Lockdown is a two-edged sword

Writers Posted 02/02/21
As I have said before, ‘demand destruction’ came and went last time but it did not last.

My prescient comments last month proved to be correct when I said there was “nothing to stop wheat reaching new market high levels”.

It came to pass; May wheat futures on 15 December were £194, they increased to £217 on 18 January and have now lost £12 per tonne, being £205 on the 22 January.

This may be just profit taking, as derivative markets are more likely to respond – to, say, rain falling in South America – but that does not make physical grain any easier to buy in the cash market. Apart from a brief period back in the disastrous year of 2012, the current levels are the highest seen in the 21st century, and they still have the chance of remaining so for the next month or two.

Over the past months, I have identified that the reasons for this are: China’s sudden increased demand for soya, then maize, and its barley demand switching from Australia to France; the knock-on effect on Russia and Ukraine prices, as a lack of port capacity in the US meant China switched to these origins; finally, in December Russia imposed an export tax to try to reduce its internal price and restrict exports, none of which has worked.

The extended ‘lockdown’ in the UK, France and Germany is a two-edged sword. As I have said before, ‘demand destruction’ came and went last time but it did not last. This time beer sales and therefore malt offtake are most affected so far. It may be that some end users won’t mind some ‘demand destruction’, especially if they are short of stock.

Unlike the market, Brexit went out with a whimper; with no levies on grain exports to the EU, barley continues to be shipped. On the other side, UK flour millers are now able to carry on buying German milling wheat, and they are, for the rest of the year. They have been using it since harvest and they want the continuity of quality, in some cases preferring it to home grown. With UK wheat still in short supply, new crop cargos of French feed wheat are already being purchased to ensure there is sufficient to cover their July and first half August positions.

On the back of our firm old crop wheat markets, new crop has edged up with it. The AHDB Early Bird Survey has published a planted area; if combined with an average yield of 8.3 tonnes per hectare, it would mean a wheat crop of 15.1 million tonnes, compared to 9.5 million this year.

Our farmers’ groups in the Midlands reckon this to be optimistic as some have only planted 50%, with southern farmers having planted a lot more. But it’s mostly sat in very wet conditions and is unlikely to look much good for at least a month and the black grass situation has still to be addressed. That said, at 15 million metric tonnes, plus the usual 1.5 million metric tonnes carry in of old crop, you have the game changer! That means the UK wheat market shifts from the minimum import price (which has given us great price protection this year) to competing with cheaper origins for exports. However, we have a long way to go before that becomes fact, if it ever does.

Meantime you still have amazing prices which are inverse to new crop by about £40 per tonne. That means two things for sure. Firstly, almost nothing will be carried from old crop into the new. Secondly, however much the end user is held to ransom now, by being forced to pay up for the old crop, they will not buy one tonne more than they have to at those differentials! So, whether it’s French new crop or early cut UK wheat and barley, they will switch to that at the first chance and at that point these high prices will be history. Now that may not be until June or if and when there is any real ‘demand destruction’ beforehand, but the music will stop one day. So my comment last month about the “trend being your friend” is still valid. Even with the recent downturn these are fantastic unexpected prices on old crop and should tempt even the most bullish long holder into selling some more. So it’s the same advice as before; smaller parcels marketed at exponential price increases can never be wrong.

The UK still has to import a lot of wheat and maize to see it through until even the French new crop arrives, so use this time to sort out your new crop marketing strategy. Whether it’s pools, trackers or direct marketing, you can probably adjust your original feed wheat budgets from £150 to £170, but don’t forget to sell some, if your crop development looks about right. To reiterate, there remains a long way to go on old crop and even more on new, but when selling it’s better to get out at ten minutes to twelve o’clock rather than one minute past!


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