Market Commentary

Grain fundamentals are, by their very nature, a slow-moving affair. Global demand for food and feed moves only as quickly as populations can grow and the supply chains that serve them can accommodate their requirements, and supplies can only be replenished annually (or maybe biannually if you include double cropping in South America say). So once we have worked out what way we should face as our initial approach to the market, we then find that most people have arrived at a broadly similar position at around the same time. After all, the sources are the same (DEFRA, USDA, AHDB, Reuters, Bloomberg, BBC etc.) and we all have access to the information at the same time.  Even the free news and data feeds are only about 15 minutes delayed these days.


Then what? Well, the standard approach would be to draw the focus from the global long-term progressively all the way into the most local spot markets, looking for the best opportunities.  Currently it seems there is little to spur on either the farmer origin sellers or the end-user consumption buyers to write much new business. Since the harvest and immediate post-harvest 'sort out' of qualities and generally accepted specs, physical prices seem to be stuck in a range, but probably for good reason – they’re actually at levels that seem to be generally acceptable to both parties. In conversation with many farmers,

it seems that broadly £130 wheat, £125 barley and £300 rape

achieve or better the budget, so entry to the market is likely to

be for cashflow management rather than taking a strong directional view. Feed and food consumers are similarly not


greatly agitated, given that we are generally sat between import and export parities, so they just concentrate on the supply chain logistics.


Notwithstanding some unforeseen external episode (I really don’t want to mention Brexit, but…), I feel we should expect more of the same for Q1 2018. Only in Q2 are we likely to move to a new

price plane as we empty the sheds and discover how accurate the crop estimates actually were, and probably more important, how those estimates compare geographically. Already procure-

ment in the far South West looks difficult, and the demand hotspot that is the range of Cheshire mills may draw from ever-increasing distances.


Starting prices for new crop commodities are very similar to current values, and that to me looks like a good entry point in all cases.  On one of the good days that occur every few weeks for whatever reason, why not let the odd load go? The crops are well established, it’ll make a fair return and it’ll reduce your risk exposure at a time when major market movers are unknown, which makes them a 50/50 gamble – hardly a robust business strategy! 

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Market Commentary

Amid the long spells of minimal activity since our last newsletter there have been two major events of note. Firstly, the “Brexit” referendum, which showed us the power of politics and external markets, and secondly and more recently – indeed still current in some of our patch – harvest, which of course shows us the effect of our trade’s own fundamental economics.


Since before Christmas, the suits in the City and Westminster had been doing a good job of spreading the idea that uncertainty and volatility would bring us down. In fact the agriculture sector had greater reason to be concerned than most. With Sterling weakening, our local markets actually gained support due to its relative value against global alternatives, although you’d be hard pushed to see it, as the spectre of another round of strong grain production loomed large.


Here we see a chart of the Pound against the Euro:-

You’d have hoped to see a mirror image when we look at the grain prices, but no.


Here is London wheat futures for Nov16 delivery:-

In fact it was only until we saw the scare of the poll that showed a chance of “leave” that we started to get a real carry through into stronger prices. I reckon it was all down to the farmers who changed their minds and left the “remain” camp!  Even the effect of that poll got turned over until we got the result itself. By shedding 11% of its value against Europe and the Dollar, our currency gave the shippers an opportunity to lighten the UK grain balance sheet, but it has to be noted that buyers from Spain and North Africa - the traditional homes for UK grain - did not just roll over and go on a buying spree.  Business was done at this time but not in extraordinary size. Throughout the whole of this period when these external issues were “in play”, the farmer has been a reluctant seller, to the point that almost all had eschewed the traditional approach of 1/3 after establishment, 1/3 once in the barn, and the final 1/3 to run the long game. This will keep buyers keen in the short term.


Now currency is flattening out somewhat, and finding a new level post-referendum (and interest rate cut), just as harvest got going.

And, ironically, this is the point on the price chart where we get to the good stuff! There had been talk that a distinct lack of direct sunlight during June may have been detrimental to UK crops, though no one could put specifics to the outcome. So in the market we chatted about it in passing, but there were easier weather stories to trade. Not too far away the northern French crops were getting flooded, and the earliest regions of the United States to come to harvest - the Southern Plains and Delta – were seeing perfect conditions. Thus those of a mind to trade the spot sentiment or a longer term supply and demand idea have had somewhere to go.

Those two stories have been proven, and the respective pricing has shown the divergence you’d expect.  And we have found ourselves somewhere in the middle of the bumper US crops and the French disaster. Extremely light specific weight barley was being cut from the outset.  elow 55kg/hl was not uncommon, and the subsequent large claims and the logistical nightmare of blending crops in stores in a desperate attempt to maintain some value got us off to a disappointing start. Thankfully the later barley crops did bring the average up, but it will be an exercise for the whole of the rest of this campaign to ensure cargoes meet export specs, and that domestic mills receive consistently high nutritional value goods.

