Markets

    Markets

    We have recently experienced some of the most turbulent months in market prices. Let’s draw out some of the key strands, which impact on both crop and livestock sectors.

    Client farmer: I am not complaining but the wheat price has already risen a lot this month.  I think I remember you saying, perhaps only two months ago, that you thought the price was most likely to  fall.  Were you wrong or do you think this might still be the case?

    Savills Research: I still think that a fall in price was more likely then, and I emphasise most likely, but we have to remember that a lot of world production is asymmetric. This means that for many grain producers there is not an equal chance of production being above or below the trend-line. In many areas, grain production fluctuates around the trend line by about plus or minus 15%.  However, it will rarely, if ever, go above 15% to 20% but very occasionally, it will fall 20% below the trend line, as a result of flood or drought. Thus, it is possible to have no crop but not usually possible to have two grain or oilseed crops in the same year.

    Client farmer: You mentioned yield trend, and by implication an upward trend, but UK wheat yields have been static.

    Savills Research: That is correct and static wheat yields are also true for most of western Europe but globally even wheat yields have been rising and total global grain yields have risen more.  We are more likely to have record grain production globally, than not.

    Client farmer: OK.  Back to the big question. Are you saying that one of these occasional large downward blips in production has occurred?

    Savills Research: Not yet but it looks highly likely. US maize is the dominant world export crop with exports dwarfing cereal exports from other trading blocks.  This crop year the US maize crop was planted early and early crop progress reports showed an excellent crop and these two factors together gave a reasonable correlation with an above trend yield – in contrast to last year when the yield was slightly below trend. Over the last month, or so, the US has had little rain and dramatic temperatures in many areas.  Crop progress reports show an almost unprecedented decline in crop condition.  Furthermore, the crop is silking (the start of pollination) which is a really sensitive period to high temperature and drought.

    Client farmer: So are high prices just reliant on a US maize failure?

    Savills Research: No, although at the moment it is the most important potential factor so far. In addition however, the western European maize crop is late, there are floods in Russia (incidentally a reversion of the drought speculators were dwelling on earlier) and we have received early reports that the weather is not too good in Australia so another exceptional crop is beginning to look less likely.

    Client farmer: So given that the US soyabean crop is slightly later than the maize crop the impact so far has been slightly less but barring a change in the weather the soyabean crop may go the way of the maize crop. And given the poor South American crop earlier in the year the oilseed shortage is likely to get worse.

    Savills Research: It may well do. But the question is what to do about it?

    Client farmer: Well, the wheat sales made to date are covered by an option and these are already making money, I could already close out sales to date at over £165 net.  I shall watch the market for a little before making any more sales. I feel £230/t for wheat is on the cards if the hit on production is as significant as it appears.  Oilseed rape is harder to judge and harvest prices may well slide yet.

    Savills Research: It will be interesting to see if the impact on price is large enough to re-open all those political debates over, say, food and fuel, and in terms of the CAP reform, debate over the environmental focus area versus food. However, we must not forget that high grain prices are bad news for most other sectors and exacerbate the frightening fall in milk prices in the past month.

    Client farmer: I agree.  It is such a long production cycle and dairy producers have so few alternative options, especially to maintain the same level of employment.  I know that pressure on milk price was predicted but it is difficult to react.

    Savills Research: Yes it is and it is made worse by the lack of notice of price changes.  This is so common through the livestock sector – pig and poultry producers have much the same problem – I am surprised it has been allowed to continue for so long.  It would soon end if buyers and retailers were unable to source product –they need something to sell as much as the farmer does.

    Client farmer: It really brings home the fundamentals of farm consultancy – only do what you can measure, and assuming you have a good handle on cost of production, only produce if you have competitive advantage.  And always put a marker down to ensure that if the sector is in decline, you know when it’s time to look at other options for the business. 

    Savills Research: I know what you mean. Dairying and most other sectors are part of a global market so anyone can find themselves with impossibly low prices.  It worries me that the CAP reform may be finalised in a period of low dairy prices.  Most other countries are likely to use the provisions in the reform to prop up their dairy producers using cash extracted from the arable sector and while Scotland might follow suit, I can’t imagine England doing the same. 

    Client farmer: Just going back to grain prices. Mixed farms are occasionally forced to sell grain at harvest and then buy in feed in, say, January by which time the price can be very different. These two decisions (to sell grain and buy feed) really need tying together.  I know some farmers who also use options so that when purchasing feed the price paid is the maximum. Therefore if market prices increase above this level they are in pocket and conversely if prices fall the option refund, apart from the set-up cost (insurance) will reduce the overall feed cost. For pig and poultry producers it seems a small insurance cost. 

    Savills Research: I agree. Just to conclude it is worth observing that while cattle prices remain strong sheep prices are now some way off the top even allowing for seasonality.

     
     

    Key contacts

    Ashley Lilley

    Ashley Lilley

    Director
    Food & Farming

    Savills Cheltenham

    +44 (0) 1242 548 012

    +44 (0) 1242 548 012