Tag: barley

Grain Commentary

In the midst of the Beast from the East, the chilling weather has already been cited as probably damaging crops (particularly winter oilseed rape) in Germany, Poland and the Czech Republic.  These countries have very little snow cover on their crops which can act as a protective blanket against very cold weather.  The USDA has also made its first prediction of US wheat area and crop size suggesting a small increase in US wheat production in 2018.  Strategie Grains has done the same for the EU (no change) and Kazakhstan (2% decline).  The Canadians, Ukrainians and Russians have done similar for their own crops (down  3% in Canada, down 4% in Ukraine, and down 9% in Russia).  The International Grains Council (IGC) has made its first global predictions.  Overall, the wheat area is thought to be declining slightly, maize increasing (but by less than the rise in consumption) and barley increasing marginally on the back of current positive prices.  Soybean production is thought likely to increase globally, but stocks fall as consumption continues to rise.

The area of US wheat is forecast to rise because of an increase in spring wheat area.  The overall winter wheat area is seen declining to a 109-year low of 13.2 million hectares with springs making up the difference.  A notable observation is that the overall yield is expected to increase, despite a rise in the proportion of spring wheat, and a write-off expectation of 17% of the planted wheat crop.

Oilseeds tend to take second fiddle in these announcements but are still important.  The main one, soybeans, accounts for 60% of oilseed output.  Whilst a small decline in production is expected in the US, a large carry-over in stocks means the availability of beans from the US is likely to be high.  On a global scale, the IGC suggested the global harvest would increase but with consumption rising, stocks would fall.  This is interesting as the Chinese have bought far less soybean from the US this year and much more from Brazil – which is now by far the largest exporter of soybeans to China.

The projection from the IGC suggests a fall in output of wheat and a continued rise in consumption, leading to the first decline in global stocks of wheat for six years.  The change is expected to be small (short of unforeseen weather extremes).  Global trade is also predicted to rise to a record level.  The Council also assumed an increase in maize consumption, leading to a second consecutive year of maize stock declines.  Whilst the US will be producing less, South America will step up and make up the difference with a small rise in production globally.  The IGC also expects a high barley crop in reflection of the current high prices.

Of course, much of these crops that have been forecast have not yet even been drilled.  From our experience here in the UK, planting intentions are rather different to final planted areas.  Furthermore, using average or trend yields is all a ‘spreadsheet-analyst’ can practically use at the moment which makes the predictions far from accurate.  From now on though, the attention on new crop will far outweigh old crop and so the fundamentals affecting both crops will start shifting.  By next month, the amount of 2017 harvest left un-committed and un-priced in farm barns will be rather small.

Domestic barley prices have been buoyant this winter and are currently as high against wheat as at any time, with feed barley actually priced higher than feed wheat in some UK locations.  This is unusual as it has less nutritional value than wheat.  Wheat milling premiums have come down over the last month.  For a period after harvest, milling premiums remained steadfastly high, but have since fallen as markets realised that the overall tonnage means ample is available for millers to choose from.  The UK pulse market will be slowing down from its current snail’s pace over the coming month as new supplies will be offered to Egypt from the Australian harvest.  Similar might happen with oilseed rape too.

January Combinable Crop Market Update

Last July, nearby and forward prices of UK wheat on the futures market converged to within £1 per tonne of each other at a spike of £157 per tonne; £15 per tonne higher than the market had been only 3 months earlier.  It looked like the start of a bull run.  Since then, the market has slipped back nearly £20 per tonne for old crop and about £14 for new crop.  Prices for harvest 2019 are somewhere between the two.  There is lots of talk of currency causing movements in the value of grains and other commodities, but, back in July, the pound was worth €1.13 (€1 = 88p) and today the exchange rate is the same.  In fact the Pound has been relatively steady at these levels of between 88p and 90p since September, and in a slightly larger range since last June.  Plus, the independent movement in futures positions clearly cannot be a function of currency as it would affect them both equally, but is therefore a series of grain fundamentals moving separately for each crop.  The movements, whilst adding up, have been gradual but consistent. Without much grain crop production news at this time of year and ample supplies to keep the consumers out of the news, price movements are often gentle and less noticeable. But it is still a £20/tonne fall since last summer.