Then came the rapeseed. Small seeds, yields shrunk typically by 0.5t/ha, and continued rumblings over the curious affair of the high erucic contamination have helped support higher prices.  Reduced area was always going to give us a finely balanced supply and demand, both here and in the EU, and with the currency allowing for a few cargoes to leave the domestic system, there are definitely more buyers than sellers today and for the foreseeable future. Strong oilseeds markets now are already pushing through to the 2017 harvest. You can put £290 in next year’s budget already. Regular readers will know I have been bullish for rape for some time, and I don’t think we are near the top yet. Having said that, we need to watch the US soyabean harvest in our autumn, for if the USDA is correct, crushers will have their pick of oilseed crops later on.


And so to the wheats. Unsurprisingly with what had gone before, we were all holding our breath over the results from the first milling wheats. Phew! Yields at about 5 year average seemed like a bit of a win, and quality is there. For sure there is a wide range of qualities across many varieties which calls for lots of sampling and lab work required so we can identify and place the right parcels into the right markets, but there should be a premium to be had.  On the subject of premiums, we have seen the strange market condition where feed wheat was scarce in the spot position and ticking up, and the mills have been shown plenty of Gp1 with reasonable specs, and so the premium has been squeezed from below. I hope we can see this widening out later in the season, once the testing is complete and all parcels duly sorted. One further word on this, beware high mycotoxin tests (DON) in what has been a disease-y (!) crop year. Please call to submit a sample for testing in our own laboratory if you have wheat that you believe has milling potential.  We have also seen soft wheats that are actually causing problems due to unusually high protein levels.  Again, call for advice on testing & specific marketing.


I mentioned in a previous newsletter that we tend to selfishly want a crop disaster elsewhere, and that appears to have happened with the French crop. It gives me no pleasure to say that. Honest.  


Seriously, within about 6 weeks, nearly every agency and analyst had slashed the French wheat crop estimate from around 38Mmt to 29Mmt due to the flooding in the northern region. Originally I was loathe to believe the size of the failure because no one could tell me whether the tonnage was just shifting sideways from the milling column of the S&D to the feed column, but it turns out that the figures do in fact report total loss. The Paris futures market has responded as you’d expect and the French grain is now the most expensive origin of all. As I mentioned above, the UK has found itself somewhere in the middle of global pricing:-

No doubt this spread will come back into line once harvest is complete across the northern hemisphere, but just for the moment the French don’t seem to mind being expensive at a time when the Egyptians will always find cheap grain from the Black Sea origins in the Russians, Ukrainians, Romanians and Bulgarians rush to turn harvest grain into hard cash anyway. Our near neighbours cannot employ the Gallic shrug forever though, for at around $45/t discount in the Chicago to Paris markets, the American wheat will become competitive to the Egyptians. Indeed they are already able to ship from the Gulf to the West African coast at the current $35 differential. 


The fundamentalists will probably win out as the most powerful force in price discovery this year, but the not-so-heavy local supply, further pressure of Sterling, and the large fund short wheat position in Chicago is likely to give us a number of opportunities to trade a better price than we have seen for very many months.  However with such a low proportion of the crop having been priced so far, it may pay dividends to trade a little and often, into the rises, when the consumers want it and the boats are on the dockside, rather than waiting for an “all or nothing” episode that may never come….



Market Commentary

It was the subject of some discussion in the office as to what I might actually put in to this piece of market commentary.  After all, we all have been living for a long time now with the fallout of the global production, stocks and demand, and that is the negative effect on prices :-

It was the subject of some discussion in the office as to what I might actually put in to this piece of market commentary.  After all, we all have been living for a long time now with the fallout of the global production, stocks and demand, and that is the negative effect on prices :-

London Wheat Features – March 17 delivery

Since our last issue, we have seen growing estimates for last year’s wheat production and next campaign’s planted area.  USDA this week put next year’s wheat output at 735Mmt, following on from the past crops of 725, 715, 658 & 697.  Sadly the global economic slowdown that we keep reading about is being blamed for the lack of demand that will mean we have to expect growing stocks again.  The demand side of the equation is so slow to change, we have to look to the supply side for a near price improvement.

Though it makes us feel slightly uncomfortable, we continue to watch and hope for problems elsewhere in the world.  El Nino’s effect doesn’t seem to have stretched far enough West – palm oil production has been disrupted in Indonesia and Malaysia which will be supportive to our rapeseed market, and South Africa has suffered drought that has turned it from a 3Mmt corn exporter into a 5Mmt importer.  However, we really needed something drastic as far across as South America for a real hit to grains production, and that hasn’t occurred – yet.  They have been waiting for bean–filling rains before harvesting the soya.  If they wait much longer then the sowing of the bigger second corn crop that follows goes outside of its favoured window, and that is known to severely diminish its yield.  Keep your fingers crossed. 

