Tag: prices

Grain & Oilseed Market

This month, the first UK wheat and barley supply and demand figures for harvest 2022 were published by AHDB.  A 15.7 million tonne crop has left the UK looking well supplied.

Given the increase in available supplies relative to last season, the discount of UK feed wheat futures to Paris milling wheat futures has grown.  This will prompt increased export demand for UK grains.

The Pound closed on Friday 21st October at £1=$1.13, almost 7% lower against the Dollar than on 1st July.  It is worth highlighting that this is up significantly from the low of £1=$1.07 at the end of September.  The political and economic uncertainty in the UK that has caused the Pound to weaken at least increases the attractiveness of UK exports.

Wheat values have bounced around over the course of the past month, mostly driven by uncertainty over the Ukraine-Russia grain shipment deal.  However, with things returning to the status quo in the Black Sea, at least for the time being, grain values have fallen back.  On Friday 21st October, ex-farm feed wheat was worth £256 per tonne, down £12 per tonne from 23rd September.  Milling wheat prices have fallen £11 per tonne over the same time period to £311 per tonne.

AHDB’s barley supply and demand estimates shows UK production at 7.2 million tonnes.  The commentary alongside the estimates highlights a decline in barley demand in animal feed driven by a switch to wheat.  Barley is currently at a £19 per tonne discount to feed wheat.  If demand falls further, without a strong gain in exports the discount will grow.  Given the reductions in the size of the pig herd, a fall in barley demand seems likely.

In the next three months, the size of the South American maize crop will be a key driver of price.  Brazil and Argentina are key suppliers globally and are set to experience a third successive la Niña. The weather pattern brings drier than normal weather and tends to reduce output.

UK ex-farm oilseed rape is worth £521 per tonne, up almost £30 per tonne on the month.  Vegetable oils are the key driver of support for oilseed rape.  The destruction of a key sunflower oil processing plant in Ukraine, uncertainty over palm oil output in Southeast Asia, and strong EU purchasing (both rapeseed and sunflower seed) combined to support prices.  A large soyabean crop, globally, and expectations of big canola (OSR) crops in Australia and Canada is tempering prices.

Feed bean values continue to move lower on lacklustre demand both domestically and for export.

Covid 19 Impacts on Farming

The spread of the Covid 19 coronavirus has seen the world stop working as we understand it.  The impact on the supermarkets and food availability for consumers has been clear.  Here are our thoughts on the crisis on the wider food and farming industry.  They can be divided into short, medium and long-term implications.

Short Term

The Consumer: Supermarket shelf stripping has been a consequence of both panic buying and preparing to feed families and elderly for prolonged periods without the use of food service, restaurants and coffee shops.  Consequently, the demand for most goods including milling wheat for bread and biscuits has rocketed; the broiler kill rate has gone up sharply and the demand for other meats has also increased hugely.  The emergency is to replace the empty shelves with goods for the consumer.

Total food requirements should not change overall.  So presumably demand will slow at some point soon when people’s stores and freezers are full.  However, eating habits in the home differ from the restaurant or food service.  With no eating out, evidence suggests consumption of expensive cuts of beef and lamb and ‘top-end’ cheeses such as Stilton will probably fall after a while.  We would expect more chicken and lower priced pig and beef meat for burgers and sausage style foods.  Perhaps people will eat more healthily, with more vegetables rather than a typical restaurant pizza or burger option, so demand may shift.  Beer consumption is falling around the world, people drink less in the home and less alone.

We are also finding several farmers, notably some dairy farmers are struggling to sell their farm goods at the normal prices because they supply the food chain that ends up in the food-service or catering outlets. Suppliers of high-end cheese manufacturers for example are not being paid in full, as most quality cheeses are consumed in restaurants. Other suppliers of places like burger bars and fast food chains are also seeing their conventional supply tailing off. It is clearly taking a while for these supply lines to re-route to where the food is desperately needed.

Prices: Commodity prices move when demand and supply are not aligned.  Expect some volatility. Prices for all the goods mentioned above where demand has risen would be expected to go up (such as wheat up £10 per tonne).  Overall trends may take some time to establish according to how the supply chain manages the flow of goods and how the consumer changes their habits.

