Below is the feed report printed monthly in the Ranger

The last month has been unbelievably difficult in terms of trying to source dry wheat supplies. An average price for wheat after considering Equal Daily Quantity contracts, plus expensive top-ups to ensure continuity of supply, has been in the region of £145/t this month. Suppliers who have not been able to deliver in August, will now supply in September, wrecking the ability of feed compounders to buy cheaper wheat. The wettest August since records began has not helped, and we know of wheat being cut at 20% moisture (and more) and then being dried. As we write this (9th Sep), some 30% of the wheat harvest has yet to be cut – and will it all be harvested with continued reports of ongoing poor weather?

For the past few years, the markets in Chicago, Paris and London have all been closely linked. Since June, that relationship has been de-coupled, and there is a new relationship between cereals, soya and crude oil. When combined with the substantial changes in currency this month, UK wheat is now £42/t cheaper than Chicago and £25/t cheaper than Paris. These discrepancies are unsustainable, and we expect volatile price corrections in the medium term. The world wheat harvest looks huge, as the International Grain Council predict 672mt (609 mt last year), which is one reason why prices are so low; but there are quality question marks for those milling wheat for bread production

Soya has been incredibly volatile, moving £10 on a daily basis! In $-terms soyabeans hit $12/bushel in mid-August, $13.50 at the end of August, and has now weakened again to $12. This equates to a movement of about £30/t. The problem is that the $/£ was near to 2/1 at the start of August, and is 1.77/1 today. This currency movement also translates to about £30/tonne. Hence in £-terms $13.5/b at $2/£1 is about the same as $12/b at $1.77/£1. In real money, non GM Hipro soya is about £295 delivered to the mill today.

The last year has been very volatile for commodities and many feed ingredients.  One could be lulled into thinking that with wheat coming down, feed prices were going to be much lower.  However comparing raw material costs with those of last year shows that in the average layer formulation, the increase is in the order of £16/tonne due to soya, £30 due to other proteins and vitamins, £15 due to minerals, £5 due to oil, etc, in total, somewhere between £80-120/tonne depending on the formulation. And that is before the impact of higher fuel costs which add £2 to manufacturing costs, and £3 to delivery costs.  Let us hope that the coming (wheat) season at least provides greater stability.

The last month has seen all raw material prices falling substantially – both conventional and organic.  November futures wheat was £200/tonne in March, £145 a month ago and as I write, on August 7th, it is £126.  The reasons are complex, but appear to be a combination of:

• Falling oil prices
• Hedge fund fear about the Commodity Futures Trading Commission
• Profit-taking
• An abundance of good news concerning crops and yields
• The aggressiveness of Black Sea traders 

The Ukraine has nearly 6 million tonnes more wheat than last year and the International Grain Council recently increased their estimate of world wheat production to 662 million tonnes.  In the UK, harvesting has been delayed by rain, and compounders are currently paying high prices for emergency spot cover until the combines start rolling.  The good news element of this rain sodden delay (for poultry farmers – not their arable brethren) is that whilst less wheat will make milling quality, more will be down-graded to ‘feed quality’ increasing the availability of feed wheat.

A month ago soya was $16.50/bushel and is now $12.50/bushel.  In the UK, this translates to £320/tonne for non-GM Hipro soya and £263/tonne delivered today (£249 for GM soya).  Prices fell when the Argentinean government failed to ratify their new agricultural taxes. Consequently the strikes were abandoned and the funds liquidated some of their long positions.

For the first time in months, there is good news for organic producers regarding the price of feed.  Organic wheat prices have been falling as most feed compounders (and consumers) have been reluctant buyers.  In April, new crop organic wheat was £320: then in May £310, June £290, July £275 and in August £265.  Organic protein prices are coming back too.  It is an unusual scenario that all raw materials have fallen so substantially - and all at the same time.  As far as one can tell, there appears to be relatively little further downslide and therefore many will view this as a buying opportunity.  However, the price and margin pressures on organic producers mean that some will change their status from organic to conventional free range, causing a potential surplus of organic raw materials later on in the season.

So July wheat fell from its height at just under £200 in March to a band of £145-155 in June and July to date. So more of a price wobble than a price spike. November futures wheat touched £135 at the end of May, hit £155 in June, and is currently £144 and weakening.  Most feed compounders are still chewing their way through their stocks of maize, tapioca and sorghum, and it is now apparent that wheat prices and feed prices would have been much higher, if the trade had not bought these wheat substitutes.
Globally, the wheat harvests still look excellent, and a few reports of flood, frost and dryness have all been discounted in the light of a huge harvest. The Ukraine’s harvest has recently been upgraded by 2mt, which has scattered the last remaining bulls.  More locally, conditions are still good for a big feed wheat crop, and as rain continues at this particular time, so it worsens the quality of the Milling wheat crop, down-grading it for feed use – even more feed wheat, that should be good news for lower prices. 
Why are prices not even lower?  The commodity fundholders continue to manipulate commodity markets.  They now hold 70% of worldwide commodity futures (2004 - <20%), and manipulate them to their own ends, pushing traditionally key factors, such as supply and demand, as a means of explaining and even anticipating market movements to the bottom of `important factors affecting the price of agricultural commodities’!

