17 July 2018 | Online since 2003

4 November 2017

Comment from the Feed Mill - November 2017

Last year the UK had good quality wheat and we exported about 1.4mt of it, to the point where we were very short in the latter months of the harvest year and had to import 1.9mt which left us with an official carry-out of about 1.6mt (about 2.8mt the previous year).  If it had not been for the early harvest in August this year, many feed millers would have run out of wheat, so the trade believes that the carry out was much less than 1.6mt, possibly 1.2mt.
The UK grain trade’s estimates of this year’s production were in the region of 14.2-14.8mt wheat this year, which using the lower carry-out would leave us with a negative exportable surplus (requirement to import).  Then DEFRA issued its UK wheat production estimate of 15.2mt.  Using the 1.6mt carry-out with DEFRA’s 15.2mt means that we could have an export capability of 1.1mt – if DEFRA is correct.  The trade is left scratching its collective head, and struggling to make sense of the huge difference between official figures and listening to their gut.
There is a North-South wheat price differential of about £10/t, which we referred to and explained last month, and it is still with us; as the South has mainly grown feed wheat and by default has the cheapest wheat in the country at about £140 delivered to the mill.  The North-South divide may also explain the difference between official figures and the trades’ guestimations, if all the July wheat stocks were in the North.
We attended the annual AHDB Outlook conference, and Jack Watts presented this graph demonstrating that we are on a knife-edge in terms of needing to import and export, and that can change significantly within a harvest year.  About two years ago the UK had the cheapest wheat in the world, and now we have the most expensive wheat in the world on a like-for-like basis.  Currently Russian/Black sea wheat is the cheapest, followed by the EU.  Russia has had a massive harvest this year and is expected to export 32mt compared to the EU which is expected to export about 28mt, thus Russia is mopping up most of the export opportunities, whilst France has taken a back seat since August and is only now starting to compete.  It is thought that France was waiting until Russia had depleted its stockpile, but as estimates of Russia’s harvest increased, France would have had to wait until New Year by which time the Australian harvest would be ready.  Against this background, with the UK not being export competitive, it is thought that wheat prices are likely to remain steady until the New Year.  This is not unusual as November is always a big month for moving the physical grain due to the November’s futures contracts, and farmers are always busy preparing next year’s crops and pursuing their hobbies rather than selling wheat.  More clarity on the carry-in stocks and UK wheat production this year will give better direction on wheat prices.
UK November futures are about the same as last month at £139/t having briefly touched £144/t in early October.  Currently November futures are about to expire (147 lots of Open Interest), so our focus switches to May futures which today (25 Oct) are trading at £147/t.
The soya story is all about stocks and weather affecting future production.  The good news is that global soya ending stocks are high at about 100mt of which about 50% are held in Argentina, compared to global demand of 340mt.  Argentinean stocks are high due to a number of reasons including export taxes, inflation and currency exchange.  The not so good news is that it is too wet in Argentina and too dry in Brazil at this critical planting time.  Next year, Brazil is expected to produce 109mt (114mt this year) and Argentina 55mt (58mt this year).  However, the possibility of a La Niña event occurring has increased to about 60% probable.  China is expected to import about 95mt soya this year, slightly less than anticipated as their pig numbers have declined by 75m to about 650m over the past three years.  Although the Chinese love pork, they do not enjoy the pollution, so have cleared many of the pig farms that were close to cities and river systems; there have also been disease issues.  As China’s demand for soya starts to plateau, this may start to cause soya prices to ease.
In the UK, soya prices are determined more by currency when there is a global sufficiency of soya.  GM soya is about £295 delivered to the mill.
Organic prices appear to again be subject to more upward pressure – yet again.  The organic harvest in the UK is always later than the conventional, so is probably still struggling in some parts of the country.  By this time we would usually have a selection of imported wheat prices, but there are worryingly few at the moment.  Due to a combination of tighter supply (in part caused by more higher levels of scrutiny) and hugely growing demand for organic raw materials from other countries, the price of wheat into the UK is much higher than last year.  The unavoidable reality is that feed prices will be rising significantly.  As retailers, and therefore packers are keen to have more organic, then surely they will have to pay higher prices for eggs to reflect the unavoidably higher costs?