Our LIFFE wheat futures have twice been £10 per tonne up and down in one week. With the UK supply and demand balance for wheat and barley reasonably identified, we have just followed the Chicago and French futures market up and down.
A critical watershed was to have been the eagerly awaited United States Department of Agriculture (USDA) August report on world wheat and maize. It was widely expected that, in the face of reports from places such as Russia, Ukraine and Northern Europe – not forgetting the United States, Canada, Australia – 25 million tonnes of wheat would be wiped off the production in these key exporting countries.
Hedge funds went long on a massive 50,000 contracts of wheat the week before the report hoping to make a killing. Needless to say, history repeated itself and it didn’t happen! The trade has to understand the USDA are not grain traders so are impervious to anecdotal chit chat about yields. Neither are they politicians, so however compelling the evidence may be, they will not risk putting themselves above the parapet.
In the end they are just statisticians. They will not put any spin on their figures: they leave that to the trade. In the UK this year, we saw how official figures over the alleged size of planted areas can mislead the industry for more than one year. There is no accountability if these organisations get the figures wrong. While not being political, in the past there has been more than a suspicion that the USDA doesn’t like giving too much bad news in one go.
So talking up potential big crops or good weather is seen as preferable to highlighting crop failure – which could lead to civil unrest – in some parts of the world. So if the real evidence of lower world wheat crops was compelling enough, they might redress the balance at next month’s USDA report, but I doubt it. They are more likely to spread any bad news over several months to lessen the medium term effect.
Back to the UK: at present we think the wheat crop is only 5% down on last year, so about 13.8 million. The market has been pricing itself at about 13.2/13.4 million tonnes. With the deteriorating weather in the second half of August, later yields may be lower and some milling quality has suffered.
Chalk land barley has performed better than anywhere. But later planted barley on lighter land is thinner and has higher nitrogen. There is a bigger debate about the UK barley crop than wheat.
The carry in figures look a bit high but a smaller surplus of say 700,000 metric tonnes is still feasible. One of the main known unknowns is what is being fed on farms? With forage short and feed demand high, more will go down the throats of livestock at home.
Openfield already has its export malting barley programme underway. It Is possible that our malting barley will be the largest single grain export from the UK this year.
If you step back from the hysteria created by the hedge funds the UK market is in a pretty good place. Even though the wheat futures have been £10 off the top you still have about £50 per tonne of inflation built in to our wheat prices. This is about double the Brexit windfall we had in 2016. In order to re-balance stocks and supply the whole of the Northern Hemisphere including the UK, will plant every available acre with wheat this Autumn! Even second wheat – at next year’s forward prices – will be considered again. This additional planting should correct this year’s global shortfalls, and replenish stocks. If you ignore the ‘one off’ price inflation this year a value of £160/£165 ex for Autumn 2019 looks attractive. Its certainly the best forward value that you could fix at – since the last big price year of 2012 – and as I warned last month most farmers missed that opportunity – by not selling forward for the next harvest. So what does this mean for this year? The UK has about enough wheat, for internal consumption; so we will remain at imported wheat value. Because of the £50 price inflation, it would be unrealistic to expect the type of rise in wheat values seen in April/May/June this year. By December we will know if the intended extra wheat plantings have materialised. The southern hemisphere will have completed harvest. So, I would recommend that you take advantage of the market from now to December latest leaving some to play with in the new year. Also, you should consider selling one third of your 2019 wheat forward. I would not suggest selling more; we still have the once in a life time Brexit effect to calculate. More sobering, is the fact, that worldwide, we have had three pretty good consecutive wheat crops that kept the wheat market quiet and allowed record stocks of up to 275 million tonnes of wheat to be assembled. But, even after all that one ‘dodgy’ production year, in some big exporting countries, and the market jumps £50! Good luck with planting those extra wheat acres but don’t forget to sell some of it!
