apart from harvesting and drying, budgeting for 2012 is still at an early stage and a wide wheat price range being used by consultants and advisers reflects uncertainty.


Early thoughts put wheat prices at £120-140/t ex-farm and in mid April few had sold more than 5% of their 2012 wheat crop.


“You can sell 2012 wheat for 140/t ex-farm, but that’s where it’s got to be given the likely growing costs,” says Mr Brunt.



Inputs



With area expected to expand in 2012, the price outlook for all the main inputs seems set firm although some early deals at lower than expected prices were done on Egyptian urea, kicking off at £275/t delivered this spring.


The path of fertiliser prices from here depends on demand and the extent of the planted area increase, currency and oil prices. Fertiliser prices will follow grain prices, says Mr Tapp, although they will take longer to follow them down than up.


While fuel hedging is a possibility for the very large operator, larger tanks and well-timed buying is also a strategy a growing number are using. However, with the price of fuel at current levels, security measures for larger stored volumes have to be considered too, warn advisers.


With the ability to apply pig slurry with more precision, there is scope for more livestock farmer to arable farmer agreements, especially in NVZ areas, to reduce fertiliser costs on arable farms, says Mr Brunt.


Good organisation, planning and communication are essential in making such arrangements work properly for the benefit of both parties, he warns.


Agrochemical price rises are likely to be limited by competition between tried and tested chemistry and new products, say consultants.


Group buying consistently achieves the best input prices, says Mr Means. He expects uptake of precision farming techniques as well as investment in newer more fuel-efficient tractors to make an increasing contribution to efficiency. Further investment in grain drying and storage is also giving more flexibility in the timing of marketing and quality management.


Bank base are expected to rise later this year, although forecasts of dates for this have been repeatedly postponed. Tough general economic conditions mean that the scope for rises is limited. For those considering investment, for example in grain storage, short-term fixed-rate loans remain well priced, says Mr Means.



Fertiliser pricing



P and K prices are generally expected to follow the wheat market, to whatever level arable production will stand, influenced also by demand from an expanding crop area and exchange rates.


Mid-April saw TSP on offer at around £385/t for May delivery compared with a price of around £300/t a year earlier. Potash however at £340-345/t was priced on a similar basis to last season, but with a tight market on low stocks, no forward prices were on offer for either.


The potash market could see more competition if the NFU and other EU farmers’ organisations are successful in their efforts to persuade the EU to abandon its potash anti-dumping rules, which impose a duty of up to 27.5% on imports.


“Industry figures show that UK farmers now spend over £100m per year more on potash than when the measures were put in place in 2006, with an overall bill of £173m per year,” says NFU farm inputs adviser Peter Garbutt.


“When the price of potash has doubled since the measures were last agreed, it brings into question the need for trade protection in the potash supply chain.”

More Cereals 2011 news.

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