Old crop wheat futures are now £8 up on the low reached in March, and £10 up on the new. Also at long last the euro/sterling exchange rate has improved; having touched nearly 70p, it’s now recovered to 73p.
We mustn’t get carried away; but since January, when attending farmer meetings and explaining the reasons for the post Christmas depressed market, I have felt as though I was addressing a man struggling in the sea and describing the water to him as he was drowning. Everyone attending those meetings will know that I have remained optimistic, and have been looking for this up turn.
The immediate reasons are there is very dry weather in the United States – Kansas, Oklahoma – and Russia. Not a real drought yet, but concerning for the Russians, who, as I have stated in previous editions, say they had the worst wheat crop establishment for 20 years.
Russia is such a basket case where quantitative and qualitative information is concerned. One report will say they still expect a 100 million tonnes 2015 grain crop, another only 75 million. We know they have to reseed some in the spring; but also know that the bankers are very reluctant lenders to agriculture, so they may not be able to finance inputs. All we know is it’s going to be very dry in Russia for the next two weeks at least.
I spent some time with Russians at a world conference last week. They are concerned that the old crop export tax, which is effectively an embargo, could carry over to new crop. Also, there is impasse upon the sanctions negotiations. Maybe Russia won’t be a serious export player at all next year.
The big international hedge funds are all short of wheat, believing the hype about massive world stocks to be added to a more normal 2015 harvest. They must be getting uncomfortable now; and being greedy they have missed the bottom of the market. Closer to home I am pretty sure that while end users may have covered requirements up to new crop, the merchants who made those sales are still short.
So there are justifiable causes for the market to recover for the time being, which it has. But on paper we still could have an exportable surplus of two million tonnes of wheat to shift over April to June. However, our carry out is only expected to be 1.6 million tonnes. But that could increase without storage difficulty to 2.5 million tonnes, which we have carried over to new crop before. Certainly if the wheat market remains inverse – that is the new crop is worth more than the old – there could be justification to do that.
But, there is a much bigger picture to consider. Suppose we have reached the bottom of this last 18 month cycle, of low commodity values worldwide? The warning signs are there: US farmers have planted less winter wheat, maize and soya, because they cannot make any money growing these crops. In total four million acres of American arable production have gone missing. It remains to be seen if late spring plantings of something will change any of this, but right now fallow looks the best bet in the states.
So, to quote my favourite Briton, Winston Churchill, who, after our victory at El Alamein said “now this is not the end,” “it is not even the beginning of the end”, “but it is perhaps, the end of the beginning.” Applying this to the grain trade, it may be the short term end of low, below the cost of production, market prices; but also it could be the start of a worldwide recovery of commodity prices.
The European Union continues to dish out export licences: the total is now up to 23.7 million tonnes for the 2014/2015 harvest. So we have a lot of exports to execute, but there is optimism about further sales yet from the EU helped by the weak euro which is down to 2003 levels.
I cannot believe that the Greek “Odyssey” on membership still hasn’t been resolved: that should happen in April. Meanwhile, UK election fever mounts. The Scottish National party has been suggesting what it might do if it were to hold the balance of power, with say a minority Labour government. This is sufficient to send some financial institutions running for cover. So don’t be surprised if sterling falls a bit more before the election. Currency remains a big ticket item in determining grain prices.
In summary, I think in these times of surplus, you only get a couple of times in the year when it’s unquestionably right to make grain sales. Notwithstanding a crop disaster somewhere, you are now heading into one of those opportunities, whether it’s selling the remainder of your old crop or starting on the new. I hope by the time you read this, the market will have moved on a bit more to at least £130 for new crop wheat.
On a lighter note, the cynic in me questions what Richard III (being buried again as I write) was actually doing in a car park in Leicester? How do they know it was him? Was he caught on CCTV? Maybe he was the first recorded victim of overzealous wheel clampers.