At the end of May my advice was ignore the old stock market adage of sell in May and go away instead just go away and sell nothing for the time being.
This proved to be prophetic. The third week of June saw UK, French and United States wheat futures all trade at significant market highs giving the opportunity for further sales of new crop wheat to be made. The spike was prompted by real (or perceived) concerns about the US spring wheat crop and the very dry and hot weather in north Dakota.
About 33% of US wheat is spring wheat. More than once I have highlighted the huge hedge fund short in Chicago wheat futures. This made matters worse as funds threw in the towel and felt compelled to buy back futures – often not because of a lack of resolve about big wheat stocks and prospective harvests. But when they are 20 million tonnes short, an adverse movement (requiring margin calls to be paid) of say £1 per tonne takes some finding. Yes, there were a few other hot spots of high temperatures and dry weather identified, from Canada, Australia, Black Sea, western Europe, even a bit into Russia. But in June what do you expect.
I have been looking at all sorts of crops in the South East from wheat, barley, peas even soya beans, and they all look pretty good with cereals enjoying good grain filling conditions and getting the hours of sunlight that we so missed last year. The biggest difference is the lack of disease in all crops.
Last month, I suggested that feed barley was too cheap to sell forward, and so it was. However, one of the UK’s best geographical export customers, Spain, has come up short. It’s barley crop is down from 9.2 to six million tonnes and wheat down to 4.7 from 6.8 million tonnes. So our harvest barley calculates down to the Spanish Mediterranean on coasters and our wheat is too expensive to work yet.
So we have enough known unknowns to keep the market on its toes. If you ignore the recent outbreak of hot spot mania the background for world wheat has theoretically become more bearish with the United States Department of Agriculture increasing world wheat stocks to a record 261 million tonnes, as recently as this June. It will be interesting to see if they make any adjustments when the big world report is made: my guess is they won’t change much.
Notwithstanding any other left field happenings, it’s really all about the UK’s own crop from now on. On wheat, we are still in no man’s land. This means we are about £5 below import parity, so if we only get 14.5 million tonnes our wheat market could yet rise £5 before imported comes in.
Conversely if we produce 15.5 million tonnes we would have one million tonnes to export: to liquidate that, our market would need to drop by £8 to compete (to be at export parity). One big advantage is that the UK has lost its extra one million tonnes carry in buffer from old crop. Last year, this was 2.7 million tonnes and this year it is only 1.7 million tonnes.
In the ideal world I hope that you get a 2015 style mega wheat yield – it’s still possible – with wonderful ultra violet light from four in the morning until 9 at night. But, if you do I hope you will have sold two thirds of it at the prevailing market, up to and including the recent market highs.
I have to mention some politics. More than a year ago I wrote that the UK should never have been given the chance to vote for Brexit. That proved to be a huge mistake. However, the calling of the last election on 8 June was an even bigger mistake. The hung parliament result was because you had one party which thought it could not win the election and was happy to promise the electorate anything as it knew it would never be called upon to deliver.
The other party thought it couldn’t lose and was arrogant enough to threaten the electorate with every change from fox hunting, winter fuel allowances, free school meals (they stopped short at bringing back the death penalty) and surprise, surprise voters didn’t like it.
Re Brexit: at least all the rhetoric about cliff edges and hard Brexit has stopped which is good for our industry. Out best bet will be to play for time. After March 2019 we should ask to remain as members of the European economic area (EEA) while we continue to negotiate all the other immigration, customs stuff etc. The compromise is we put the divorce settlement on the table up front – we can’t dodge that anyway – and remain in the single market/ EEA for an agreed transitional period of say a another two years. Bear in mind the history of minority governments surviving is not good, so anything could happen. We need more time to sort this and we need to play for it.
