When it comes to
determining the price
of wheat, the UKs
tonnage is pretty
are far more
Guess the size of the UK wheat harvest. It doesnt really matter whether you choose 10, 11 or 12m tonnes, unless you are betting on the outcome. The latest figure, according to DEFRA, is 11.96m tonnes, but, when it comes to determining the price of wheat, it is pretty unimportant. Other issues, such as currency, foreign prices and international markets, are much more significant.
UK grain prices reached import parity in September. That meant imports matched internal prices and gave buyers easy access to another 10-20m tonnes of wheat at prices unrelated to the size of the UK crop. About 10m tonnes were available from near European sources, such as Germany, Denmark and France, and, if required, another 10m could be bought from further afield, such as the CEECs and FSU.
But back in August, some members of the cereal industry seemed to believe the UK still ruled the world. Talk of a low UK harvest was used to predict a rise in prices. Instead of being encouraged to sell part of their crop or lock-in to minimum prices, farmers acquired a false sense of security and waited, in the hope of even better prices.
What actually happened was quite different. Futures prices peaked at £82/t in the last week of August, and by Oct 19 they had fallen to £74/t, a drop of £8/t, or 10%.
Why did professionals, who should have known better, make such wildly improbable predictions and then believe them? Despite the pessimistic views of farmers about harvest prospects, there was no sound basis to suggest the possibility of a 10.5m tonne wheat crop, which was one widely publicised estimate.
Going back 30 years, yields have never been more than 5% above or below trend. Admittedly, the weather in 2000/2001 was extreme, but even taking that into account and allowing for an unprecedented 10% fall in yield, a harvest of 12.1m tonnes was still inevitable.
To achieve only 10.5m tonnes would have required a yield drop 25% below trend. The probability of that happening was exceptionally low, yet it was given some credibility and encouraged unrealistic positions to be taken on the market.
The reality is that there are now bigger issues that affect the price than internal production levels. While the UK argued whether the harvest would rise or fall by 500,000t, the harvest potential in the CEEC and FSU was increasing by 1.5-2m tonnes a week.
It is time to learn a hard lesson, that in the greater scheme of things UK production is relatively unimportant. The difference between the first and final US maize harvest estimates are greater than the size of the whole UK cereal crop. This year the Ukrainian wheat crop increased by 10m tonnes over last season a figure which is about two-thirds the volume of UK wheat produced in a normal season.
In the UK, we cannot behave as though we control the world. We have to accept that farm profitability is highly vulnerable to small changes in price, with just £2/t often making the difference between profit and loss.
The only way to cope with such uncertainty is to adopt a proper marketing plan, not one based on predicting market movements. Having a flutter in the markets or "taking a view" is okay, if it is within a safe structure. Otherwise, even in a good year, disaster may result.
The difference between the first and final US maize harvest estimates are greater than the size of the whole UK cereal crop.
lMarie Skinner is chairman of HGCA Market Information. She farms 200ha (500 acres) in Norfolk with her husband, Chris, growing cereals and sugar beet.