A gentle but persistent underlying bearishness in the market is borne out by the UK futures.  This can possibly be explained by the chart below.  It shows how the USDA’s monthly expectation (forecast and then estimate) of the 2017 global wheat harvest has changed since the first estimate in May 2017.  Its estimate of global production has risen by 20 million tonnes to 757 million tonnes. Whilst this doesn’t sound particularly much, it is approaching a 3% increase in global output expectation; considerably more than the UK produces in total.  The USDA’s consumption figures have increased but by much less (6 million tonnes), meaning considerably more crop is now available than was initially thought.

USDA Monthly Global Wheat Production and Consumption Estimates – Harvest 2017

Whilst anything can happen, it does appear that downside currently exceeds upside in the wheat market. We are aware that any information that is reported on (including USDA statistics) is built into the market immediately meaning forecasting further moves is not possible from public information, but a heavy surplus is likely to slow any future bull runs.  Indeed, wheat has fallen more than barley this month, and the difference in some regions is now small.  We might see some feed consumers switching from barley into wheat.

Global soybean trade can be simplified as either a) from USA or Brazil to China or b) any other trade. Between them, the USA and Brazil account for 83% of global exports, and China alone accounts for 65% of imports.  Whilst exports in both countries have been rising, Brazil now outstrips the USA as the major soybean supplier for the world.  Indeed, China has been favouring Brazilian beans this year.  This is possibly a price issue, with the Brazilian Real weakening making them more competitive, but also as their protein is consistently higher.  China buys soybean, primarily for the meal, not the oil. We would generally expect a weakening of US prices to have a greater impact on EU oilseed (and pulse) values than Brazilian, being more closely connected to the EU marketplace, however, the overall balance between supply and demand is the ultimate arbiter of the base price for commodities.

Whether higher protein adds value in beans is a moot point: A recent seminar on pulses held in Peterborough, was told by a prominent pulse buyer that whilst higher proteins is preferable to lower proteins in beans when it comes to securing export outlets, protein levels do not attract higher payments and growers would not receive more.  In other words, the key in the UK when growing pulses is to go for yield, and not protein.  At least not until the buyer recognises it as preferable by way of price differentiation.

Arable Markets

In commenting on current grain markets, similar factors continue to prevail as the last couple of months and the market is still comparatively flat.  The November 2017 UK wheat futures contract, which ended on 23rd November, showed a total price variation over its total 2 years and 4 months of being open for trading of £32 per tonne.  For 94% of the time it traded within a tight £20 per tonne range of between £125 and £145.  There have been single weeks in previous years when markets have moved by £20 per tonne.

For old crop grains, the International Grains Council (IGC) has increased its estimate of 2017 harvested grain crop, increasing wheat by 1Mt and maize by 6Mt.  Wheat consumption also rises leaving no net change but maize consumption increases by 2Mt, meaning a small rise in stocks too.  We note that whilst half of all global grain stocks are in China, the rest of the world also has ample for now and consumers are not concerned about the whereabouts of their next purchase.

The Black Sea has been, and remains, more competitive for business to North Africa, and so exports from the EU have been slow so far this season, leading to reductions in export expectations and therefore higher carry-over predictions.  UK wheat exports have also been considerably slower than last year but with potentially less to export (higher consumption, far smaller opening stocks).

Early indications suggest the US winter wheat area is likely to be down yet again in 2018 and autumn crop establishment conditions are not great (it is too early to make yield judgements but planted areas and write-offs might have a small impact on cropsize).  A smaller US wheat area would mean the third consecutive area decline.  Also, it follows a massive switch away from wheat in the US last season and a halving of its area since it peaked in the early 1980’s as the chart shows. This can only be bullish for our new crop values but is also fueled by the fact that other countries are fulfilling the demand.

Soybean stocks at the end of the 2017/18 seasons are seen by the IGC as rising, by 2Mt, to 41Mt, largely from slippage in usage figures. Markets have been relatively quiet with little market movement (as per the grains). The next big opportunity for large price movements will probably be in the spring when the spring crop area is established (in the UK, EU and elsewhere).

UK malting barley premiums remain firm, especially for pre-Christmas, as sellers have dried up.  However, supply and demands remain tight for the season so opportunities for post-Christmas sales are still good. 

Demand for pulses is nearly over pre-Christmas and relatively quiet for the New Year too.  The Southern Hemisphere (Australia in particular) will be starting harvest soon into January so the UK will then have to focus in its competitive advantage of distance to the major markets of North Africa.

US WHEAT PLANTINGS: 1980 to 2017 – Source: USDA