Grain

    Commodity Markets

    The grain markets have been relatively febrile in recent weeks, with everyone looking over their shoulders at 2007/08.

    There are a number of factors which counteract each other and the price moves reflect whichever impact is believed to have been under-estimated in the most recent USDA supply and demand estimates (12 September 2012). At current levels of supply and demand, a small additional reduction in supply is likely to have a particularly big impact on price.

    The main dynamics on both sides of the balance are:

    UPWARD PRESSURE ON PRICE:
    • It is believed that the proportion of US maize which will be abandoned before harvest is even higher than anticipated by the USDA.
    • A number of recent national forecasts have been more pessimistic than have been allowed for in the latest USDA estimates. For example, the Australian (ABARE) wheat production estimate for Australia is 22.542 Mt while the USDA estimates 26 Mt.
    • Estimates of grain consumption for 2012/13 have been understated. Consumption has been estimated at below last year for total grain - this is possible but unusual.
    • Analysis of positions taken by US Non Commercial Traders (traders who do not trade the physical crop) suggests that they expect the market to rise since they have more long than short positions i.e. more purchased crop than sold crop.
    • China and India hold large strategic reserves of grain which are counted towards the total global stocks but which are not available to be traded, and hence not accessible to countries looking to import grain to buffer any shortfall in production. These stocks could be used to keep down local price and maintain consumption as occurred in both the previous price spikes.
    • UK wheat yields are expected to be poorer than average resulting in the UK being a net importer of grain. Prices will therefore increase In areas which flip to export parity and may be above traded prices, even if quality is poor. However, East Anglia is likely to remain a net exporting region.

     

    DOWNWARD PRESSURE ON PRICE:
    • The US maize crop is arguably the most closely monitored crop in the world. However, it is possible (although unlikely) that the severity of the effect of the drought on US maize production may have been over-estimated.
    • It is very unlikely that global total grain or wheat stocks will fall to the levels seen in 2007/08 and therefore the price of the commodities (in $) are not expected to rise to the levels seen in 2007/08 either. Relaxation of EU import barriers may not lower price as it did in 2008 because feed grains such as maize are at even higher price than wheat.
    • The US ethanol mandate has a significant bearing on world maize consumption. If it was relaxed it would immediately result in oversupply and a fall in price. However, this is unlikely since many of the ethanol-producing states are swing states (which change allegiance between the Republicans and Democrats).
    • Economic growth in China has slowed, potentially reducing growth in demand (but see note above).
    • If the dollar were to weaken (and the USA has had some discouraging economic data recently) this would reduce sterling prices.
    • Current high market prices for grain should theoretically stimulate larger areas to be planted next season. Maize is planted in South America in September – November, although currently hampered by rain in Argentina.

     
     

    Key contacts

    Andrew Wraith

    Andrew Wraith

    Director
    Food & Farming

    Savills Lincoln

    +44 (0) 1522 508 973

    +44 (0) 1522 508 973

     

    Steve Hollis

    Steve Hollis

    Director
    Food & Farming

    Savills Salisbury

    +44 (0) 1722 426 853

    +44 (0) 1722 426 853

     

    Keith Preston

    Keith Preston

    Director
    Food & Farming

    Savills Oxford

    +44 (0) 1865 269 170

    +44 (0) 1865 269 170

     

    Ashley Lilley

    Ashley Lilley

    Director
    Food & Farming

    Savills Cheltenham

    +44 (0) 1242 548 012

    +44 (0) 1242 548 012

     

    Giles Hanglin

    Giles Hanglin

    Director
    Rural Research

    Savills Margaret Street

    +44 (0) 207 016 3786

    +44 (0) 207 016 3786