Russia, Ukraine and the US have had dry weather that was leaving the growing wheat somewhat vulnerable to frost damage, but they have all recently got some protective snow cover.  The areas of Ukraine that did suffer winterkill will probably be re-sown with maize, not spring wheat, which should help our cause a little.

Recent weakening of Sterling has enabling some export business to be done out of the UK for old crop in both wheat and barley, however the poor external market sentiment (e.g. crude oil and equities) has meant we’ve not really benefitted to the full extent.

Although all the above points to a flat, low runout of this campaign, it is interesting to note that the (futures) market is still paying a £12/mt carry out of May and into November.  This market is auctioning up for new crop, optimistic of better things to come….


Market Commentary

“If it don’t change, it’ll stay the same."


I don’t know which clever man coined this pearl of wisdom, but he wasn’t wrong. And not only is it annoyingly obvious and true, it applies universally. Take our grain market situation – we still have surplus crops to consume or dispose of by export (the speed of which is still not increasing), weather has been benign for most areas, political tensions are still bubbling in Crimea but not escalating, Sterling continues to appreciate against the Euro and US dollar, and Downing Street and Whitehall are still occupied by (mostly) the same bunch. With neither consumers nor originators being enthralled by all this, it is hardly surprising we have the same price environment – weak and low.

London Wheat Features – July 16 delivery

What is also true is that a change will come, and so even in this long period of no fresh news we must continue to dig a bit deeper to get a sense of what might come next. Locally (UK) we still have the spectre of the great wheat surplus. This was originally slated by Defra/HGCA to be 3.8Mmt and this has now been trimmed to 3.4Mmt in a somewhat unconvincing way. Whatever, on this basis there are going to be very many farmers who will be putting new crop on top of the old crop heap come harvest. To us here in Wiltshire and the Witney Grain trading area this is hard to believe. For sure we have clients with 2014 crop left in the shed, but they are traditional long-holders and are operating their usual plans. Even for East Anglia, Lincolnshire and the other major wheat growing areas, I struggle to believe that many farmers can and will over-year that much grain. So where is it all? Are we just about to be swamped with huge volume coming to the market for immediate movement? I wouldn’t want to be the last man in that line!  Does it even exist? I suppose we must believe the harvested area numbers, but was the yield really as good as you thought?


What we do know is that commercial and futures stores have an unusually large stock still in place. Who owns this? My guess is that apart from the traditional long-term farmer accounts, the vast majority of the tonnage is in the hands of the merchant trade, and the “big boys” are the only ones who could fund such a sizeable trading position. The domestic consumers do not have the risk appetite for taking a storage position these days. None of us do something for nothing, so you have to assume that these big trading houses believe that holding stock will come good.  We are, after all, at long term low price levels, with the same old bearish arguments and numbers in the market week after week. The longer we stay the same, the closer we are to the change. I’m not sure I want a position that requires a market move large enough to cover the cost of more than a year’s storage and finance before breaking even, but if big money is backing a rise in price, then we need to be aware.


Whether this strategy pays off or not, it does increase my concern over the harvest market. Readers of my previous market note will remember the comments regarding the possible weakness. Harvest is always a time for price pressure, but this campaign might throw us an extra problem – if your shed is not clear, and commercial stores have substantial stocks of old crop, where is this crop going to go?

I don’t much want to think about the scenario of having spent months viewing good looking crops that will have made strong yields only to get a wet harvest where 1000s of tonnes of grain need drying off farm! Will we need lorries queued up on the output side of the dryer ready to bring the crop back to the farmer? Only those few buyers with real sales into real mills or dock warehousing or valuable free storage will be able to buy the crops, and don’t expect them to pay up for it.


Phew! Enough of our nightmare scenarios! At the time of writing, large parts of the US Southern Plains and Delta regions – those that were concerned with dry weather in the winter and early spring – are under several feet of water. One poor town saw 11 inches of rain in 24hrs. The rivers have burst their banks and whilst the market believes the effect on total production will not be great, the quality is under threat.  This is a double-edged sword for us. The sentiment will push the benchmark Chicago futures higher, but we will have a larger feed wheat tonnage to compete with. Spring sowings further north in the grain belt have continued apace, but with current weather patterns being outside of the norm, I would say the production risk to this crop is rather high. The Americans love to trade the weather forecasts, and with the large speculative funds being heavily short of wheat futures contracts (about 12.5Mmt equivalent), we shall watch that market very closely.