The Argentinean farmers opposition to their new tax is still a hot topic; but their resistance may well change from organised strikes to a call for a judicial review. Brazil’s new crop saved the day for UK soya suppliers, and prices are down about £20 from the highs, but in $-terms prices hit an all-time high last week at $16.45/b for July. With low ending stocks this year, any problems with this years’ US harvest may cause shortages in 2009.

We are still concerned about the organic poultry sector, on the grounds of lack of profitability, lack of an approved salmonella treatment for feed and the welfare issues caused by only being able to use organic raw materials which have low levels of methionine. We continue to lobby those responsible for influencing the organic rules, but a lack of understanding has proved a major stumbling block. The same could be said of our politicians and biofuels, so thank goodness the World Bank has confirmed that biofuel policy is responsible for increasing global food prices by 75%, and now politicians are hastily back-tracking. We do not need u turns but rather sensible well balanced policies that reflect the needs of our society at large.  If the biofuel policy is modified, we would likely see a fall in grain prices, watch this space. 

July wheat has continued its fall since March. On the 10th of each month, March, April, May, futures prices were approximately £190, £180, £160. It is currently £151 (6th June). November wheat is currently £11 lower at £140.  So the July/Nov differential has narrowed (at the beginning of the year it was £40!), as arable farmers who missed the highs and held on hoping for a price spike, have thrown in the towel. Those whose nerve is still holding may well benefit from a spike in July, but it is anyone’s guess, particularly as there are almost no buyers. Most feed compounders took forward cover because after the previous 12 months experience, if wheat had been short, prices would have had no upper limit.  The stocks of maize, tapioca and sorghum are almost depleted. 

Globally, the wheat harvests look excellent, and all the good news has contributed to the current low prices. Russia's wheat harvest is said to exceed 50mt (10% more than last year). China’s wheat harvest is also expected to hit a high at 112mt (110mt last year). Canada’s harvest should be up by 24% over last year to 25mt. Even dry New South Wales got a dousing this week; a 27mt crop is still forecast (13mt last year). The IGC forecasts a world harvest of 650mt, and demand of 632mt.

The last few months have been a brinkmanship exercise for UK soya suppliers as we almost ran out of NonGM hipro, and a crusher breakdown added to the difficulties. The difference between non-GM and `any origin’ (GM) has varied between £20-60/tonne this year. New crop supplies from Brazil are now in full flow, but the strike in Argentina continues which is keeping prices (even) higher than they should be. The farmers are protesting at the new tax on agricultural commodity exports and are blocking ports and crushing mills. The truckers are now also striking in sympathy, and are blocking the movement of food and fuel. Both the government and the farmers want to profit from the high prices, but how to slice the cake?

We continue to be concerned about the organic poultry sector, on the grounds of:

1 lack of profitability – look at the feed price graph, the organic and conventional prices diverge post harvest.  Whilst conventional prices come back after harvest new crop organic, marches upwards.

2 lack of an approved salmonella treatment for feed
We will continue to make representations across the organic supply chain to elicit a long term sustainable solution to ensure we retain a sustainable organic supply chain into the future.

May wheat has fallen about £15/tonne in the past month.  However, the cereal trade has confirmed that most mills are behind with their wheat contracts and are struggling to use up their maize, sorghum and tapioca contracts (wheat substitutes), so are unable to buy this lower-priced wheat. There is still the possibility that wheat prices could reach higher levels in July and in the first ten days of August - particularly if the harvest is delayed - and if there is wet weather in August. The International Grains Council believe that global wheat production will be 645mt - about 40mt more than last year - and that the EU production will be 138mt – about 17mt more than last year. The US expects 2.3mb, 15% more than last year’s 2.1mb; Australia should reach a record 27mt, more than double last year’s 13mt. 

As a note of caution, the rise in expected worldwide production will be offset by increased demand from bio-fuel plants! Can that really continue?

The current UK soya situation is still tight and the first shipment of new crop South American soya is expected this week. The Argentinean farmers’ strike in protest at the new windfall tax on agricultural produce has been renewed and is causing jitters – particularly as it is reducing the availability of soya to the EU. Non-GM Hipro soya is currently £340 delivered to the mill, a rise of nearly £20 on the month, whereas GM soya has only lifted by less than £10.  The premium for non-GM soya over GM is widening.

