Well, we did get our rise in the wheat market: November wheat futures peaked on 3 July – a £10 rise in June, but alas it’s £13 off that today! (27 July). Such is life in grain trading.
What’s changed then? Well, not as much as you might think fundamentally. We were in a weather market: too much rain in the United States, a lack of it in Canada with very high temperatures there and in Europe. It was bound to stop raining in the US sooner or later and start in Canada and Europe. As the temperature fell, prices fell with it! So that’s that then, or is it?
The question now will be how much harm did the prolonged drought or flood actually do to the crops? Wheat crop ratings in the US have bounced back OK but August is a critical month for maize. With the Missouri and Ohio rivers in flood a chunk of the maize crop had its feet wet for a long time, so roots would not have established well. If it were exposed to high temperature in the next month, it could still impair yield.
The United States Department of Agriculture (USDA) has started with an unusually high 2015 maize crop figure at 989 million tonnes. It’s difficult to see how it can go up from there! The European Union maize crop is at least 10 to 15 million metric tons (mt) down because of reduced plantings and poor growing conditions.
Cheap maize hanging over the market undermined wheat last year. That should not be the case this year with maize and wheat trading at parity just now. Sentiment is the big change really, rather than real crop conditions. The big hedge funds have now squared their positions on futures wheat, but remain long of Chicago maize futures. The next USDA report on 12 August could be a game changer on maize. In Canada some of the damage caused by late frost and dry hot weather to the canola crop is irrepairable. The driest conditions for decades will mean below average yields on canola and wheat.
In the south of England as expected, the winter barley on chalk has been the crop of the year so far, with good yields and quality: lighter and gravel lands have not done so well. I remain very friendly towards barley long term. The UK will be exporting another large tonnage to Saudi Arabia and France will do the same to China. Brussels has carried on its strong export support from last season granting export licences of 475,000 mt last week, making 1.2 million tonnes so far – double last year at this stage. So barley needs tucking away for sale later in the year. Even the USDA have to agree that we will consume more barley in the world than we will produce from the 2015 harvest, so stocks must fall again.
I am even more bullish towards oilseed rape. Fundamentally, like barley, we will consume more canola than we will produce in the world this year. Also, like barley the demand is inelastic, meaning you cannot easily substitute anything else for it. The UK has the biggest importer of oilseed on its doorstep, the European Union, which will take all of our surplus. Even with the euro/sterling exchange rate being unfavourable for months, UK oilseed has defied gravity and retained a good price level. The longer you keep it the more it will be worth.
UK wheat remains the enigma: the market is not as bad as last year yet, and our crop could be two million tonnes less. But stocks, be they real or perceived, are hanging over the market. This is one of the reasons why the big end users have been able to hold off buying much new crop yet.
They are too comfortable with enough old crop stocks to keep them going. Add to that the usual harvest sell off of cheap Black Sea wheat and it’s no wonder they are content to watch the market drift lower. It will be all down to our quality now. If we have good 76 kilogram feed wheat, we should not be frightened of a 2.5 to 3 million tonne surplus. The Black Sea doesn’t have a bottomless pit of cheap wheat, and we don’t have to ship all of our wheat surplus in August/September! Milling premiums look interesting. There are already potential quality issues in different parts of the world. The UK crop is likely to vary a lot in protein so the current minimum £20 to £25 may be a bit on the light side if you have real 13% protein.
So, we have had a massive downside correction on the American wheat futures, with the EU and UK following it down. We have now entered the traditional harvest dip phase and I am sorry to say it will get worse before it gets any better.
If you missed selling some wheat before 3 July, don’t beat yourself up too much, join the club! The £125 you missed was no great shakes anyway. If you had sold that, it would have only been locking in a slightly lesser loss than the one you are faced with now. It is better now to wait and see what quality you get. Unless we are surprised with an above average yield, I think less wheat will need to be sold and moved at harvest, as farmers have arranged a lot of third party off farm storage.
I don’t believe all of the potential worldwide crop problems have disappeared over the last three weeks. The weather premiums have for now, but there is a long way to go yet.