10 July 2018
Comment from the Feed Mill - July 2018
July wheat futures are currently trading at about £117/T, but with on a few lots trading, this contract is all but useless because the contract is illiquid and bears no relation to physical wheat. In the real world, July wheat costs £170/T delivered to this Hampshire mill. Three months ago, in early April, wheat for June delivery was only £152/T, so congratulations to everyone who fixed the price for the Quarter, because that would have saved £18/T of wheat, or approximately £11/T of finished feed. Feed and flour millers who are still buying spot, are finding it difficult to locate the last remaining pockets of old crop wheat in the country. Those pockets are sewn tight and located in remote geographies, so that the buyer has to bid hard in order to secure supplies to see them through to new crop.
The strange North-South (N-S) situation where Cheshire had to pay £12/T more than Hampshire has now eased to about £7/T as high prices have allowed for imports of Continental wheat and maize to the North East. The lack of old crop wheat for late July and early August may well be supplemented by imported maize in the North, and barley in the South. The question is whether the same (or similar) N-S price differentials will occur this coming harvest year. The general consensus is that it is possible, because the UK crop is estimated to be less than 15mt, and much of it will be (weather permitting) milling quality. Thus feed wheat will have to be moved to wherever the demand is located. This year most of the feed wheat was in the South, which may not be the case this coming harvest if the weather continues to benefit milling wheat. If it rains during harvesting then the milling wheat will be `downgraded’ to feed wheat. Should we be hoping for rain?
In terms of new crop, prices rose rapidly due to the concern for global maize stocks and due to Black Sea wheat production. Global maize ending stocks are forecast to be 257 Mln T in the year ending 2018/19 compared to 300 Mln T the previous year, mainly due higher usage, less production in Brazil and reduced stocks in Iran. Last year Russia harvested 85 Mln T wheat, in May the USDA believed this year’s harvest would be 72 Mln T, and this week (12th June) downgraded it again to 68.5 Mln T. The problem has been hot and dry weather in the Black Sea, and we are in the midst of a ‘weather market’. Consequently November wheat futures have risen from about £143/T in early April to £166.65/T (2 July).
Three months ago, in early April, soya for June delivery was only £352/T. Then Argentina lost 18-20 Mln T soya due to drought, so by early May prices had hit £382/T delivered to the mill and by the end of June £330/T. So again, congratulations to everyone who fixed their feed prices for the Quarter, because that would have saved an average of £15/T of soya, or approximately £1.50/T of finished feed. Combined with the wheat prices (see above), fixing for the Quarter saved about £12.50/T of finished feed.
In $-terms, the July soya bean contract has just hit the lowest price since April 2016, whilst the July soya bean meal contract is at its lowest since February this year. The falls appear to have been driven by fund-selling rather than supply and demand. The fact that meal has not fallen quite as far as whole beans may possibly reflect the point that Argentina is one of the major exporters of soya meal to the world. In trade terms, the US needs to have a decent soya harvest to make up for the dent that Argentina has left in global supplies; it expects to produce 116.5 Mln T this year (119.5 Mln T last year).
China is expected to consume about 120 Mln T of soya next year. As Chinese-US talks progress about the $400billion trade deficit, a solution to the sanction/Tariff impasse could lift US markets. The converse is also true. The US is expected to respond to the Chinese offer of increasing the value of Chinese purchases of UD goods this week. Trump is as unpredictable as ever, so anything could happen.
In conclusion, after making enemies of his allies (EU), and an ally of his enemy (N Korea), Trump has announced his intention to impose tariffs on Chinese and European imports. The trade are generally nervous about the International political environment: US vs Mexico & Canada which could see major swings in supply chains e.g. Mexico has applied a 20% tariff on imports of US pork, of which it imported 650,000T last year, and has simultaneously offered a quota of 350,000T of tariff-free pork imports from anywhere other than the US; consequently Mexico is looking at importing pork from Brazil. China may try to reduce its soya imports from the US. What this could all mean for agricultural exports of maize and soya is anyone’s guess.
Although this means that limited feed cost savings may have been made by a few if they bought their wheat and soya separately, for most producers there are sharp increases in price up to the end of the old crop season, and unfortunately it does mean that there will be a limited opportunity for new crop based price reductions going forward into new crop. To make it a little worse cereals having lifted so much in the last few days, this market looks rather too volatile at the moment to call.