Well, another month has gone by and the UK feed wheat market continues to defy gravity and remains very firm with good spot UK consumer demand cutting off the need for further exports – for the time being anyway.
Two questions: can it last and then how long can it last? In these circumstances however much you have been relying on an unchanged set of supply and demand figures, you have to go back and re examine them. UK wheat exports look like 1.17 million tonnes at the end of January. Most agree crop size was between 14.37 to 14.46 million tonnes.
So the low estimate of the surplus left is 300,000 tonnes, with the high figure 702,000 metric tonnes. Either way between February and June that is not a lot to liquidate – if it’s there.
Reviewing the balance sheet the “carry in” figure from 2016 could be worth questioning: 2.79 million tonnes of wheat is a huge figure. Could it be that this “carry out/in” tonnage was an over zealous estimate simply to balance up the alleged surplus tonnage from the record 16.4 million 2015 wheat harvest? The UK wheat consumer certainly did not require that amount of stock to see them through from the end of June until the new harvest began in the middle of August. It’s also difficult to see where it could have been physically stored.
The industry has returned to a more normal “carry out/in” estimate of 1.6 to 1.8 million tonnes from 2016 into the 2017 harvest. If that extra one million tonnes was not really there that would account for the tight feel to old crop wheat and its very high value. Assuming that “carry in” figure was right, the other demand and import figures stack up. So the answer to the first question is “it can’t last” and then it’s a case of how long before it falls.
Because of its high wheat value the UK market is already at import parity for wheat and maize. Apart from some cheap Baltic States imports, Denmark exported 60,000 mt of wheat to Ireland around the turn of the year. That suits compounders with mills at or close to the port side.
So there is a cap to the wheat market. We don’t know what that is yet, but we may have already reached the cap. Keeping with feed wheat, new crop is still about a £10 discount to old and that’s as it should be. But the only reason that the new has been making £130 is that it’s riding on the back of the old at £140. So when the old crop runs out of steam, the new crop will fall with it. At some point old crop wheat will come down to the new crop price.
The big international hedge funds and trading houses really have taken a bath from harvest to date by selling wheat futures short against the big world picture of record harvests and stocks. Being under water for most of that time, their appetite has diminished and they now have one of the smallest short wheat positions for a long time.
There is a theory that looking at the index of global commodities, grain has fallen behind harder commodities like metals, for example, and that perhaps it’s due for a cyclical or inflationary increase. Well if that encourages the hedge funds to pile in and start buying grain futures, good! But I have seen all that before. The record stocks of world wheat and maize would prevent cyclical price rises. Only a significant crop disaster in probably the northern and southern hemisphere would result in prices of the kind we saw in 2012.
With the UK market being recently more about domestic demand than export, currency has taken a back seat behind fundamentals, for now. It has ranged from 85p to 86p exchange rate to the euro. There are some very eminent forecasters who still see, for the rest of 2017, a downside value of 80p for sterling, but more surprisingly an upside of 100p to 105p. This suggested depreciation of the pound is due to the UK’s current account deficit, which at five per cent is wider than other western economies. Perhaps the UK is underestimating the potential loss of access to European Union markets for the services sector.
My view is that it is more of a medium to long term concern if it is at all. Short term over the next four months the European elections are more likely to cause the euro to fall in value against sterling – artificially inflating sterling, making our exports less competitive. That may not matter for the next few months as we have little old wheat left to export. But should we return to 2015 levels of production and have to export say three million tonnes, strong sterling would remove a lot of the £20 Brexit increase we have seen on cereals.
The expression “post truth” seems to be in fashion just now. Looking at the political examples, it seems to mean eventually telling the truth but only when you have been found out. From our industry’s view point it would be good if we could have some ratification of fundamental figures that we have to work with, even if its “post” one or two harvest ago!
Lastly, every time I receive another set of United States Department of Agriculture figures advising exponential world record crops and stock I want to reach for the fake news button.