Grain surplus, Brexit impacting U.K. Agriculture

by Chris Lyddon
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The dynamics of the world’s grain market are changing as it encounters its fourth consecutive year of surplus, experts speaking at the Agriculture and Horticulture Development Board’s (AHDB) Grain Market Outlook Conference Oct. 12 in London, England, said. They also discussed how the British vote in June to leave the E.U., which triggered a sharp fall in the British currency, has affected farming and what are likely to be the vote’s longer term consequences.

Jack Watts, lead analyst, AHDB Cereals & Oilseeds.

Jack Watts, lead analyst, AHDB Cereals & Oilseeds, set the scene for grains.

“Over the last three years we have seen a continuous deflation,” he said of U.K. wheat price levels, although he noted that they have risen recently because of currency.

He said the pound was the worst performing currency against the dollar in 2016, but noted that currencies like the peso, the real and the ruble also were down.

“It doesn’t really set the U.K. apart,” he said. “The production base in the medium term is more than capable of keeping up with demand and that’s true for all the major exporters. A lot of the growth is coming from those key exporters.”

Strong supplies have set the tone.

“The impact on price has been quite marked,” he said. “The market is much more about export competitiveness. Low freight rates have made the world a much smaller place.”

He considered global stocks.

“China represents quite a transparency issue for global wheat stocks,” he said, referring back to the Soviet Wheat Deal in the early 1970s that led to increased transparency, albeit in a world in which North America accounted for 70% of global wheat exports.

“This year we expect to see Russia topping out as the world’s major exporter,” he said. “One of the key markets is going to be North Africa. There may be some opportunities for the U.K. there.”

Watts said France has had a terrible harvest.

“It has a big impact on export availabilities — a million-tonne fall in French exports to non-E.U. markets,” he said.

There have been exceptions in Europe, including in areas like Romania and Bulgaria, where Watts said there has been “an uptick in production.” But it hasn’t been enough to change the overall picture.

“The ultimate impact is that we are going to see some sensitivity coming into European wheat stocks,” he said.

Maize demand and production are growing.

“Global demand continues to move higher and higher, but just look at the performance of some of those major exporters,” he said.

He explained that there has been three straight years of relatively stable stocks-to-use ratios for maize.

“You can start to see why the market has this growing confidence in the vagrant supply,” he said. “We may well see ethanol demand picking up. There were limits on that. Maize is not the only raw material producing ethanol and producers are becoming a little bit more efficient.”

Russia will encourage maize production to improve the security of its own livestock industry, a factor Watts said will keep Russian influence on the feed grain market in the news.

Maize production was expected to rebound in Brazil, but there are caveats about the weather.

“The barley situation remained pretty (volatile),” he said. “It has to remain in step with those of the commodities.”

Barley exporters could not rely so much on the two big importers.

“In line with lower expectations for Chinese imports, there are also lower expectations for Saudi imports,” he said, adding that this meant there was a need to diversify export markets.

Christophe Cogny, a biofuel and oilseed market analyst at Stratégie/Tallage.

Christophe Cogny, a biofuel and oilseed market analyst at Stratégie/Tallage, explained the contrast between a bearish global oilseeds market and a tight E.U. rapeseed market.

“The crude oil price may be increasing a little bit in the months ahead, but it will still be a cap on oilseed prices,” he said. “We see a stocks-to-use increase for the third year in a row, which gives a bearish outlook for the whole sector.”

Prices of soybeans do not have any upward potential, except there is a problem in South America, he said.

“Vegetable oil production is not going to increase a lot,” he said. “We expect palm oil production to recover from the lows seen this year. We expect rapeseed oil production to decrease.”

The E.U. will need to compete with other importing countries to find tight supplies, he said, highlighting the import potential of China, Japan and Pakistan. The sharpest falls in the E.U.’s harvest are in the west — France, Germany and the U.K.

“We see a sharp increase in shipments from the Black Sea,” he said, referring in particular to Romania and Bulgaria. “Crush margins are going to remain low in the E.U. this year. We are not going to be able to crush a lot. We will have daily less stocks and that’s the key point preventing rapeseed prices from going down. We see a slight margin for prices to increase.”

It would not be by much, he noted.

“Rapeseed prices in the E.U. should be relatively supported,” he said. “We need a premium for rapeseed oil and we have not had enough rapeseed. The rapeseed price has to follow up the rapeseed oil price to keep crush margins thin.”

Access to E.U. is vital

David Swales, head of strategic insight at AHDB.

David Swales, head of strategic insight at AHDB, discussed the effects of the U.K. vote to leave the E.U., although he explained that nothing has actually happened yet.

“It is likely that the U.K. will remain a member of the E.U. for at least a couple of years,” he said. “Tariff-free access to the E.U. market is a critical issue for the U.K. cereals and oilseeds sector.”

He looked at the potential effect of Brexit on international trade.

“The pound dropped dramatically on June 24,” he said. “It’s obviously helped our export competitiveness. This could be very much a short-term factor. There are trade-offs between the regulatory autonomy we will have and the costs of doing trade. Much of the rhetoric seems to suggest we are not going to remain in the single market and we will be seeking some sort of free trade agreement.

“That will enable the E.U. to set its own rules and regulations. Over time you would expect E.U. and U.K. regulations to diverge. That will increase our costs of doing trade.”

There are around £18 billion of food and drink exports each year from the U.K., and two-thirds of its export grain goes to the E.U., he said.

“Tariff-free access as well as access is incredibly important,” Swales said. “Over 80% of wheat and barley exports go to the E.U.”

In the oilseeds sector, U.K. exports last year all went to the E.U.

“We are a very big importer of soybeans from South America,” he said. “There are lots of question marks over what regulations the U.K. will put in place.”

He said E.U. tariffs will effectively keep cheap grain out of the E.U.

“There is a real threat here that the U.K. would be exposed to these tariffs,” he explained. “We will be out there competing with the Russians. That will create downward pressure on prices.”

Brexit could force the U.K. to look further afield, leading to a potential rapid expansion of the global middle class, he said. The fastest growth was in the Asia/Pacific region.

“The E.U. has set up a number of free trade agreements,” he said. “There is debate around whether the U.K. will inherit a share of these agreements. Probably we won’t. This is going to be a really key government priority. Arguably, what is more important is the myriad of technical agreements. The U.K. is likely to adopt a very liberal approach to trade. The key question for the U.K. is where does the food and agriculture sector fit within the hierarchy of priorities?”

There are some countries that have higher support for farmers than the E.U. level.

“It is highly unlikely that the U.K. will head in that direction,” he said. “Keeping food prices down is likely to be a higher priority. It is important that we recognize the importance of those support payments. They have a refuge source of resilience of the industry.”

He expected the focus of support to change.

“I think they will be more outcome focused,” he said, suggesting that agricultural environment schemes or schemes to make farms more competitive might be introduced.

“There are some out there who feel that there will be a rising patriotism and consumers will pay a bit more for British food,” he said. “They potentially have a bit more money to spend. Whether we can count on that continuing is difficult to say.”

He referred to a study by the Institute of Grocery Distribution in which consumers criteria for buying food were listed in order of importance.

“Price nearly always gets the first mention,” he said. “I don’t think we can rely on consumers to spend more just because products are British. We are going to have to focus on being more price competitive.”