Unusual phenomenon

Writers Posted 29/11/19
Well, as I said last month, the latest Brexit deadline came and went and we are all still here trading.

I have sold three further cargos of export malting barley to Poland, Germany and Spain, since 31 October, all for shipment by Christmas. However, we now have a much bigger story, which has even eclipsed Brexit – for the time being – the good old English weather!

We have the unusual phenomenon of our new crop 2020 wheat market completely supporting old crop values. The lack of winter wheat plantings, throughout the UK has created an ‘inverse market’ where the old crop May 2020 futures have been £10 cheaper than November 2020!

With estimates of only 30% to 60% of winter wheat planted (on 19 November anyway), new crop UK wheat estimates are currently as low as 12 to 13 million tonnes. Ok, we know that some wheat varieties like Skyfall can be planted up to the middle of February and others will ‘puddle in’ winter wheat anyway they can, between now and the New Year but, apart from acres not drilled, this late planted wheat will have a significant yield penalty. Hence the big premium for new crop over old – at this stage.

All of a sudden the big surplus from the 2019 16 million tonne crop (1.7 to 2.6 million tonnes) – depending on whose figures you believe – does not look so big after all! Further, if the remainder of the winter wheat crop cannot be planted by February, it’s conceivable that this year’s surplus will need to be carried forward to cover next years deficit. Winter barley is better placed with up to 80% planted. In many cases it’s emerged already.

It’s pointless talking about oilseed rape plantings. I know of one farmer who has planted his crop twice and ripped it all up already, sufficient to say, not only will there not be enough UK oilseed available for this year’s demand, next year is already going the same way!

Weaker sterling needs to be the trigger to sell. You could argue that, our mammoth effort in exporting 1.1 million tonnes of UK wheat by December, would have meant a tighter UK wheat market anyway. That is a big factor, but the reality is the increase in old crop wheat value, since 31 October, has made us less competitive for export. There are cheaper origins than the UK – that was not the case last month. If you add farmer retention – because of being too busy trying to drill – floods causing livestock to be brought in early, with some feed compounders coming in to buy extra spot supplies, you have a perfect ‘mini storm’ of demand exceeding supply – well for now anyway. I said last month that “I don’t see cereal prices falling short term”, and they have improved in the last month, a lot on new crop.

But, we all know it won’t last forever. For now, forget about the UK old crop feed wheat surplus – which is still chunky. The world still boasts a residual record stock of 288 million tonnes. That usually means we can have a modest crop reduction – like Russia losing 30 million tonnes of wheat in 2018 – and still have enough in stock to prevent long term price increases. So with that bearish back stop, selling a percentage, say 10%/20% of wheat you have managed to plant, with the prices for Oct/Nov/Dec in the £150’s has to be right. If that is your first – and ultimately your worst sale – that will be pretty good.

Historically selling new crop forward at £150 plus has proved to be the right thing to do. Barley is more tricky, because the forward new crop values are not that good compared to wheat. If we do only have a 12/13 million tonne wheat crop, I would expect the differential between wheat and barley to narrow.

The UK wheat could move again to import parity, rather than export parity, which should imply a firming of price. But beware, don’t forget we only had about 13.5 million tonnes from the 2018 harvest, and while we had a firm market for a few months after harvest, between January and June 2018, the wheat and barley price collapsed – because about – 2.8 million tonnes of maize was imported into the UK. It was thought in June this year – a bit like our wheat now – that because of supposed late plantings, the USA maize crop would be much reduced, but it turned out to be a near record! So nothing lasts forever. There is always someone producing maize cheaply enough in the world, who cannot wait to undercut the UK cereal market!

In theory we should be able to export to the EU up to 31 January tariff free. I have sold some more boats of malting barley, believing that to be so. If we have the current government returned with a working majority, we should be able to accept a deal by 31 January. This would get us into the transition period, allowing us to carry on trading as now, up to the end of 2020. Personally I cannot see all the trade agreements being completed by then, but at least we should be able to trade up to December 2020 with confidence.

I would like to wish you the compliments of the season, and a happy tariff free New Year in 2020.


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