Poor crop prospects

    Cereal Markets

     

    The fall in cereal prices six weeks ago and the more recent rise have taken many by surprise.  The reasons for both price movements are discussed here with a view to informing marketing decisions in future.

    The USA is the dominant global grain exporting country, topping the export ranking for wheat and maize, so their influence on price is important.

    USA crop and price development suggested:

    • It was extremely unlikely that the USA would suffer a repeat of the exceptional drought of 2012 so it was difficult to justify the high forward price at December 2012 for December 2013.
    • High prices meant that farmers globally were likely to plant as much as possible and apply a more rigorous crop protection programme than usual (globally our problems in North West Europe had little influence).
    • Poor US wheat condition recorded in the Autumn has historically had little impact on final yields and the remnant of the drought was unlikely to curtail the low average yields usually achieved.
    • The first estimates of 2013 maize production confirmed the expectation of recovery with no major shortfalls predicted in the production of other grains.
    • The first crop condition reports for maize showed a relatively high proportion of the crop in good or excellent condition.

    In reality, the drought has never fully receded and spring planting was delayed (increasing the price in the late spring before falling again).  However, according to the US Commodities Futures Trading Commission (CFTC) an unusually large number of traders classified as ‘speculators’ went short on the grain markets (i.e. they sold crop) with the expectation of buying crop back to supply the sale contracts once the price fell.

    More recently, exceptionally high temperatures were forecast and drought conditions returned.  By this time, many of the speculators were showing a good profit and rather than risk losing the accumulated profit, many reacted quickly to the uncertainty and purchased crop futures to secure the profit.  This meant a relatively rapid price rise.

    Looking forward, the probability is that prices will again fall.  Our analysis shows that historically US maize yield has been determined relatively early in the season with later updates on condition being less important (in contrast to, say, wheat where harvest conditions can have a strong impact on yield).  Historical experience does not always hold for the future and this year may yet prove to be a production disaster – but it is unlikely.

    Confidence in relationship between final US maize yield and USDA crop progress report for period 1986 to 2012

    View graph

    The UK

    The UK market usually follows the US market but there can be subtle differences.  When UK wheat produces an export surplus, poor quality can mean that the UK crop tracks the (usually) lower priced US maize crop.  This year, the UK is unlikely to produce a crop surplus so as we have previously described UK prices are likely to be up to £17 per tonne higher than the globally traded crop.  This makes it extremely unlikely that the price will fall below £130 per tonne this year.

    Key Message

    Fortunately, some were able to secure options for November 2013 in the week of the Cereals event for £8 per tonne.  Where put options were taken out quality premiums were in addition to this base price and there was no risk of over-selling. Whilst not the preferred route of many farmer sellers, the use of options in a volatile market and with some uncertainty on actual production have proved a worthwhile route this year.  Of course, those brave enough to have marketed in December 2012 would have netted, pre-transport, nearly £200 per tonne or a minimum of over £175 if covered with an option.

     

     
     

    Key contacts

    Andrew Wraith

    Andrew Wraith

    Director
    Food & Farming

    Savills Lincoln

    +44 (0) 1522 508 973

    +44 (0) 1522 508 973