Crop markets

Crop markets

Speculation on the impact of possible events such as a fall in US crop area, frost or drought, rather than actual reduced supply tends to drive market prices in March. These provide opportunities to sell – as traders say: sell on rumour and buy on fact.

 

Currency

Since crop is traded in dollars, exchange rate is a crucial determinant of crop price. The strong dollar relative to sterling has kept prices relatively high although not as high as prices in euro terms.

 
Graph 1: Dollar Sterling Exchange Rate

While sterling has weakened against the dollar virtually linearly since 1 August, the graph shows that sterling strengthened soon after the start of this year (reducing sterling export prices and, indirectly, internal prices) before weakening again at the beginning of this month. 

Supply and Demand

The latest DEFRA/HGCA supply and demand estimate provides some guidance as to whether there is likely to be a crop shortage or surplus towards the end of the marketing year and thus a rise or fall in price. The most recent report for 2014/15 was produced by DEFRA in March:

 
Defra UK Wheat Balance Sheet Estimate January 2015 (‘000 tonnes)

Perhaps with the benefit of hindsight we suspected that the annual consumption figures estimated in January had been overstated. The manufacture of ethanol from wheat is not profitable at present and return is unlikely to cover the operating cost.  Ensus has temporarily closed and Vivergo down valued their holding by £98 million. Livestock consumption also looked to be overstated. We expect that the surplus available for export and stocks could be as much as 5.5 Million tonnes – the HGCA estimate is below this but getting closer.

However, the most important concern is export progress. Imports to date are slightly above expectations but the difference is small. In contrast, the January exports were lower than in December, making it less likely that the exports needed to remove the UK grain surplus would be achieved. The graph below shows exports to date and estimates for the remainder of the year. The projected exports are based on the most recent 10 years where there was an exportable surplus. The maximum and minimum estimates are the highest and lowest rates achieved on average for the remainder of the marketing year in these years. Total exports have been higher in the past but only in those years with higher exports in the first half of the year (see graph 2). The logistical capacity can limit export potential in any one month.

 
Graph 2: UK Export Progress and Estimates for the current year

It looks unlikely that exports will reach the 3 Mt mark and if our estimate of reduced consumption is correct it would suggest closing stocks of at least 2.5 Mt. Put in context only one year in the last 10 has had higher closing stocks (2.76 Mt in 2008/9) and there is at least a possibility that closing stocks this year will be even higher than the 2008/9 record.

This is likely to mean pressure on wheat prices will increase, potentially depressing prices below internationally traded values as the season progresses. This might result in a widening difference between old crop and new crop prices, particularly if there looks likely to be a global shortage of grain in 2015/16. Forecasters remain split on global prospects for grain production – hardly surprising given that US maize is largely unplanted.

 
 

Key contacts

Andrew Wraith

Andrew Wraith

Director
Food & Farming

Savills Lincoln

+44 (0) 1522 508 973

+44 (0) 1522 508 973