I would like to be able to claim all the credit for the new crop wheat being up £12 and oilseed rape £15 in the last month.
In reality it’s the external, sometimes ephemeral, nebulous factors that I have been banging on about for the last two months which have made the buyers come to the table.
The elephant in the room (El Niño) I referred to last month cannot be ignored any more. It has broken out of the room and is rampaging all over, be it scorching heat in the Canadian prairies or incessant rain in mid west America.
Europe is not immune, with spring wheat areas of Russia and Kazakhstan burning up, and southern Russia too wet. These extremes of weather may not persist, but they are damaging crops, no doubt about it. This has triggered another of my forecasts – which was, the international hedge funds, who have been massively short of futures wheat and maize, would be forced to cover short positions. On Friday 26 June, 2.5 million tonnes of Chicago wheat futures were bought back as funds scrambled to reduce short positions. So what implications does all this have for the world and UK markets?
Well, apart from the welcome rise in our prices, the answer is not a lot yet. The good old United States Department of Agriculture (USDA) served up another world crop report in June, which just about ignored or dismissed all of these weather issues, as having no effect on overall production. They really are adopting a “crisis, what crisis” approach. For example Australia has stated it will only have 23.50 million tonnes of wheat at best – the USDA persists with 26.50 million tonnes. They have left the wheat crops in Canada, China, India all unchanged, when everyone else believes they are collectively 10 million tonnes down.
Probably the greatest calumny is the opening figures of about 719 million tonnes as its forecast for world wheat production from the 2015 harvest. Worse still it revised the figure upwards in June to 721 million tonnes (MT). It usually starts at 700 MT.
Unless the USDA starts to reduce its world wheat crop estimates from last month, it really is going to be heading into FIFA territory in terms of its credibility. The next work of fiction is of course world stocks.
The UK is still arguing over 400,000 MT of wheat which may have been incorrectly included in the 2014 harvest wheat carry in figure. But that pales into insignificance when compared to the millions of tonnes of wheat stocks, which we are continually being told reside in places like China.
I am sorry to bring FIFA into it again, but there are similarities between the old boy network where major decisions or pronouncements seem to be made with a nod or a wink. But who ratifies these figures? I doubt if anyone outside China, India and Russia has a clue about the size of stocks. But each month they make up a significant part of the USDA report, and remain unchallenged.
The bears will have you believe that the world carry out stocks of wheat and maize are such that we could withstand a crop failure somewhere. I am not convinced about that. I think the manufacturers, because of low prices and surpluses, have become complacent buying just in time and keeping low inventories. They have already missed the bottom of an 18 month index low in commodity prices, some must be feeling uncomfortable now.
The Black Sea still remains the biggest threat to the UK. Ukraine is very short of hard currency, so cheap sales for harvest will happen just to obtain some dollars. Russia is different: yes they need hard currency too, but they have domestic issues to address.
The replacement of their export tax with a floating tax means the tax is applied when the grain is shipped, not when the sale is made. That is very uncertain for the shipper: he could sell forward now, but find the tax is so high it’s not worth exporting, at all so that may restrict Russian exports.
I said last month there was no point in selling forward at a price which was below your cost of production. OK, with oilseed rape going up £15, plus oil bonus that brings it into the frame as it’s making up to £260 for harvest. The European Union will need to import up to three million tonnes from somewhere.
Despite the £12 rise, feed wheat and barley are still behind the curve. The problem will be for those who must have harvest movement. But we don’t have to move the whole crop at harvest time. So keep with this bullish run, and only sell what you need for movement. Spring malting barley has now edged into the margin over cost frame and with oilseed rape is the only crop I would sell in the post harvest position.
Please note I have not mentioned Greece for the first time in six months. By the time you read this we will know if they voted to stay in or leave the EU. I still cannot see them leaving, but what do I know? What I do know is that the EU financial institutions are more robust than we have given them credit for, and the damage which could be caused by GREXIT has been either ring fenced or discounted. Hence the euro has remained about 71p exchange rate to sterling over the past torrid weeks.