We have several concerns about the organic sector. Organic raw material prices have risen so rapidly this year (by £150-£300/tonne), that most feed compounders are discounting the price of organic feed by using some of their well-bought purchases. We estimate that if we re-priced our organic feeds at prices available for September then feed prices would be at least £50/tonne higher. Our poultry customers are not currently receiving a high enough price from the supermarkets to make a margin at these levels. Despite writing an open letter to The Grocer about this issue, we have received not one reply. It is difficult, as feed compounders, to summon up the confidence to buy raw materials at these levels.  The comment from organic layer producers about ‘converting away from organic back to free range’ is being more frequently muttered out loud.

What an odd situation this month!  The trend for Chicago soya prices was down and the trend for UK soyabean was up. US soya is no longer available in the EU because of its non-approved GM status, so the main source of permissible GM soya comes from Argentina (AO soya) and Brazil virtually has the monopoly on non-GM soya. For three weeks farmers in Argentina have been on strike with crushing plants stopped and ships not loaded. UK feed compounders who were short of AO soya have had to buy the more expensive Brazilian non-GM soya, but these stocks were limited as the South American harvest has only just started. Thus the UK sellers of soya pushed up their prices to £330 ex-port to deter buyers, before finally withdrawing it from sale. The situation in Argentina is still not entirely resolved as the farmers have called a truce for 30 days, so they can harvest their soya and continue to keep the Argentinean public on their side of the argument! The South American harvest looks good, so we expect soya prices to remain high in the short term, and may possibly ease in the long term.

As far as we can determine, there has been precious little wheat traded south of the M4 and most of the wheat traded in the Midlands has been to supply the new facility at Manchester. Most feed compounders have bought maize, sorghum or tapioca to reduce their dependence on wheat and the best guesstimates are that about 0.75mt of wheat has been substituted. What will happen in the next few months of the old crop year is anyone’s guess; some suggest fireworks, others a damp squib. In terms of new crop, wheat prices still look high, although they have eased in the past few weeks.  Most compound buyers would probably like to pay around £120.

Feed prices have also suffered due to the rapid vitamin price rises, particularly vitamin E, along with rises and short supplies of methionine, which between them have put feed prices up circa £1.50 in the second quarter of the year.  Phosphate prices continue to escalate and are now four times what they were six months ago – scarcity continues to drive that price up too.

Organic raw material prices remain high and, unlike conventional raw material prices, are not showing a post harvest dip.  Bearing in mind compounders are selling to their customers at prices which are discounted from the current replacement prices, and organic producers are being squeezed at these levels, we have to hope that the retailers will meet the cost of the high new crop prices, otherwise the sector is heading for an unsustainable squeeze.

We try to provide advice to our customers with the most up-to-date information we have. At this moment, our gut feel and best advice for the year ahead would probably be to buy in three month chunks; that way raw material prices can be fixed and it irons out the extreme volatility of the market. For those who want a higher risk strategy, there is the possibility of covering post harvest, when the size of world-wide wheat and soya crops are better known.  This could be the low spot for the rest of the year and you might want to consider covering forward for a longer period, as the coming season is likely to retain the current volatility – unfortunately.

Nothing makes much sense on the raw material front at the moment. With just nine months experience of these astronomic prices, volatility for wheat, maize and soya continues unabated.  We would like new crop wheat to fall £35 to £120 but is this just wishful thinking?  Maybe, but it is a possibility.  This wheat crop is valuable, and farmers are spending good money to protect it. Given a fair wind, the UK exportable surplus could reach 3 million tonnes. Not yet willing to sell any more new crop, grain farmers are waiting for old crop prices. It is, however, believed that UK farmers have already sold 15-20% of new crop compared with a normal 10% at this stage. 

Of course, it all depends on what happens in the rest of the world. The early signs are good for worldwide crops too, with a larger EU crop in part brought about by the temporary rescinding of set aside.  The Australian and Canadian crops are looking relatively good as well.  Fingers crossed that the growing conditions remain favourable to pull prices down.  The market may only experience these lower prices when the combines are rolling – that may yet again be the best time to consider fixing forward feed prices.

The situation with regard to non-GM soya is less clear. Non GM Hipro has taken a slight dip recently and is now beneath £300 delivered to the mill – still a historically very high price.  The world depends on the Americas to supply it with soya.  However, this year a new type of herbicide tolerant GM soyabean is being planted in the US so the 4 million tonnes of Any Origin (GM) soya imported into the EU from the US will flounder on the EU’s zero tolerance policy of unapproved GM soya varieties. After next harvest, the EU will have to buy all of its soya from Brazil and Argentina and if EU approval is not forthcoming before the South American spring 2009 harvest, when they too will have this variety, then how much soya will reach the EU - and at what price? 

