Market View December 2013

Market View

A look at the performance of the grain, livestock, oilseed and dairy markets.

 

Grain Markets

Wheat

The latest UK forecasts from Defra show lower wheat production in 2013 than following the dreadful 2012 harvest, but above average yields and high spring barley plantings have resulted in higher total grain production than in 2012.  According to the EU Commission, EU total grain production is also up on 2012 and stocks of all grain types are expected to recover.

UK imports of wheat for the first three months of the marketing year were exceptionally high and are already more than 50% of the initial annual HGCA estimate, which was published on 27 November. If imports from now on fell to the level of  2011/12 (the lowest total imports within the last five years) we would still be importing more wheat than the initial forecast – but not by much.

Graph 1 UK wheat imports

UK wheat imports

 

As the graph shows, the rate of imports has historically been predominantly linear over the year, even in 2012/13, although there is no reason to assume that this will be the case this year.  A key factor will be whether imports to date can be used over the remainder of the year to supply the appropriate quality wheat for the rest of the year, or whether it has already been consumed substituting for UK wheat. The rise in the milling premium over recent weeks perhaps suggests the latter.

With total grain availability in the UK higher than last year, it may be hard for wheat to sustain a premium over other grains and, as at present, a premium over US wheat. However, consumption of wheat is also strong and compounders do not appear to be swapping to other grains yet. 

Wheat prices have not fallen as much as was anticipated in July and a fall in price will only occur if there is a move from wheat towards other lower priced feed grains leaving a wheat surplus. 

The first Strategie Grains report for 2014 included a prediction of the EU wheat area, at 4% above last season. The HGCA suggests the UK wheat area is 22% above 2012/2013 and higher than 2011/12. If average yields are achieved, the UK will be again a  net exporter of wheat. This would be expected to lower prices in the extreme by £20/tonne with the discount depending on location and quality. 

According to the USDA, the US winter wheat crop, has had its best start for several years with latest reports putting 65% of the crop in good or excellent condition. However, our analysis shows that wheat condition at this time of year has historically had no correlation with final production.

Reports from the former Soviet Union, suggest the good weather during October allowed drilling to catch up in both the Ukraine and Russia, this could lead to a larger planted area but one more heavily reliant on a benign winter. However, frost kill is a complex issue and the most forward crops are often damaged most, although risk will be reduced by progressive exposure to cold conditions. Frost lift is sometimes an issue and this will affect the more backward crops. In the extreme, it may be too cold to allow for germination.

On balance, we feel that the price of wheat will come under pressure by the end of the year as a consequence of supply and the prospects of sterling strengthening against the dollar as US quantitative easing is reduced. However, futures prices post the following harvest tend to reflect the spot price at this time of year and there is no strong indication of direction of price movement post harvest 2014.  

Grain Demand

The most startling aspect of the current USDA supply and demand forecast is the increase in grain demand compared with the 2012/13 harvest year.

Graph 2 The deviation in consumption from long-term trend

Deviation in consumption from long-term trend

 

Graph 2 shows the deviation from the 50-year linear trend. The red point is the 2012/13 estimate and the final yellow point is the extraordinary increase above trend.  Removal of biofuels demand would leave consumption below the linear trend. Current consumption would still be below the trend if it were not for biofuels and despite the global increase in wealth and population.

Use of maize in US ethanol production has had a significant impact on additional grain demand over the past 10 years and has maintained consumption on the long term trend line. Growth in bioethanol production from grain over the next 10 years in the USA is expected to be negligible.

The use of maize for ethanol production in the US has declined from the peak partly in response to lower fuel consumption but also due to poorer profitability in a period of high maize prices. The US operate a trading system that allows blenders to offset earlier over supply against under supply. Bioethanol inclusion rates are contained by the ‘blend wall’. While most cars will run on bioethanol inclusions over the current 10%, some older cars may not. As a consequence petrol stations would need to stock two blends and in doing so invest in infrastructure. This has led to the Environmental Protection Agency, which administers the scheme, putting forward proposals to reduce the mandated use of bioethanol .  

The EU Commission has also put forward a proposal to reduce renewable fuels in transport fuels in the EU to the EU Parliament and while the motion gained a majority of votes, it failed to gain sufficient votes to proceed without resubmission. It is unlikely that the reduction will be adopted.  

Oilseeds

Oilseeds prices are likely to show a period of relative stability until indications are obtained for the South American harvest next spring.  The US soya bean harvest is now over 90% complete and there are no indications to suggest any surprises with the final 10%.

Milk

World prices for butter, skimmed milk powder (SMP), whole milk powder (WMP) and Cheddar cheese rose in October compared to September and were significantly up on last year.

Rising UK and global dairy product prices suggests that milk prices will remain firm in the short-term, however, they may be reaching a ceiling. Meanwhile, the dramatic dumping of butter milk in New Zealand is not an indication of excess supply over consumer demand but a consequence of insufficient processing capacity following an exceptional increase in the spring production peak.  

 

Graph 3 The dairy market

 

The dairy market

 

Livestock in the year ahead

If the recession really is over, demand for meat and meat products is likely to outstrip supply in the short term until breeding stock numbers increase and so the next 12 months should remain profitable. However, different sectors can respond at different rates and any increase in meat demand is likely to be met first by poultry, then pig and finally beef producers.

An analysis of UK Barley Beef margins over time shows significant volatility and demonstrates the opportunity to manage industry risk. The calculation is based on monthly prices and a 3% rise in fixed costs, but nonetheless the volatility is startling.

Graph 4  An analysis of UK Barley Beef margins

An analysis of UK Barley Beef margins
 

Key contacts

Andrew Wraith

Andrew Wraith

Director
Food & Farming

Savills Lincoln

+44 (0) 1522 508 973

+44 (0) 1522 508 973