24 June 2018 | Online since 2003

5 June 2018

Comment from the Feed Mill - June 2018

Last month we had UK May wheat futures to guide us for old crop values, but now we only have July futures which are almost useless because the contract is illiquid (useless!) and because the physical market is the main driver.  

The strange North-South (N-S) trading year is playing its last few rounds; until now feed wheat has been moving from the South to the North, but supplies are drying up rapidly.  The N-S price difference is widening as the Northerners are willing to pay more for wheat.  Imports are quoted at about £5/T more than current £10/T N-S haulage cost (Hampshire to Cheshire), so millers are restricted to domestic supplies.  Most of the feed wheat located on the north Hampshire borders and Kent has already been shipped up north, or remains in very strong hands.
Feed millers have been buying spot for most of this year, due to the flat market and lack of the monthly carry, but the March/April spike caught many by surprise as a biofuel plant restarted and thus a wheat surplus transformed into a deficit on about March 1st.  Three months ago on 16th February, wheat was £142/T delivered to our mill, today (1st June) it is £164/T.  In Cheshire, today’s delivered price would be £174/T.  To be fair, the Northern industrial users of cereals have been mainly importing their supplies this year, which may partly explain why the market was so flat, for so long. 
The Flour millers are reported to have also been buying spot this year, with anecdotal evidence that lack of consumer support in the form of long-term demand contracts has forced them to do so.  Most millers (feed and flour) are now busy trying to secure wheat supplies for the remaining 11 weeks (June to harvest) of the year.  The fall-back position for feedmillers is to supplement the lack of wheat with a small amount of barley, but old crop wheat is the same price as old crop barley; but new crop barley from the July harvest at £142/T could still be a possibility, but much of it is earmarked for malting.
The grain trade, who have been puzzling all year about the accuracy of DEFRA’s wheat stats (mainly carry-in and production), have now received an update showing that in 2017, English wheat growers were paid an amount commensurate with a planted wheat area about 45,000ha smaller than DEFRA’s official crop figure.  This suggests 360,000T less UK wheat produced in 2017, which tightens the wheat balance sheets further for 2017-18, resulting in a reduced carry-in for the 2018-19 season; so finally the trade are vindicated (and DEFRAs old figures were [officially] incorrect).
Brazil has all but completed its soya harvest and its maize crop is nearly complete too.  The second maize crop, the safrinha, which amounts to 70% of Brazil’s total maize harvest is still growing.  Brazil’s currency has been relatively strong (as Argentina asks the IMF to help support its currency) which has incentivised Brazilian farmers to sell 64% of their soya crop (52% sold last year at the same point, 5-year average 62%).  Local estimates put the Brazilian soya crop at a record 116.7 Mln T which is 2% more than last year; the maize crop is estimated to be 92mt total, of which the safrinha will be 65 Mln T.
The USDA increased the world soya bean carryout to 92.2 Mln T for this year, and by increasing demand by 15 Mln T, reduced next year’s carryout to 86.7 Mln T (despite Argentina making up for this years ‘loss’ of 17 Mln T due to drought).  China is expected to consume about 120 Mln T of soya next year!  As Chinese-US talks progress about the $400billion trade deficit, fears of a solution to the sanction/Tariff tit-for-tat ease, which means that soya prices have lifted as the US now expects soya exports to China to continue unimpeded.  However there are reports of six ships loaded with US soya in Chinese ports which China is refusing to unload.  It seems that China has ample stocks of soya following the ‘panic’ in April when sanctions were announced.  Since then imports from Brazil have slowed, and it appears that Chinese pig farmers are not making sufficient profits so demand for soya bean meal is also slow.  In terms of strategy, Chinese farmers are increasing their soya planting (at the expense of maize) which long-term will both reduce their imports of soya, and reduce their maize mountain.  Excluding Trump, the past eight US presidents (1974-2009) have promised to reduce their dependence on imported oil; it seems that in a similar fashion, the Chinese want to reduce their dependence on imported US soya.  Argentina has been importing US soya to meet its contractual obligations to sell meal, and thus the shortage of meal production this year is expected to keep prices high with economists talking of rationing demand.  To put this in perspective, today soya bean meal is about £370/T delivered to the mill, three months ago it was £345/T and six months ago £290/T.
In summary, the trade are generally nervous about the International political environment: China; N Korea; Iran & Israel.  UK old crop wheat prices have risen as stocks dwindle and the N-S divide continues to make sourcing and trading difficult, whilst the new crop price is also rising; and the global shortage of soya meal remain the focal points of our markets worldwide.