Poultry production is also increasing rapidly in South America, so how long before even more of our livestock industry goes overseas? On this note, a company specialising in agricultural investment, recently gave seven reasons to invest in agricultural commodities: to hedge against inflation; record low inventories; frequency of weather events; limited land and water; a growing, wealthier population; biofuel demand; and - as agricultural companies cannot pass on rising commodity costs to customers - it is better to invest in agricultural commodities than in agricultural companies!

Since November wheat is up £50/tonne, and Hipro NonGM Soya bean meal is up £60/tonne.  On 11th Feb wheat hit £200/tonne for May and July, and the next day prices fell £10/tonne. So what can we tell you about future prices?

Unfortunately very little, except to accept the unexpected, as fund managers increasingly exert their influence. Commodity prices are so volatile in both directions, that predictions are extremely difficult.  And it is not just about price anymore, it is about guaranteed supply. The world is running out of certain raw materials – phosphates, NonGM soya and sunflower have all been rationed either by price or physical supply.

In the broadest terms, conventional feeds now cost £100/tonne more than a year ago, which equates to at least 20p/dozen, and that is before the increased feed cost for the pullet is added into the equation.

It looks as though the current problems of limited supplies of expensive NonGM soya will be `spared’ by limiting its use, but that still means it will be used in Free Range diets.  The medium term issue is `for how much longer?’  Supplies will last two years – maximum.  So how can we help our customers, the retailers, withdraw in an orderly fashion from the now untenable commitment to Non-GM soya?

Our biggest concern at the moment is the supply and price of Organic raw materials. Since harvest last year, organic raw materials have increased in price by between £100-200 per tonne, or 24-48p/dozen eggs. Organic wheat has gone up from £220 to £330/tonne, Organic Full Fat Soya was £350 and is now £568, Organic sunflower was £210 and is now £360, Organic Soya expeller was £340 and is now anything from £530 to £620. Worst of all, we recently contacted four major suppliers of organic grains and proteins, and none of them has any surplus to sell. In addition we jumped from 85 to 90% organic on Jan 1st, in a situation where Organic Soya expeller was not available. 

Unfortunately DEFRA’s hands are tied on the matter of derogating against the increase in organic inclusion, and many within the organic certifier community are reluctant to relax the situation back to the pre January 85% level (despite the fact that France and Belgium have decided to do just that!)

These high prices will ultimately paralyse the organic sector unless the costs can be passed on to the consumer.  It is difficult for compounders to buy forward (and that is the only way of securing
supplies) if they are convinced that these prices force uneconomic feed prices for customers.  Feed compounders are currently discounting prices to keep customers in business, but the financial risks are huge, and the situation will only be fully resolved once consumers bear the full price, rather than being protected by retailers’ reluctance to accept the necessary cost price rises.

If any supermarket, certification body or DEFRA manager has an hour to spare and is interested in exploring the new economics of raw materials, feed formulation and organic percentages, so that the organic egg supply chain may be preserved and even prosper and grow, please contact me.

December and early January have provided a bumpy ride for commodity prices, and is this, as some commodity traders believe, just year 1 of a 20 year boom in agricultural commodities? 

In December wheat prices maintained November’s upward impetus.  Prices dipped on the first day of trading in January, then leapt up £12 on the following two days as European markets followed US wheat’s surge. US prices have since retreated, with a corresponding smaller dip in the UK.  Wheat prices are £20 off their highs achieved in early September, but are £20 above the subsequent lows in mid November.

Whilst the graph shows that wheat has `kicked’ upwards, it is nothing like the explosion seen for soya, particularly Non-GM soya.  Chicago soya markets have been pushed ever upwards by commodity fund holders.

Most free range flocks whose eggs are destined for the main retailers have to be fed Non-GM soya.  The UK has been plunged into a shortage of Non-GM, as only one supplier has any left.  The shortage is pushing prices up, widening the gap between GM soya and Non-GM soya to >£50/T, with the price of delivered soya comfortably exceeding £300/T – record highs.  Prices will only relax once new crop soya is available in April. 

Is there enough Non-GM soya to satisfy the market though?

Just before Christmas compounders were notified by phosphate suppliers about significant shortages of dicalcium and monocalcium phosphate. Phosphates are essential, along with Calcium and Vitamin D, for animals’ skeletal development, and for the laying bird, the shell quality.  Hopefully feed suppliers can overcome the shortfall without compromising diet quality.  This matter is dealt with in more detail elsewhere in this issue of the ranger.
Organic prices continue to be firm.  Since the start of the season organic vegetable proteins have risen by £200/T, whilst organic wheat has only risen by just over £100/T.  Vegetable proteins are in crisis shortage, with compounders having to adjust diets for variable raw material availability.