During the past three months we have already had just about every twist or turn in quality or marketing that you could expect in a year. We have had ample time to prepare for the predicted shortage of domestic wheat and surplus of barley. Yet still the spot cash market for grain does not want to lie down, with flour millers and compounders still buying for delivery next week while at the same time being reluctant to pay any sort of carry and buy for the forward months.
Apart from the UK, the weather in the main global production areas has been benign: no summer droughts in the Black Sea, no panic over the critical development months for US maize, the Australian record wheat crop looks like it’s coming into land ok, with the Indian monsoon normal for a change. Ok, so there is some dry weather now in Russia, Ukraine and Argentina but that can only affect next years crop.
Notwithstanding all of this, we have had an amazing bull run on prices, especially for wheat and just recently maize, as the USDA surprised everyone by knocking seven million tonnes off America’s maize stocks. China has been the main driver of this bullish market. What China has been doing is hoovering up huge quantities of US maize and soya. For the previous six months China had been auctioning off its domestic stocks and it is now replacing them at much cheaper values. It’s certainly been re-building its pig herd, so it all makes sense. Maybe they are keen to get it all bought, in case of a change in the White House! That’s another non-fundamental factor which has helped to ‘bull up’ our markets. Over the past month there has been a big sell off in equities, stocks and shares. It’s not just the usual pre-election sell off. As indicated by the volatility of VIX futures, investors are really concerned that if President Trump should lose the election he will cry ‘foul’ over postal votes, demand another vote and refuse to transfer power. So the big hedge funds have been selling off equities and buying commodities, and guess what, the cheapest was maize futures! So even before the news about reduced stocks, maize futures spiked and made the hedge funds a lot of money, but what will they do next?
Our market should be more predictable. Weak sterling falling to an exchange rate of 93p to the Euro has made imported wheat more expensive, hence the ex-farm price increasing by about £15 recently. We know that a lot of wheat, at least one million tonnes, has been pre-booked for import to the UK, before the danger of tariffs being applied post Brexit.
If we get a deal which allows us to carry on trading levy free with the EU, then happy days, but millers have not put their trust in that; the wheat has already been bought. No deal and import taxes could keep the new year market firm, but when you look at the 42% stock to use ratio on world wheat and the intention to plant ‘wall to wall’ wheat this autumn, my conclusion is that this bull run will come to an end. If demand destruction re-appears because of the Covid-19 lockdowns, it will end sooner rather than later.
The lesson from history remains 2013, when similar wheat prices to our current values fell away in the second half of the year and were £110-ex farm the following Autumn. So this is yet another reason for selling new crop wheat at £150.
To paraphrase Dickens you may look back upon 2020 as “the best of times” in terms of price and “the worst of times” for yield and quality, but it will be a long time before you see these prices again. You can always tell when a ‘bull’ market is ‘tired’; traders keen to prolong it start imagining stories about La Nina and locusts!