Grain

    Grain market update

    Just before the release of the USDA supply and demand report on 9 November the London futures price rose to the highest price ever for the closest contract at £221.25 for November.

    For many this was a time to sell.  As luck, or analysis would have it, the USDA forecast was negative for price and the market fell, before recovering further in recent days.

    View the graph: May 2013 London wheat futures price showing peak and fall following publication of USDA supply and demand report

    There is still a lot of uncertainty and it is possible  the price may  recover later in the year. A lot depends on whether the higher price will constrain global consumption (in practice feeding to stock) and result in global consumption of grains falling below last year’s levels as forecast by the USDA. It has happened before, but it is very unusual.

    In addition, in the last two high priced years (2007/8 and 2010/11) prices were not transmitted evenly across the world. For example, rises in India and China were very small, presumably a function of both countries relatively high grain stocks. Thus, for these consumers consumption is unlikely to be reduced. However, based on the FAO meat index meat prices have not risen to date.

    It is therefore perhaps possible that a reduction in grain consumption has been achieved by disposal of breeding stock with the consequent potential for a rise in prices next year, and a reduction in grain use in the short term. At present, we feel that there is no clear steer on the market movement for this year’s wheat crop.

    In contrast, the post 2013 harvest price looks interesting. The following graph shows that since 2005 the forward and close price has tended to rise. The forward price reflects the anticipated supply and demand situation based on virtually no meaningful data other than the current price, trend lines and a ’hunch’.

    In the long-term, forward price is most likely to be slightly above the final close price but occasionally a long way below the close price.  However, the reduction in subsidised exports, tight supply and change in the parties holding grain stocks, has meant that this equilibrium has yet to be established  and consequently prices are still tending to rise. Thus, it would appear that a high priced year is most likely to result in a high forward price.

    View the graph: November wheat futures at close and 12 months earlier

    The November 2013 price is way above the long term upwards trend as illustrated by the black line in the graph and higher than the average price achieved at market close. Part of the reason is almost certainly the high (but falling) current price but also the prospects for the USA wheat harvest.

    The USA is the major exporter of wheat in the world although production is below China, India and the EU. However, US wheat exports are relatively small compared with the volume of maize exported. The USDA produces a weekly estimate of crop condition and the current score at 36% of winter wheat crops classified as good or excellent is the lowest ever.  In contrast to the analysis of US maize crop condition where the indication was that the maize yield would be lower than estimated, and that the price would rise (as proved to be true on both counts), there is far less certainty that the wheat crop will be particularly low yielding as the lack of a trend in the graph below shows. Conversely, in some of the lower yielding States if the crop does fail, and replanting is with maize, there is a reasonable chance that total grain production will actually increase.

    View the graph: Percentage of US Winter wheat scored as good or excellent against yield deviation from trend

    There may yet be a disaster and the November 2013 price may rise well above current levels but information is unlikely to be available to show this until the second half of 2013. We believe it is most likely that wheat prices will fall £20 to £30 per tonne but there is a very slight possibility of an extraordinary spike (might be as high as £260 per tonne) with the desperate need to replenish very low Soil Moisture Deficits across large areas of the USA being a factor.

     
     

    Key contacts

    Andrew Wraith

    Andrew Wraith

    Director
    Food & Farming

    Savills Lincoln

    +44 (0) 1522 508 973

    +44 (0) 1522 508 973

     

    Steve Hollis

    Steve Hollis

    Director
    Food & Farming

    Savills Salisbury

    +44 (0) 1722 426 853

    +44 (0) 1722 426 853

     

    Keith Preston

    Keith Preston

    Director
    Food & Farming

    Savills Oxford

    +44 (0) 1865 269 170

    +44 (0) 1865 269 170

     

    Ashley Lilley

    Ashley Lilley

    Director
    Food & Farming

    Savills Cheltenham

    +44 (0) 1242 548 012

    +44 (0) 1242 548 012

     

    Giles Hanglin

    Giles Hanglin

    Director
    Rural Research

    Savills Margaret Street

    +44 (0) 207 016 3786

    +44 (0) 207 016 3786