Make use of a huge windfall

If our internal wheat price increases too much, Black Sea milling wheat is currently at the same level as our feed wheat so we could see our feed market undermined by Black Sea imports. Currency is still keeping the UK insulated from some of the realities of the world and European Union market. To put this in a very sobering perspective: if the sterling/euro exchange rate went back to the December 2015 levels of 70 pence, oilseed rape could suffer a £60 turnaround in price and wheat £20 per tonne.

Some economists say that a year from now the exchange rate could be only 66 pence and others 96 pence. Always having to assume that there are EU buyers that still want our cereals and oilseeds, this exchange rate will have a greater effect than anything else upon our market prices. This trading bubble that we find ourselves in is evidenced by the fact that in the last month UK wheat futures are only £2 per tonne down (after increasing by £12 in the prior month) whereas Chicago wheat futures are down 30 cents per bushel, and soya 60 cents per bushel.

The UK has all time low exchange rates for the pound sterling against the United States dollar and the euro. This gives us a huge windfall advantage – but we must make use of it while we have it. Actually UK wheat exports look good so far. In July 135,000 tonnes was shipped, albeit old crop. But it still comes off this year’s supply and demand – and the trade believes it could have reached 500,000 tonnes during October. So this will have knocked quite a chunk off the estimated 1.35 to 1.50 million tonne UK wheat exportable surplus.

There is no doubt the UK has the required wheat quality to fit the third country and intra EU demand. Given that our millers will want to use as much of our better quality group one and two wheat as they can – thus avoiding imports made dearer by Brexit – the remaining lower quality good hagberg, 11.3% to 12% protein, 76/78 kilograms wheat, is ideal for the export markets. OK the Russians and Black Sea will always try to be cheaper sellers than the UK, but sooner or later they will run out of steam – and after October most of the Baltic and Black Sea ports will be frozen up. Whether it’s France, the US or Canada; the picture is the same: quality is poorer, so logically milling premiums – which are low in the UK – should improve, but that requires time.

The obverse of that is there is more feed wheat than usual in the world chasing the same demand. But within the UK trading bubble we have the benefit of not much feed wheat and a lot of variable quality, milling and biscuit. Actually that’s a nice problem to have, and it’s better than being the other way around. The EU continues to reduce its yield estimates for soft wheat, barley and maize from this harvest. But noone seems to take any notice and perversely French and US futures quite often fall further after such revisions.

For however much the yields are marked down, there are two realities which cannot be denied: firstly, the world demand for feed grain is not increasing, especially with one of the biggest players China sitting out for the time being; and secondly, the world stocks of wheat and maize are.

After a worldwide crop of 1 billion tonnes, maize stocks are forecast to rise to a record 221 million tonnes by June 2017. Likewise wheat is set to increase to 253 million tonnes after allowing for 12 million tonnes less in France. It’s no wonder the hedge funds remain short of wheat/maize futures.

I said last month that the UK market was “defying accepted wisdom” and “without bigger world problems it won’t last.” I am afraid that still applies. The opportunities to sell feed wheat, malting barley and oilseed rape forward in the new year at decent values still remains. Milling wheat is not a bad price, but the premium could improve. Feed barley is a problem to sell before the new year.

So the message remains don’t squander the Brexit windfall money. As each month is ticked off we get closer to the next harvest, so the window narrows. And however unlikely, if the UK economy suddenly gets a boost and sterling strengthens, then the prop of weak currency which has added £10 to wheat and £30 to oilseed could disappear as well.