The main cause of recent pressure upon old crop wheat has been the need for long holders on the LIFFE May market to execute the physical tenders of futures wheat they have received. This type of never never land usually creeps up on merchants at this time of year. As I have said before, the trade here and around the world remains short of physical wheat. They have futures wheat bought against short sales.
These may have already been rolled from the November, January or March positions. But when you reach May, the music stops. So if you don’t sell back your futures wheat for May, you are faced with having to pay immediately for your tendered wheat, and it may be that the physical tender appears in the least desirable part of the UK, which means it’s no use geographically for your physical short sale.
This is what has caused the run on May futures; and of course everything, including new crop, is index linked to them. May futures finish on 23 May so the musical chairs could go on a bit longer, but it’s usually sorted out well before the end.
Old crop wheat export sales from the European Union remain brisk with another 763,000 metric tons of licences granted last week, so Brussels has certainly played its part in moving our surpluses. Closer to home one of the UK ethanol plants has started production again. I guess that’s because wheat is cheap and Brent Crude oil has hit a four month high.
For the fourth consecutive month the weak euro and consequently strong sterling has helped to keep wheat and barley prices low. In May we should at last resolve two of the main causes of this poor exchange rate. Firstly the Greek exit from the EU will be decided. Currently the Greek government is ordering all public institutions to send in any loose change they may be holding onto so they can meet the next several billion euro instalment of debt repayment. But, it’s not the sort of sum they are going to find down the back of the sofa. So, the “GREXIT” will be avoided at all costs and when it is, the euro will bounce back up, and the sterling exchange rate will improve.
Likewise, if the UK should have anything other than a Conservative majority government, sterling will fall, to the benefit of our exports. You see, despite all the scare stories about a Labour/SNP coalition, none of the financial institutions think that will happen. So either a Conservative majority or at worst status quo has been factored in. Apart from some short term gain in grain prices, I am not sure if it would be a price worth paying. Most people are quietly better off than they were five years ago, and are unlikely to risk that by a big change.
New crop values have drifted off in sympathy with the old being some £7 down on November futures in the last month. However, new crop wheat remains at a £10 premium to the old, despite the lack of weather issues. Why is that do you think? Well, it could be that wheat is now 150% below its high point of 2008.
It could be because lower plantings alone, suggest the world will produce about 60 million tonnes less wheat and maize combined than last year; and that world stocks of both will be back to 2012/2013 levels. But it’s probably more to do with the fact that everyone is massively short of wheat, maize and soya on the Chicago futures market and they dare not risk selling any more.
New crop barley is interesting. China has been a huge importer of EU barley this year, taking in two million tonnes at least: because of record pig production, this is set to double next year.
Adding that to the big (60,000 mt) boat trade that Openfield has developed to the Middle and Far East, it’s good news for southern growers. Similarly with malting barley, we have enjoyed another record year of exports from southern ports. With premiums around £20 over feed, spring malting barley is one of the few crops you can sell at a margin over production cost.
A word of caution though: we have had a late, cold spring, with little rainfall. It’s early days, but sometimes this leads to a later release of nitrogen. When rain comes the barley tends to bolt through growth stages, sometimes leading to higher nitrogen. We have been spoilt this year with low nitrogen. In some cases the really low – under 1.40 nitrogen – have not been wanted at all by domestic or continental maltsters.
Actually we have had two vintage years of southern malting barley: we should beware expecting a third. Certainly with this weather pattern I would not be selling any barley with a low nitrogen guarantee – 1.6 – maximum. Export brewing is OK at 1.85 nitrogen and it can always be blended if higher, but distilling is less forgiving.
OK, there are no tangible weather problems just now. But in the background you have El Niño in the Pacific, dry conditions in Dakota, snow in Chicago, the Indian exportable wheat surplus washed away, a volcano in Chile pushing sulphur dioxide into the atmosphere and bird flu in Iowa.
So I will not give the usual sell in May and go away advice: just go away and do nothing until June!