June Arable Update – Jun ’13

Old Crop

The end of June marks the end of the recorded grain marketing campaign.  There is some old crop still on farm and in pipeline stocks, but this will now register as being carried over into the 2013/14 campaign season.

Data shows that to the end of April, 609,000 tonnes of wheat had been exported from the UK. This is down from 2.375 million tonnes by that time last year (incidentally UK import tonnages have been almost identical to UK export tonnes from last year.).  DEFRA’s May prediction of total wheat exports this year (2012/13) is 800,000 tonnes.  This looks increasingly unlikely to be achieved with monthly export figures averaging only 26,000 tonnes  since December (its normally ten times that level), and this is not expected to change much as UK wheat is now considerably overpriced on the global market place. Indeed prices need to fall before export sales resume.  Closing wheat stocks are thought (by DEFRA) to be higher than for the previous 2 years, which will add to the total availability for the forthcoming new-crop campaign.

We have no idea what the weather will be like at harvest time of course, but many are suggesting it will be delayed from normal. Historically this has often created price spikes but these are probably events of the past, especially this year because not only is there a surplus but also consumers are well aware of the situations that have led to poor crop growth and so the delay will be accounted for already.

New Crop

US grain traders are exceedingly nervous of warm weather reports in the US Midwest as they fear a repeat of last year’s devastating drought. There is little risk of those conditions this year, the Midwest having experienced heavy rain recently. In fact the warm weather is good for current growing conditions.

In the UK growing crops have caught up and filled out considerably better than envisaged only 3 months ago. There is little doubt that yields will still be impacted based on the large number of fields that still have gaping holes in or around the edges of crops. Nevertheless, farmers have gained more confidence that they will have a cropto harvest this year and have increased their sold position. This year, traders have reported a lower level of forward ex-farm sales than for many years, but this is starting to pick up slightly.

Under the current factors in the marketplace, this appears to be a sensible action to take because UK grain prices are overvalued compared with comparable (or even superior) specification crops elsewhere in the world. This includes France and the USA. Furthermore, the world grain crop is looking likely to be a big one. Even though the USDA has reduced the global 2013/14 closing all-grain stock by 7 million tonnes since last month, it still sits at 34 million tonnes higher than the 2012/13 figure with rises in both wheat and (mainly) coarse grains. Much of that gain is centred in the US, the dominant player when it comes to influence in the global prices of grains.

Furthermore, not only is the world expecting large grain crops, but more importantly those who we trade with or compete with are also looking forward to a barn-busting season. The Former Soviet Union for example has a growing crop which, according to the USDA is over 35% larger than last year’s crop. Exports will be substantially greater too. The North African’s and Spaniards to who we sell our surplus and have done so for many years are also sitting on better yields than has been seen for some years (all the rain was ideal for them!). This suggests that the downside to the UK grain prices is greater than the upside.

Whilst we are thinking about forward selling, if we agree the 2013/14 crop is probably currently overvalued, we should consider the 2014/15 crop. There are few if any market fundamentals as yet for that crop, but prices are available. So how does anybody know what to bid or offer? Well, prices of very long way off crops tend to be linked to the nearest crop but with a discount. This is exactly the case at present. However, it is likely that by then, the UK will be back in a net exporting situation and therefore the domestic grain prices will be based on export parity to the world price matrix instead of import parity. Clearly all sorts of things can happen in the mean time but things could happen to push grain prices in either direction. Whilst the 2014 prices might not be as high as you or your farmer clients are hoping for, hope will not move a market price and it looks like entering the market with a small proportion of grain sales could prove profitable.