Arable Update – Apr ’14

Listening to the weather reports from the main arable growing regions of the world could make you think you are reading a travel brochure; ideal blue skies and warm temperatures by day, followed with refreshing light showers at night.  Growing conditions around the world are therefore currently pretty good for almost all arable crops.  This suggests a large harvest is about to be gathered, so it may be surprising that prices have remained relatively stable over the month.  But there are bullish factors in the marketplace too.

Precious little old crop old crop remains unsold in the UK now, so the spot market is, for most, of little interest.  The focus is on the upcoming harvest and new crop prospects.  The grain markets are very quiet.  This is quite typical of this time of year as most forward sellers have now done sufficient business ahead of harvest.  The difference between what buyers are prepared to bid for wheat and the price sellers are prepared to accept (the bid/offer spread) is as much as £5 per tonne in some parts of the UK.  This gap means that few trades are taking place and highlights the inactivity in the market.  UK cereals prices are overpriced compared with EU values too, and will either have to fall by around £7 per tonne, or EU prices rise by as much, before the boats start arriving again to collect our grain.

Milling wheat premiums are currently very high with £34 per tonne for old-crop full specification (if there is any left).  A premium of £30 per tonne is available for new crop.  However, selling full specification (highest quality) milling wheat ahead of harvest is clearly a very risky thing to do, as not even the most consistent of milling wheat grower knows how much they will harvest at that demanding specification.  So what is the benefit of high premiums to the grower ahead of harvest?  It is limited, but some merchants are prepared to take on some risk to attract sales at this point in the season in the form of minimum price agreements.  Here, the merchants buy the grain, and if the premium collapses between now and delivery, the minimum price guarantee is in place.  This leaves any loss below a £20 per tonne premium as the merchants’ exposure.  if the grain does not turn out to be of a high enough quality, then a lower price is made (down to feed specification).  It is like a low cost option, but the downside of not meeting the grade should still be understood.

Feed barley is at a very large discount to wheat for both old crop and new crop.  The old crop spread is because of the shortage of wheat from the 2013 harvest.  This has rallied the wheat price to import parity (the price at which it is worth importing wheat).  At the same time, the substantial surplus of barley from harvest 2013 means the price has been driven down to export parity (the point at which it is worth overseas buyers purchasing shipments).  For new crop, whilst there could be some barley carried forward into the new marking year, a portion of the price spread is the effect of the old crop price differential.

Pulses too retain their high premium over cereals, although the human consumption market is almost non-existent and prices are not liquid enough to be quoted.  The old crop premium is still high by could disappear completely before long when buyers decide when there is simply not enough left unsold to market.  Any long holders should clear their tonnages now.

Oilseeds are also showing a notable old-crop premium.  Again, this is probably because there is barely any old-crop left.  In some parts of the UK, notably Scotland, the market has now effectively closed on the 2013 harvest crop.  New crop prices have held their own in the light of political unrest in Ukraine (causing uncertainty amongst buyers), good growing conditions around the world for all oilseeds crops, and questions over just how much soybean China is likely to buy this year.  China has been cancelling vessels it had previously purchased; it is working on its own bean production and, crucially, its economy is in slow-down mode.

The USDA will be releasing its first forecast of the 2014 harvest (2014/15 crop in their words) on the 9th May.  This is an influential publication and often unsettles the market.  The USDA crop forecast is the most commonly used analysis of grain supply and demand in the world.  Unexpected figures could move the market, but of course, until then, nobody knows which markets or in which direction!