1 December 2017
Comment from the Feed Mill - December 2017
Every harvest year is different to the previous, and after some thirty years one would have expected to have seen it all, but this one is a little bit more unique. As we have previously reported, there is a North-South divide, with wheat in the South valued at about £140/t, in Cheshire about £10 more, and the North-West at an additional £7/T. UK May Liffe wheat futures have traded at £147/T plus or minus £3/T since September, but London futures are useless (too cheap) for Northern traders who can only trade physical wheat. That could partly explain the reduced `open interest’ in UK Liffe futures this year compared with previous years. In the South, there are more wheat sellers than buyers, in the North the reverse is true, so we have the very strange situation where Kent wheat is being hauled up to Cheshire. Logic would dictate that Southern wheat should be put on a boat and shipped up North, but taking into account storage charges, haulage to and from ports, loading and unloading, it is cheaper to haul it by road; and as the UK is not exporting much, it is a sensible use of otherwise-idle grain vehicles. The other option would be for the North to import from the Continent, but when priced in €, Matif wheat is €168, Liffe is €162 (May futures), not enough of a difference to import. UK wheat exports for September were 75,000T of which Spain and Ireland received the largest shipments of about 28,000t each. Year-to-date exports are 147,000T (676,000T last year), which indicates that we will not export all our wheat like we did last year.
Markets that move sideways are also difficult markets for the grain trade to make a margin, and are quite boring for the speculator sector of the market. As to what could change this situation this harvest year, it is difficult to predict: a crop scare; or a significant change in currency exchange possibly caused by a new ‘remain’ government. Last week, the £350m Vivergo bioethanol plant announced an early closure for annual maintenance as ‘low bioethanol prices have impacted on their profit margins’. It seems certain that the high cost of transporting feed wheat to the North East was also a factor. This plant can consume 1.1Mln T of wheat per year, thus any hiatus in their production adds to the wheat S&D, which could explain why wheat prices eased to £144/T this week. There was no indication as to when the plant would re-start.
Internationally, the Russians believe that they have produced 88Mln T wheat this year (76Mln T last year) and will be the world’s largest exporter of wheat this year, having shipped 13Mln T in Jul-Oct (10.6Mln T last year). Their wheat is also the cheapest in the world, making life extremely difficult for EU exporters, and in part explains the lack of price volatility in the EU and UK markets. The Russians are also taking a stab at Australia’s traditional customers, by shipping wheat to the Far East. Australia’s wheat harvest is almost complete in Queensland (top right of Oz) and the combines are rolling in New South Wales (bottom right). Overall they expect to harvest about 21Mln T (35Mln T last year) of which they are expected to export 18Mln T (22Mln T last year), Russians permitting.
The USDA estimates a US soyabean carryout of a comfortable 425Mln bushels, with the US harvesting 120Mln T of soya, Brazil 108Mln T and Argentina 57Mln T in 2017/18. They estimate China will import 97Mln T, leaving global ending stocks at a comfortable 98Mln T; however the China National Cereals Oils and Foodstuffs Corporation (COFCO) believe that imports of 100Mln T will be needed. All of which indicates that soya is likely to trade sideways unless/until there is a weather event in South America weather such as La Niña - the probability of which has been increased to 65-75% (55-65% last month). Brazil has planted about 70% of its soya, and Argentina is always behind, but continued dryness may delay planting further. There are reports that Trump’s current visit to China, has led to a commitment by China to buy more US soya but the volumes are not disclosed. Last year the US sold 38Mln T of soya to China (40% of its imports), and has sold 21Mln T this year to date (Jan-Sep) which is 15% more than the same time last year as the bulk of US soya exports seem to take place in the latter part of the year (post US harvest).
In summary, UK wheat here in the South seems plentiful and cheaper than in the North, and prices appear to be stable. Global soya stocks also seem to be plentiful, but there are weather concerns in South America. In terms of future drivers: the Brexit volume is getting louder with frustration vented by all sides (UK, EU, WTO); and currency may become volatile with traders suggesting that Sterling is an emerging-market currency citing high political risk and high levels of debt comparable with the BRICs.