Grain markets dip

Grain markets dip – 9 heads out of 10

Have you ever tossed a coin 10 times and correctly predicted a head or tail nine times out of ten?

 

 

The May edition of USDA’s World Agricultural Supply and Demand Estimate (WASDE) has correctly predicted the direction of wheat stock changes (and thus price) for the following marketing year in nine out of the last ten years. This publicly available information should at least influence grain marketing decisions – to be right nine times out of ten is a good start to any grain marketing strategy.

The May 2014 forecast is described, even by USDA, as tentative since it is based on trend yields. However, if the forecast was viewed as meaningless the market is unlikely to have responded. In fact, in most years subsequent forecast updates have confirmed the direction of the following stock change and the change, up or down, has increased. Thus, when the forecast surplus has increased, prices have fallen further - at least for a period. Over the last 10 years stock changes and prices have moved an equal number of times in each direction although the average price increase (reflecting falling stocks) has been greater than the average price fall.

In some respects this year is much like 2008, with the ratio of estimated year end stocks to consumption being roughly similar.

Stock-to-use ratio

  2008/9 Forecast 2014/15
All grains 21.2% 21.5%
Wheat 26.5% 27.7%

Perhaps not surprisingly prices are similar:

 
Graph 1: London futures prices for March 2009 and 2015

While sterling had been stronger pre-2008, the dollar/sterling exchange rate is similar in both periods. However, while the USDA wheat and total grain supply and demand estimates for 2008/9 showed an increase in supply over demand compared with the previous year, the ratios in May were much lower than they eventually proved to be. This was partly as a result of an underestimate of opening stocks and in part an over- estimate of consumption.

Therefore if current forecasts prove to be close to the final estimates the slump in price looks likely to continue. Prices are only really likely to rise as a result of political turmoil (anywhere) or production issues in South America.

 
 

Key contacts

Andrew Wraith

Andrew Wraith

Director
Food & Farming

Savills Lincoln

+44 (0) 1522 508 973

+44 (0) 1522 508 973