Poor crop prospects

    Do poor crop prospects mean a price bonanza?

    There is little doubt that the UK will be a net importer of grain next year. DEFRA has produced its crop planting estimates for December and it will be a surprise to no one that the outlook is not good.

    While there has, no doubt, been some wheat planting since the survey took place it is unlikely that the yield will be even as good as the average and possibly below 2012.  Twelve million tonnes of wheat for 2013, against 2012 production of 13.3 million tonnes and an average of 14.7 million tonnes for the five year priors to that, looks if anything optimistic.

    Crop condition in the UK continues to be affected by the cold weather and lack of any appreciable growth during one of the coldest March months on record is not helping. The hope for stressed crops coming out of winter was a helpful spring to make the most of the crops in the ground. However, agronomists are now scratching heads as to how crops will respond when they finally do grow.

    After last years experience and more bearish factors in the market around expectations of global production increases, attention is turning to marketing crops for the coming year and indeed what amount of crop there is to market. There cannot be an assumption that crop shortages in the UK will automatically lead to significant price increases after harvest 2013.  Making the best price out of a lower yielding crop is the preferred outcome, the real risk is a poor price from a poor crop.

    The prospect of being a net importer turns attentions to what impact this will have on prices. The general view is that when the UK moves into being a net importer the price benefit is around £15 per tonne for wheat. The benefit is not shared across the whole country as proximity of production to end user, distance to port, freight and haulage costs all have an influence. The issue will be a £15 benefit over what base price.

    Marketing strategies to limit risk are a possibility with some looking at the current forward market for grain and accepting that a forward price for harvest at around £180 per tonne, historically, is not a bad place to be. Were there certainty of yield, locking in 25% of crop production would seem sensible.

    Lack of certainty over both price and yield are leading some to look at different strategies of selling. The use of put options to effectively lock into a future price without selling physical grain can be used to manage risk of a price fall where there is uncertainty over grain production levels. Similarly committed forward physical sales can go in tandem with call options to benefit from the market if prices substantially improve.

    Options come at a cost and clear understanding and advice on strategies to meet individual needs is imperative. Volatile weather and crop prices certainly warrant further investigation on the sales process depending upon the individual business approach to risk.

     
     

    Key contacts

    Andrew Wraith

    Andrew Wraith

    Director
    Food & Farming

    Savills Lincoln

    +44 (0) 1522 508 973

    +44 (0) 1522 508 973