This is very much our party

As I predicted in my December article when the euro exchange was only 70p: “The mere thought of Brexit will cause a run on sterling.”

This proved to be correct as sterling weakened to nearly 78p recently. The European Central Bank spoiled it by talking about quantitative easing again in the euro zone, knocking it back to 75p: but it’s still very good news for UK exporters. Anyway for the time being, while the UK referendum date is uncertain, this is very much our party.

As the Brexit brigade gathers momentum, however unlikely it is to happen, further hedge selling of sterling will take place. Sterling could weaken to 80p. However, the closer we get to the referendum date, the more likely that common sense will prevail.
If Brexit seems less likely sterling will start to strengthen. This is very important for the grain trade and requires constant attention. With all the surpluses around us, it may be that if 80p is reached we just have to sell any grain/oilseed in euros, just to obtain the good exchange rate and worry about the price afterwards. Despite the benefit of weaker sterling, our grain market and the rest of world commodities have had to yield ground in the face of the continual meltdown of the Chinese economy.

Since Christmas the Chinese stock market has had to suspend trading on three occasions. They had a circuit breaker in place, but they decided to remove that as it was being triggered too often – a bit like taking the batteries out of your smoke alarm. So the biggest open mouth in the world seems shut for now. Or is it? Delving for bits of good news, I found that vegetable and crude oil imports to China were 30% up in December, compared to November. So there must be some growth somewhere. And another thing: even now China is forecasting growth of 6.25% for the next year. Here we are thinking that a quarter of one percent might look good! So China is a long way from being bust yet.

As I have said before, China has played a clever game of making it very difficult for France to export its usual millions of tonnes of feed barley – not opening letters of credit so loaded ships cannot sail or discharge cargo. But China is supposed to have 65% of the world’s pig population. So it must get barley from somewhere. I mean, you cannot feed maize to pigs or they will turn yellow.

No one wants yellow pig or chicken meat. Another great piece of work was that after 15 years the UK managed to agree protocols to enable it to sell barley to China. Unfortunately it was just at the time when China announced it didn’t want any for the foreseeable future. That is really up there with the Chamberlain’s “Peace in our time” Munich agreement.

Despite the welcome help from currency, our domestic markets have followed United States and European Union markets down, hitting new contract lows on most futures contracts. We can only wonder where ex farm values would be now, without the aid of weak sterling.

The UK remains competitive for wheat export business and is still on track to reach the 1.2 million tonne figure by the end of January. But it must do the same again by harvest to clear the decks. With new kids on the block like Argentina – buoyed up by the floating devalued peso – under cutting the UK, it may mean further price reductions are needed to keep capturing our share of the export market. Argentina is still quite militant so it’s just as likely to spoil its newly developed export activity by either the farmers, hauliers, dockers or ship owners going on strike. Let’s hope so.

As I have written for the past several months if you need to sell, wheat or barley, sell it while there is still some forward carry in the market. Unfortunately, since I began advocating that the old crop months have slipped by and the £1 per tonne per month carry has gone with them.

With seemingly overwhelming stocks still hanging over the market, selling any carry on wheat or barley is the right thing to do. But now the attention must switch to the best carry which is represented by new crop. There is at least a £10 differential between May and November wheat futures. So one is too cheap, or the other too dear, but which is it? For the last two months I have been selling for CMG, the new crop 2016 and 2017 wheat futures, as a hedge against old crop. But also because they gave a reasonable base value in their own right. Already the gap has narrowed and the prices have fallen, so far so good. For a limited tonnage, say 20/25% it makes sense.

Unless there is a really big problem, it is likely that we shall have a repeat of the last three years where the best sales were made 12 months before harvest. Look at it this way: if it’s the worst price you make, good, you will do better with the rest. But if like this year wheat is only worth £100 in autumn 2016 or 2017 you will be glad you sold some forward.

Lastly, I have remained constant in my view that oilseed rape, because of exports, would be tight at the end of June, and into next year as plantings are 14% down. While I still think it will remain firm, it is the one crop that you can still sell for old or new which makes you a profit, so it’s not all bad news.