Donald Trump’s victory initially sent the dollar down in value. Sterling strengthened as a result, moving from an exchange rate of 90p to the euro to only 85p. When the initial shock subsided the dollar regained its loss, but the pattern is emerging.
If Mr Trump actually implements what he has said he will do, the dollar is likely to weaken again, with investors switching to safer currencies such as the Swiss franc or Japanese yen. Even sterling may be considered safe, so I think sterling will strengthen from time to time. Next, we have elections in France and Germany, and a referendum in Italy. France now looks set to have either a centre right or very right wing nationalist government. Some on the extreme right have talked about France also leaving the European Union.
By the way, Germany faces the same problem, with Angela Merkal possibly being replaced with a right wing chancellor. The very thought of France leaving the EU – FREXIT – and the damage it would do will cause a run on the euro. And before you say “France would never leave the EU” don’t forget that half the UK thought we couldn’t leave the EU and half the Americans said Trump would never be president. So in order; the biggest influence on our grain market is now: 1 politics, 2 currency, 3 weather and 4 fundamentals. So for a grain trader it’s no longer good enough to get the usual three out of five decision right, based on supply and demand. Your crystal ball has to second guess elections, currency and weather.
The trade reaction to Trump / weaker dollar was a loss of £5 on the UK wheat futures. Even when the dollar bounced back, the futures only improved by £1. As I said, it maybe that we see this as presaging further repeats of the dollar weakening when Mr Trump really gets going.
The trade is now mostly preoccupied with executing the huge amount of grain that has to be delivered to mills or ships by Christmas. As the largest exporter of UK malting barley, Openfield is having to cope with low water levels in the Rhine and Danube causing shipment delays to our maltster customers in Europe. Openfield is also very busy with handy size large boats of wheat for North Africa.
Algeria has emerged as a really important destination for UK wheat, needing to import up to eight million tonnes. For historical, colonial reasons France is the biggest competitor for this market but it just doesn’t have the soft milling quality this year (oh dear, what a shame, never mind!) Also the Arabs have worked out that the black bits in French cargos is ergot and they are very fussy about bugs, so the job has to be done right.
It won’t be long before the southern hemisphere wheat crops come to the market: Australia and Argentina have good looking crops. The new Argentine government are keen to develop exports. Fortunately they are like the UK in the 1970s: as soon as they start to make exports work either the farmers, lorry drivers, dock workers or seamen go on strike.
Using the only reliable daily price index for wheat – the LIFFE futures market – we have established the following: from 1 June 2016 to end October/November 2016, wheat futures averaged £126.50 (£117.50 ex farm) without Brexit. Using the euro and dollar exchange rate at 1 June 2016, November futures would have been only £114 (£105 ex farm). From November 2015 to Brexit, November futures averaged £120.76 (£111.76 ex farm). If you average the two figures together, it means that from November 2015 to date, the average futures price was £122.80 implying an average ex farm value of only £113.80. That should be your bench mark for feed wheat sales. If you have done better than that, well done. But bear in mind what the downside of the price was (£105) if we had voted to stay in the EU. It would have been a very risky strategy not to have sold at least one third before 23 June.
As I have said before, the UK wheat balance sheet is quite tight for this season. Europe is more comfortable – especially with all the low quality wheat surplus in France – and the world is awash with wheat. It is thought that up to one million tonnes of UK wheat could be exported by the end of December. If so, that only leaves 750,000 to ship from January to June. We have the wind in our sails in terms of quality and exchange rate (for now). So that should happen, leaving us the minimum carry out stock to keep our mills going up to middle of August of 1.8 million tonnes. So our firm, old crop wheat market is justified, because of this tight position. Unfortunately the good value for 2017/2018 is not. They are simply index linked to the current futures price and without any natural disaster they should return to more normal levels if the northern hemisphere has a good harvest next year.
So my advice remains unchanged: keep selling the feed wheat base. Flour millers may have a lot to cover from February to June so milling premiums should improve. But in case it is at the expense of feed wheat falling – fix the base price. Feed barley is still under cooked so I would wait for a better day on that. We are at export price parity so we have to compete with all the cheap jack barley exporters around the world. But that said, unless the £15 to £20 discount to wheat narrows, more barley will be used farm to farm.
Oilseed rape is in a world of its own. It follows sterling closely but the difference to wheat is oilseed fundamentals justify the high price as well as currency. As I have quoted in the past, oilseed rape trading is for consenting adults only.