Talking of weather, an El Nino pattern is building in the Southern Hemisphere it seems. If mild then there is a greater global acreage that will benefit than will suffer. However, if it strengthens and/or persists, the Northern grain producing areas could well be hit with a very stormy Autumn and Winter. It may even threaten the harvesting of the last of the 2015 crops.


In Western Europe grains and oilseeds look good in the fields. There remains some doubt over the size of reduction in OSR area, and there is more political tinkering with the biodiesel support system in the EU. Many of you know I’ve been friendly to price for rape into the Autumn and this side of Christmas. It’s been hard to maintain that stance all this time, but we had a swift run up and then retraced all the way back and the speed of that move reminds me that rapeseed can be our most volatile crop. Daily moves of £10pmt are quite possible. The International Grains Council is predicting a slump in world rapeseed stocks of 26%, and so I will stick with the long view for the moment.


Central Europe and Russia have been dry this season, and coupled with the inability of many farmers to pay for sprays and fertiliser, I’m sceptical of their ability to produce big yields this time. Timely rains will soften the blow, but the region – like the USA – needs a careful watch over the next few weeks.


Egypt as the biggest buyer of global wheat will continue to be given substantial lines of credit with which to buy (particularly) US wheat all the time they make the right noises politically. America and the Middle East needs stability in Egypt, and usually the first way of keeping the population happy (quiet) is to ensure cheap food supplies. (Beating food inflation is also the driver in the Russian export tax situation.)


The Far East is as difficult to read as ever. I can only come up with information that follows the trend of levels of demand that tend to outstrip expectation each year. I can only wonder what might happen if the central government actually created a support system that created more Chinese farmers.Now that would change the way of our world....

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Market Commentary

Since our last report we have seen a particularly difficult trading quarter. Many of the traditional links and guidelines that our markets work to have been broken – Chicago wheat futures have represented only a US valuation of the crop, not a window on the world situation; feed barley pricing has divorced itself from feed wheat in order that panamax-sized vessels can be filled, and (most worrying for us as your friendly independent grain merchant) the 3million plus exportable surplus in UK wheat is seemingly being ignored by many farmers with unsold old crop parcels.


In November we noted that we had seen welcome gains after the late September lows, but having acknowledged the premiums that can quickly be built when politics, weather and logistics go awry, the spectre of the supply overhang still needed to be addressed. Sadly, through this period nothing has actually sparked a risk premium – Russians and Ukrainians continue to lob bombs at each other but both sides make sure they steer clear of the crucial railheads and ports; weather has been pretty benign (with a couple of notable exceptions in India where they had a weak Monsoon, and in Indonesia where palm plantations have been flooded); and with logistics much eased as the collapse in black oil markets has allowed global freight prices to fall and the internal fight between oil companies and grain traders to secure US railcars has gone away.


I know it will not feel like it to anyone with unsold grain, but we have held remarkably well, certainly through December and early January. The support to UK prices has only come from continued farmer retention. After all, everything else is against us (don’t forget to factor in the strengthening Pound to the above too), and it is apparent from the graph above that – even without farm selling pressure – the market is finally starting to focus on the fundamental truth that no one really wants to be left holding the baby come the end of this campaign.  To get rid of the surplus we must get aggressive in the export market, and I’m afraid that means lower prices...


The reluctance of the UK farmer to trade is also very evident in the new crop.  Perhaps this is not such a risky stance to take as it is in the old crop – as long as you are not forced to market in the early months. With old crop sitting in store somewhere (probably not in Witney Grain’s trading area), a new shedful of even average yield will cause pain no doubt. If you are a harvest or early season seller for whatever reason, I would urge you to consider your risk and call the office to discuss how best

to protect your interests. In the longer term, we do have a chance of (mildly) better prices. The USDA projects increased wheat yield on a lightly reduced area, thus making the price somewhat more sensitive to any “problem”, but the increased carryover will limit the upside. I note with interest that they assume per capita food use of wheat as constant – I’m not sure the average Egyptian will be too happy with that scenario!


Similarly corn plantings will be down, but with ethanol inventories already high, again there is a natural ceiling to that market. Neither is soya immune from the low prices being responsible for the trimming of new plantings. This is also apparent in our rapeseed, but in all these crops, we have to contend with the price impact of 2 years of record world production.


What we need is a proper “episode” somewhere in the world (obviously not in the UK, and particularly not in “our” patch please)! Weather has the obvious potential here, with the favourites being for winterkill/late frosts in the US, and early drought in Russia. And then of course we have the small affair of a General Election in May. Which way should we vote to get a collapsing Sterling and soaring UK export competitiveness, I wonder…? 

Spring 2015 Grain

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Grain Sampling

Grain Sampling

Combinable Crops Passport

Combinable Crops Passport