Ethanol production is the key

The UK wheat market has remained quite stable in the last month, but within that there have been huge regional differences in value. For example European Union wheat was imported to the Teesport area at £153 cost insurance and freight free out; whereas wheat in Kent was traded at £140 free on board ship.

Because of the ethanol demand into the Borders of Scotland, wheat is already being drawn from Yorkshire, Nottinghamshire and Lincolnshire to the North. This means that other wheat consumers in those areas are also having to pay a premium as well.

Within the UK supply and demand balance sheet I discussed last month, ethanol production really is key to keeping the market tight. The problem is it’s enigmatic and quite unpredictable. There have been years when a huge consumption of wheat for ethanol production was forecast: neither plant fulfilled its potential and the market remained flat.

Neither has price necessarily been the main factor as it wasn’t many years ago that wheat was £105 on the farm and they still could not make the plants pay. The world and EU ethanol spirit market has been quite firm although it came off the top recently in Europe. The two plants are capable – at full capacity – of using 2.5 million tonnes of wheat, but they never have. That said, if you extrapolate the first three months wheat usage for this year at these plants, they could use 1.6 million tonnes of wheat rather than the 1.2 million tonnes currently being used in the UK balance sheet.

However, there is a blip. One of them has just announced that it intends to close for maintenance in December for two months. This is not new: the plant closed for two months last year in January/February, and came back into production afterwards. The second plant has continued to buy wheat delivered for January/February/March. So they are not closing for maintenance as far as we can tell. So this could make a difference to wheat demand but so far the market has more or less ignored the impending closure.

The point is whether you believe the 15.2 million tonne DEFRA UK wheat crop figure or the Openfield 14.6 million tonnes, neither are game changers. The UK is still a net importer of wheat this year, albeit milling wheat.

Step back across the water into Europe and sure enough the EU (including us) are behind the curve on wheat exports with only 25% of the 27 million tonne annual target shipped by the end of October. So will that be a big problem? Well, yes for mainland Europe. However the UK, as in 1940, has the advantage of 22 miles of English Channel, plus the North Sea to separate our market from theirs.

Of course if – for some reason that I cannot foresee now – the EU eventually fails to reach its export target, then the invasion force of French and Danish wheat could undermine the currently stable UK market.

But northern Europe is currently more concerned about getting its winter wheat crop planted. Spain seems to have had an ongoing drought for the last two years and is providing a good home for UK wheat and barley, so happy days.

Currency remains a big wild card. It’s been up to a 90 pence exchange rate to the euro recently. My view is sterling is over valued at that rate. We now know that the interest rates may crank up another 0.25% in a year’s time: big deal. Who is going to bother to buy sterling on that basis? Its recent strength has more to do with the weakness of the euro. The UK financial outlook is poor: sterling ought to be around 85 pence.

So as we approach the end of the year, perhaps we should count our blessings. Let us rejoice that unlike some large parts of the world we are not having to plant crops with the expectation of commodity prices that are below the cost of production. Also that we are still benefitting from two smallish consecutive wheat harvests on our island and the sterling devaluation caused by Brexit. Lastly that we don’t have to worry about La Nina (just arrived in the southern hemisphere) or having North Korea as a neighbour. Seasons greetings.