Annual investment allowance

    Grain Update

    One wobble and we all fall off


    The USDA produced their first forecast of supply and demand for the 2013/14 marketing year in May.  It is as always at this time of year, highly tentative and based on historic performance and planting intentions.  It becomes more meaningful when the global harvest starts in earnest, when results for the biggest variable, yield start coming through.  As it stands few should be surprised by the forecast: production in the USA, the number one grain producer, is forecast to have recovered following the severe drought last year.  As a consequence USA coarse grain production is expected to rise by 89.99 Mt compared with last year and global coarse grain by 125.02 Mt.  Not surprisingly downward pressure on prices continues.

    Compared with the current year, the USDA global forecast anticipates a substantial improvement for the supply of all grains.

    Forecast 2013/14 as a percentage increase on the estimate for 2012/13 - Graph 1

    View the graph.

    In addition, for all classes of grain, production is expected to be greater than consumption so stocks are not expected to reduce.  However, stocks are still tight and there is an important change in stockholders.  For example, wheat stocks held by India and China have increased from 24% of total global stocks in 2005/6 to 45% in 2013/14.  While only estimates, it is a fact that both countries trade a lower proportion of their crop than, say, the EU or USA. So by implication, supply is constrained by a greater volume than that  implied just because of the lower stock levels.

    The market is nervous.  Planting in the USA is behind normal, and while not a concern yet, it soon could be.  The biggest increase in wheat production is expected in the former Soviet Union and to a lesser extent the EU, but the Ukraine is suffering from the early stages of drought and the full impact of the European weather has not been fully taken into account.

    Grain market price movement on the horizon

    While the grain price, as might be expected, is drifting down, data from 2006 to date suggests that a major market movement is unlikely until June or July but when it does happen, the movement may be rapid – up or down.  Some comfort may be gained from the fact that prices have risen more often than they have fallen and in each case the percentage rise has been greater than the percentage fall.  The following graph shows the London futures price for March in each year for the period from January 2006 to 2013 relative to the January price 15 months prior to close (i.e. January in each trading year = 100%).  The current forward price for March 2014 is still comfortably within the expected banding.

    London wheat futures price for march in each year from January 2006 to 2013 relative to the January price 15 months prior to close - Graph 2

    View the graph.

    UK likely to be a net importer of grain this year

    The UK is expected to be a net importer of grain this year which will have some positive impact on prices. Even at this point, despite the reduction in forward prices, the post harvest 2013 price is still at a historically high level.

    Average March wheat futures price as at January in the previous year (before harvest) - Graph 3

    View the graph.