Medium Term

The Farmer:  Farmers are relatively good ‘self-isolators’ already.  We would expect many to be able to ‘carry on farming’ with most farms operating as usual as long as supplies get through.  However, staff absences could lead to livestock welfare issues, diversified business dependant on general public foot fall could be hard hit, and estates renting out cottages may be affected as tenants can stop paying rent without the threat of eviction.  The only support farmers will get is loans or Statutory Sick Pay refunds as the Government grants announced by the Chancellor, Rishi Sunak, are based on Business Rates at present and (undiversified) farmers don’t pay rates.

Farm Workers:  Access to casual migrant labour is going to become a big issue if travel bans remain in place over the summer. The Farmers Weekly reports that appeals have started to go out for British workers to work on farms.  This is easier said than done if everybody is staying indoors.

Supply Chain:  This is where we see problems of maintaining physical turnover because of lower staffing.  Abattoirs, packing sheds, mills and other points where bulk commodity starts its transition into branded food products is largely labour intensive and cannot be done at home.  They require lines of people working closely together in sheds.  Many people will not be happy to work in these conditions.  Whether work can be taken outdoors, or spread out will depend on each facility, but it is likely that turnover may fall sharply in some locations.

The flow of cash has also already started to slow, with many firms hoarding cash and not paying each other.  Expenditures that are not short-term-critical are also being postponed.  Profitable businesses unable to turn their profits into cash will struggle in coming weeks and months.  Some supermarkets have committed to pay small manufacturers more quickly than usual.

Retailers are already shifting resources in their outlets towards the supermarket floor and fulfilling online demand.  Whether this distracts them from purchasing and supply roles will depend on how well they are managed.

Trade:  Travel restrictions do not apply to medical staff, medicines or, crucially, goods.  However, there are inevitably going to be plenty of supply-chain glitches, people going into self-isolation, shipping containers not where they are supposed to be etc.  There is no news yet on such matters.

Trade Negotiations:  Michelle Barnier, the EU’s Chief Brexit negotiator, has got Coronavirus.  The UK-EU trade talks had already been put on hold in any event.  This has led to speculation that the Brexit Transition Period, in which the trade talks should have been completed, will be extended.  However the UK Government is currently sticking to the line that the Transition will end on the 31st December.  The deadline for triggering any extension is 31 July.  We await announcements.

Long Term:

Policy:  The severe shortages of food availability in the shops, and the images of desperate panic-buying shoppers might encourage Defra, and Government more widely, to rethink its policies on food security.  Currently, there is peace of mind in Defra that 80% of our imports have been from ‘friendly neighbours’ in the EU.  Might Defra consider that more home-produced goods could be a strategic benefit?

Industries will also look towards Government to support the rebuilding of the UK economy when this calms down.  The cost will be immense.  Whether it will mean major infrastructure projects like HS2 will be postponed remains to be seen.

Supply Chains:  Following the horsemeat scandal of 2013, some food supply chains went to great effort to shorten their linkages, source from fewer and more local outlets.  Perhaps this will do the same.  ‘Local food’ almost became a brand in its own at that point, certainly becoming more powerful than simple patriotism when swaying shoppers how to buy.

Globalisation:  The expansion of global trade routes since 2000 has been considerable, and given consumers more choice, lower inflation, cheap goods and created cost savings.  However, events like Covid -19 could lead to new procurement policies, with maximum percentages from certain countries or suppliers, for example.  Will this lead to a refocus on nationalisation, albeit for a short while?  It might fit with some of the Brexit mantras we have been hearing.

Businesses Generally:  Coronavirus will bankrupt more than it kills.  Several high-profile companies have already been floored, presumably not to recover.  If businesses have to take out (Government backed) loans to continue in business, these still need to be paid back at some point.  This may lead to lower investment in the future and possibly reduced future profitability.  Some firms will use the loans to provide liquidity as their profits are tied up in non-cash forms such as debtors or valuations.

The Economy:  Whilst customers and consumers stay in their houses, the economy is in freefall.  The economic effects of the pandemic look set to outstrip the recession of 2007 to 2009, even though the UK economy a month ago was in a much stronger position than it was back then.  The concern of the markets is shown in the collapse of the Pound (reaching its lowest point against the dollar for 35 years).  This actually helps farming, as it makes goods imported into the UK cost more in Sterling terms.  Commodity prices move as a response to currency shifts immediately, whereas other goods such as agricultural inputs, wages and rent change very slowly.  Thus, the rise in price will favour the farming community.  But it will not take long to for a weak Pound to fuel inflation and the new Governor of the Bank of England, Andrew Bailey, will have to act quick to stop it when necessary. Both the Governor of the Bank of England and the Chancellor have both been in their posts for less than 5 weeks!

