By the time you read this, Israel will probably have commenced its ground offensive in the Gaza Strip. Like Ukraine, this will be another conflict where neither side can win and neither can afford to lose. Indirectly, escalation can affect our grain trade. If Iran decides to support Hamas, oil prices will rise as 20% of the world’s oil has to pass through the vulnerable straits of Hormuz, so freight rates will increase.
Despite a seemingly never-ending supply of Russian wheat, the world markets are beginning to tighten. As the Chinese economy recovers, it has recently been active buying maize and wheat again and not just from Australia, where a much lower wheat crop and logistical issues with barley mean they cannot continue to “keep going to that well”.
Most recent attempts by the ‘bulls’ to get the markets moving positively have been snuffed out, usually by reports from the USDA or other agencies about crops being better than expected. However, futures markets have been stubbornly refusing to go below some critical chart points.
These markets have now seen a ‘bounce’ from these lows, but any recovery is still very fragile. You must pay respect to the so-called ‘big hedge funds’; they have gambled big time in the past 18 months, correctly anticipating either larger than expected world crops or, more significantly, the fall in demand.
The economic recovery from the pandemic has been slower than expected, and just when it got going it was hit with huge inflationary costs and, worst of all, interest rates which have rocketed. So, almost irrespective of supply, the demand has fallen away.
A good example of this is the malting and brewing industry. This year the brewers decided that they would try to pass on the high extra energy and other inflationary costs to the beer drinkers. Well, that hasn’t worked! Instead of drinking out, consumers are buying beer as cheaply as possible in supermarkets and drinking at home. This is one reason why many pubs no longer open on many days in the week and closures continue, so in a year when Europe has had one of its poorest malting barley crops, demands for the end product has fallen. Brewers, by trying to maintain margins, have created profit-led inflation, but the strategy of passing their costs to the end user has failed so far.
Instead of an incrementally improving market for malting barley, which you might expect in circumstances of reduced EU supply, you have a stop, start affair. Big brewers don’t want to break ranks and price malt for fear of making themselves uncompetitive with other brewers. Maltsters are limited to what they can buy. Meanwhile, premiums remain high.
Two things will happen. The UK will continue to export its surplus which, I said last month, is probably already committed up to June 2024. Reluctantly, brewers will have to come in to price malt. On farm, quality will continue to deteriorate as the original harvested quality is nowhere as good as last year, so be vigilant about moisture, temperatures and bugs as you can only mess it up from here. And the loss of premium will be immense.
Also, last month I presaged the AHDB announcement that the UK wheat crop was only 14 million tonnes. It’s encouraging that UK shipments of wheat to our usual EU outlets have re-commenced. It may be that the stocks of feed in northern and eastern EU countries are beginning to dwindle. My view remains that if you have the quality, taking the high premiums for milling wheat and malting barley must be right. Feed wheat and barley require a longer burning fuse, but take comfort from the wheat crop figure, which means the UK surplus is modest.
As I said, the hedge funds have probably read the world market better than the UK grain trade in the past year or so, but the Israeli/Arab conflict will be causing them concern because of their mostly short positions. Quite apart from the oil supply issue, a large amount of the world’s internet traffic travels through the Red Sea and Egypt, so it is vulnerable to disruption.
Russia also may be thinking that supporting its Arab allies may distract the world from what it’s doing in Ukraine. All of this has potential for grain market volatility, so be prepared to sell into any sudden large market spikes.