Archive Article: 1997/07/19

19 July 1997

OUR diehard feed wheat grower is undergoing a change of heart, as the Rockingham Castle Farms Milling Wheat Challenge approaches the harvest finishing post.

On a 11ha (27-acre) field near Corby, Northants, Ray Dalton has drilled three new generation milling varieties next to the farms mainstay variety – feed wheat Brigadier.

The challenge is whether these high performance breadmaking wheats can outdo Brigadier, in profit, if not in yield. Merchant company BDR Agriculture and three major UK millers – Rank Hovis, Allied Mills and Smiths Flour Mills – have joined forces to persuade Mr Dalton to change his ways, and try milling wheats.

Inevitably, the arguments boil down to cash. Like the majority of feed wheat growers, Mr Dalton would switch into breadmaking varieties, despite the hassle factor, if he could be convinced that this move would make sense financially.

Now, the dramatic fall in the feed wheat market is ringing alarm bells for him. It is swinging the balance in favour of breadmaking markets – helping the millers cause.

After all, a £10-£20/t milling premium looks relatively more attractive bolted on to a feed wheat price of £85/t, than when wheat was at £120/t.

Mr Dalton has done some preliminary "what if" calculations. Based on a feed wheat price of £85/t, and average farm yield of 8.6t/ha (3.5t/acre), he believes the average margin per tonne of feed wheat is about £23/t over the 1,000ha (2,500-acre) estate at Rockingham Castle Farms. This takes fixed and variable costs into account.

How could he improve this margin? Decreasing variable costs by 15% would bring in an extra £5/t, as long as yield performance stayed the same. Decreasing fixed costs by 15% would generate £7/t.

However, increasing the selling price by 15% – which should be feasible with current breadmaking premiums – would raise the margin even higher – by £12/t.

The figures are persuasive. Adding to the arguments, milling wheat prices have held up this spring whilst feed wheats have come crashing down.

But what are the future prospects for milling premiums – might they also shrink by next season, in line with feed wheat markets?

Persuading millers to predict future premiums is always difficult, if not impossible. The three millers involved with the challenge are no exception.

The bad news is that they cannot rule out a drop in milling premiums for next season, particularly if the harvest is good, and if more growers switch into Group 1 or Group 2 varieties.

But they are quick to point out that they should not be blamed – the problem is that flour buyers also study grain markets closely.

Cheaper flour

"As soon as wheat prices fall, our customers want cheaper flour, even though millers may have bought ahead at higher prices," says Peter Knight, managing director of Smiths Flour Mills.

"Margins are becoming ever tighter in flour milling. So we have to source wheat as competitively as we can – buying wheat accounts for about 75% of our costs.

"Ultimately, milling premiums have to be determined by the market – but growers can continue to expect a reasonable reward for the extra effort involved."

For the challenge, a theoretical, and arguably optimistic, milling premium of £20/t will be costed in for all three varieties.

The three millers are each backing a different breadmaking variety for the purposes of the challenge; Caxton is supported by Rank Hovis, Abbot by Smiths Flour Mills and Malacca by Allied Mills.

In practice, all three millers accept a wide range of breadmaking and biscuit wheats, with Hereward still the major ingredient in many bread grists.

In future, finding a customer for wheat could become just as important as price considerations, adds Peter Jones, northern regional wheat manager with Rank Hovis.

With some grower customers still holding unsold feed wheat from last harvest, grain trader Gary Sharkey of BDR Agriculture agrees.

Advice from the millers and the merchant to Mr Dalton is that he should avoid being stuck with unsold wheat in store by choosing varieties "to suit the true market – and that means roughly a third feed, a third milling and a third for export.

"We dont want wall-to-wall milling wheat – it wouldnt make sense for anyone," adds Mr Knight.

Nick Riley, regional wheat manager with Allied Mills, says theres a danger that too many growers might switch into Group 1 and 2 wheats this autumn – particularly if the harvest is a good one.

"It would be bad for growers because of the downward pressure on milling premiums – remember what happened in the 1980s with the large area of milling wheat Avalon."

The millers want a sensible balance between supply and demand. A consistent supply is seen as the only way of protecting against large swings between milling and feed varieties which unsettle the market, and make problems for both sides.

"At the moment, the supply of Group 1 types is tight," says Mr Jones (see graph). "But because of the good harvest last year, the millers have been able to source what they need, using Group 2 varieties to plug the gap. That might not be possible if the harvest is more difficult this year."

Its a reflection of the tight supply that more milling wheat contracts have been placed – particularly with the specialist varieties.

For example, Allied Mills have put out contracts on Malacca even before this wheat has been considered by NIAB for inclusion on the UK Recommended List.

Mr Dalton would prefer to see contracts placed for a set price, rather than for a set premium over feed. However, this is unlikely, say the millers.

"For us, its been relatively easy to grow barn fillers over the past few years," concludes Mr Dalton. "Now prices have fallen and weve got to re-think the market – perhaps we may move into that three-way split."

Harvest analysis will show whether his management of the three milling varieties in the challenge gives the high quality that the millers need. That could be his next challenge.

Feed wheats are losing ground, while milling wheats are racing ahead in our farm challenge. Its now neck and neck. Gilly Johnson finds out why.

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