Combinable Crop Markets

This time last year, we showed the chart below with the faded bars.  It demonstrated wheat was priced with a typical carry as it goes through the year; with the monthly rise in value the longer you keep it to account for the costs of storage. It also showed the usual drops in value each year when the new crop physically comes into the marketplace.

The dark blue bars show this year’s equivalent set of futures prices, and how there is a full carry from now all the way through to May 2021.  In other words there is no drop in price when the flush of new crop becomes available this summer.  It demonstrates that the market understands that there might not be much harvest to account for the flush.  Only when we get to the summer of next year, do we see wheat futures prices start to fall.

UK Wheat Futures Price – source AHDB

Old crop wheat is currently cheaper than new crop, but is still dearer than equivalent continental values meaning they are too expensive to secure exports to EU destinations.  It also suggests that, if the supply situation changes in coming weeks, the market might fall considerably.  This may be prompted if there are enough dry conditions for the many farmers still sitting on their winter wheat seed, some varieties of which could still be planted well into February, to get some more drillings done.  Globally, wheat prices are strong, sitting at levels not seen at all in 2019.  Some with a crop already safely growing, will see this as an opportunity to sell some new crop forward now.

Higher wheat prices have boosted feed barley values this month too.  This has been coupled with some useful exports, particularly from old crop.  New crop barley could be a big one this year, with large volumes of spring barley seed committed or delivered.  The markets (both wheat and barley) will be sensitive to both the ongoing weather throughout the spring and also the updates on drilling.  We do not expect a million hectares of spring barley to be drilled, but it largely depends on how the weather turns out in coming weeks.  Wherever possible, many growers are still very focussed on getting their wheat in the ground.  It is difficult selling even the feed base forward this year as currently, many farmers are not even sure what they will harvest.

It is emerging that large crops of soybean from the southern Hemisphere, Brazil in particular, are expected this coming year, and other regions such as Ukraine are looking to grow more oilseed rape. This, coupled with trade talks between the Chinese and Americans, has seen oilseed rape lose some value.

Old crop pulses have been rising in price this month, partly because of demand for the protein, but also, it is thought, as growers hold tonnages back for potentially drilling.  Winter beans can be drilled relatively late, and of course, spring beans might also play an important role in the 2020 rotation.  Many seed merchants have sold out of bean seed and potentially, we could have the largest pulse cropped area the UK has recorded for many years.  It takes a long time to multiply beans up (compared with cereals and especially oilseed rape), hence the high proportion of home saved seed.

Grain Price Spring Volatility

The £16 per tonne difference in price between old crop and new crop wheat will eventually close.  Either old crop prices will fall or new crop prices rise.  There is currently not much happening to suggest a major increase in new crop values (and prices tend to drift downwards on the lack of new market information). But this time of year tends to see grain market volatility increase slightly.  This is for several reasons.

  • Firstly, the limited tonnages of old crop grain at the end of a marketing season have to match up with demand, and any surpluses, or even more so, shortages, could see prices shift considerably.
  • Secondly, the winter crops that have been lying dormant around the world emerge from their hibernation and agronomists get to see how well (or not) the forthcoming crop has coped with the cold.
  • More importantly though, a quarter of the world’s wheat and almost all the maize are only now being planted, meaning that over the course of this month, the total wheat area for the Northern Hemisphere (which accounts for 80% of cereals) will be established.
  • Weather conditions at this time of year affect crop growth considerably.  However the forecasts, particularly concerning large grain-producing regions such as the US Prairies tend to affect the traders more.  One forecast of rain and the markets swing one way, and another forecast for drought and they swing the other.
  • Finally, whilst the International Grains Council started suggesting its global crop area thoughts for 2019 last month, and the US Department of Agriculture posted some thoughts along the same vein, April is the first month that the new crop is analysed in any real depth by global grain analysts.  This alone causes market shifts as market traders look carefully at these reports.

Cereal farmers will have relatively little grain left unsold by now and will be thinking more about the new crop.  It is important to keep a focus on the underlying market fundamentals when marketing grain in the spring rather than respond ‘knee-jerk’ style to daily announcements and short-term movements.