17 October 2017
Comment from the Feed Mill - October 2017
The UK physical wheat market is a little strange with a £10/t North-South differential so wheat is £148/t delivered to a mill north of Manchester, and is languishing at £138/t south of the M4. It seems that there is more milling wheat in the North, where the demand is for feed wheat (for the biofuel plants and starch extraction). In the South, there is more feed wheat than milling wheat, thus the quality of the wheat is in the wrong place, which will add to the transport costs this year. In the South West the cereal harvest is not yet complete, which could mean that this year is the longest harvest in living memory. Farmers are reluctant sellers, as some finish the harvest and the majority concentrate on putting next year’s crop into the ground whilst others pursue seasonal hobbies.
UK November wheat futures are stuck, having traded at £139/t plus or minus £3/t over the past month. On the other hand currency movements have been significant; the £ started falling against the € from the start of May (€1.19) and continued to the end of August (€1.08), and is now (25th Sep) almost at €1.14; which supports the old adage ‘sell in May and buy again on St Ledger’s Day’. Last month UK November wheat futures were trading at a €10/t discount to the Matif, and are now only €4/t which means that UK exporters have little chance of exporting wheat [the Matif is a milling contract whilst the Liffe is a feed wheat contract]. In fact exporters are hampered by the variable quality of the UK harvest which means it is difficult to put together thousands of tonne to load a boat quickly. Even EU exporters are finding life difficult as Russian wheat is reportedly $20/t cheaper than the French as illustrated by a recent quote to Egypt. This competitiveness is allowing Russia to ship wheat to Asia, and is pre-empting Australia’s traditional export markets. The Russians have a record wheat crop of nearly 90mt, and are likely to export a third of it, raising valuable hard currency. Australia starts its harvest next month, but may only produce 20mt (53mt last year), so like the EU, its exporters are hamstrung.
Although we normally try to ignore the weather, this year we cannot. In the UK we had a superb early summer then the rain came. In the US a couple of states bordering Canada which grow virtually all the US milling wheat suffered from severe drought. In the Caribbean a series of hurricanes devastated several islands and brought storms to the US just as their soya and maize harvest starts. Now the US Climate Prediction Centre has increased the probability of a La Nina event occurring in the next 3 months to 55-60%. La Niña normally means a cold US winter and increased rainfall on the East coast; and in South America reduces rainfall on the border between Brazil and Argentina during December and March which could affect both maize and soya. Thus it is likely that future price action next year will be determined by ‘the little girl’.
Brazilian farmers prefer to wait until the ground is wet before they plant soya to ensure germination; planting of both maize and soya normally starts in October. In Mato Grosso, the weather has been dry and hot, so very little soya has been planted yet. Further south, in Parana they have had rain, and planting has started. In Argentina there has been flooding around Buenos Aires and La Pampa which is likely to delay maize planting (normally starts in September), but bodes well for soya which is not planted until November. Argentinean farmers have had the same problem as the UK, with the maize harvest having started in March, and due to the wet weather some 2% is still to be harvested.
The World Trade Organisation may have a busy year. It is thought that Argentina may invoke the WTO to sort out the apparent US refusal to import Argentinean biofuels; luckily for Argentina, the EU opened its doors at the same time. It also seems that the US has called on the WTO to investigate China’s tariff rate quotas which have dramatically reduced the imports of US maize products. China has been trying to reduce its maize stockpile (possibly as much as 250mt), and has auctioned some 4mt of its 2014 vintage this month. A reduction in farmer subsidies to grow maize has succeeded in reducing production, consequently domestic prices have risen. However this has attracted more imports which China would like to stop, but that will be difficult with the WTO watching. It is a little surprising that the US has taken this action against its biggest soya buyer.
No two years are the same, and this harvest year is shaping up to be an unpredictable one, not least because of the extreme weather events, but also due to politics, Brexit, currency, etc. Never a dull moment!