1 January 2018
Comment from the Feed Mill - January 2018
Traditionally, we use this January edition to gaze into our crystal ball, and to speculate on what may happen in the New Year. Usually, it is possible to isolate specific circumstances from any year in the past decade, and predict that this coming year will be similar. Not so this year, as this harvest year appears to be unique.
There are a number of unusual circumstances, which may be symptomatic of an entirely new dynamic, which makes us feel nervous. First, the North-South wheat price divide, with the South valued at about £138/T delivered to the mill (today 12th Dec), Cheshire about £10 more, and the North-West at an additional £7/T. This appeared to be caused by the demand of the Northern biofuel and food plants in conjunction with mainly milling wheat in the North and feed wheat in the South. However, the announcement that Vivergo was to close for prolonged maintenance period appears not to have reduced the North-South price difference, but may yet do so in the New Year when Vivergo demand is zero. It is difficult to understand what factors may reduce, or indeed increase the North/South price ratio. Second, as a consequence, the Liffe exchange is only useful to traders and hedgers in the South, and it would not be surprising to hear that Northern traders are using Liffe as a basis plus eg £10/T. But traders would be wary of deals where the factors affecting the value of ‘plus’ are unknown; nominally this is the haulage rate from the South, but the closure of Vivergo could make the North self-sufficient in wheat, and thus ‘plus’ could drop to zero. So the Liffe exchange is not representative of the whole UK. Third, in the recent past, the UK produced a lot of wheat and exported the surplus; now in recent years the Northern biofuel plants have gobbled up the surplus and the UK has become a net importer of wheat. Defra state that the UK produced 15.2Mln T wheat this year, whilst the grain trade generally believes that 14.6Mln T is more likely which would reduce the official exportable surplus from 1.05Mln T to a mere 0.45Mln T of which 0.15Mln T has already been exported! Currently UK wheat is too expensive to export as much as last year, so will the UK wheat market be tight or in surplus in July? Since August, the May 2018 wheat futures have traded between £140-150/T and the lack of volatility gives no incentive for activity whether it is buying, selling or exporting. 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 for this harvest year, it is difficult to predict: a crop scare; or a significant change in currency exchange; or perhaps a Brexit upset?
In International markets, EU and US wheat prices are also weak, with Chicago March futures hitting new contract lows this week at $4.19/bushel (and December futures sub $4/bushel) as Russia continues to dominate the global export trade, consequently EU export shipments remain 22% lower than this time last year. So far Russia has harvested 140Mln T grain, before drying and cleaning (125Mln T last year) and it expects to export 45Mln T this harvest year, of which 35Mln T will be wheat. Russia also appears to be reducing its prices to maintain its hold and control of the markets; allegedly Russia is subsidising grain transport to the tune of 2bln roubles (approx. $34Mln) to ensure this stockpile of this year's record crop is moved, and to convert its wheat into hard currency. Whether the world will see a repeat of Russia’s dominance this next harvest year mainly depends on the weather this winter.
Brazilian soya is about 92% planted (87% 5-year average) having been slow to plant due to dry weather a month ago, but good rains during the month allowed planting to catch up by the end of the month. Brazil is expected to produce 108Mln T soya (114Mln T last year) although it appears we are in a weather-watching market with bulletins every few hours, as traders watch for signs of La Niña. Beneficial rain has sprinkled central, eastern, and north-eastern Brazil, but it is still relatively dry in the South – but not yet at the ‘problem’ stage. The early-planted soya is at the flowering stage, and could be harvested as early as New Year’s Day with the majority harvesting in mid-January. Argentina is expected to produce 57Mln T in the New Year (57.8Mln T last year), subject to weather. China has relatively plentiful stocks of soya at port, and is apparently delaying some purchases waiting for better prices. If history is anything to go by, then China will wait for harvest pressure, and then place its orders before Chinese New Year. US soya bean exports are lower than predicted as the world waits for the South American harvest.
One other unusual factor affecting feed prices has emerged over the last month, and that is the price of vitamins. A large fire in a huge German BAS-F factory at the end of October has halted 50% of the world’s production of Vitamins A and E – both vital in animal feeds. Worse still, the same factory also produces a crucial element of citranaxanthin, the only BEIC approved form of red pigment used for yolk colourant. Like any other market, scarcity (in this case of vitamins) has seen prices escalate, so much so that the price of feed in the New Year will be at least £5 higher – and that is just a guestimate. Prices could rise higher, until the burnt out factory comes back online later in the year.
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. After a volatile and stormy 10 years, will feed prices be less volatile this year? Probably not with the fire affecting vitamins and red pigment prices at the start of 2018!