26 December 1997


A SLUGGISH first half to this seasons export campaign has limited the prospects of a cereal price recovery in the second half.

Despite a 1m tonne lower wheat crop of 15.1m tonnes, and a 25% reduction in the export surplus to 3.4m tonnes, trade estimates of the amount shipped to the end of December are well down on last year at 1.2m tonnes. Barley exports have been even slower, especially for Third Country business, with Brussels missing several opportunities by not granting export licences.

The problem has been exacerbated by high carryover of old crop stocks and an increase in the predicted level of imports. Total cereal availability, says the Home Grown Cereals Authority, is only 500,000t less than last year, which was itself a record year.

Relatively high prices for wheat in the early part of the season, (of up to £85/t), were purely the result of farmers starving the market of grain. But this was only delaying the inevitable and the past six weeks have seen a lot more coming forward, pushing prices back down below £80/t. Trade estimates put the volume shifted off farm so far at 60%.

Quality has also limited price expectations, with 30% of the UK crop below 72kg/hl specific weight. The net effect has been an increased supply of feed grain, says the HGCA, with UK suppliers having to discount themselves considerably to compete with higher quality French and Danish material. This has been passed back to growers.

The expectation now is that things will not get any worse – in grain trade speak, there is very little "downside".

On the quality front, the feeling is that the worst is already out the way. The further farmers dig back into their barns, the better is the quality that comes out as they reach the earlier cut samples. And some farmers have done a good job grading and blending their grain to raise specific weights.

More importantly, sterling appears to have peaked, settling back down at about 2.90DM compared with a top value of over 3DM in the summer. This has halped the competitive position for UK grain.

Predicting future movements is foolhardy, with rates ranging from almost 3DM to 2.88DM in the past three weeks alone. But it does seem that the worst is over, with economists widely predicting a slowdown in the UK economy, no further interest rises and a gradual weakening of sterling during the course of 1998.

Whether it falls enough to trigger green £ devaluations remains to be seen. But at least it seems that further revaluations, cutting intervention support and area aid, are unlikely. Sterling would have to rise above 2.99DM and stay there for two months for this to happen.

Another reason for guarded optimism is trade suggestions that official wheat estimates put out in September may overstate the actual crop. And combined with the fact millers have been reducing their estimates of their import requirement, (from 1.3m tonnes to 1.1m tonnes), while animal feed usage is up, the domestic market starts to look a bit tighter.

But that does not escape the fact there is still about 2.2m tonnes to export and some of that will have to go to Third country destinations. Brussels is expected to maintain its tight line on export subsidies and that grain will have to fight hard on price to secure a home.

World prices are not expected to stage much of a recovery in 1998. Contrary to earlier expectation, the El Nino weather pattern has not disrupted Australian and Argentinean crops too much, and these are now being harvested. Plantings of winter wheat in both Europe and the US are also up, pointing to another big crop mid-1998.

At best, farmers can look forward to a gradual improvement in prices for wheat. But for barley, intervention, which so far has taken 100,000t, looks like being the main outlet, unless Brussels has a rethink on its export policy.n

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