No margin for error

by World Grain Staff
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A record wheat crop is dominating the world’s thinking, yet tight supply could still be a problem, according to experts who spoke at the Home Grown Cereals Author ity Grain Market Outlook Conference in London, England on Oct. 17. With inputs expensive and the credit crunch creating problems paying for them, farmers could be set to cut plantings just when stocks need to grow some more.

"We haven’t really rebuilt stocks this year," said Julian Bell, senior rural business consultant at the Scottish Agricultural College. "We’re still open to any crop problems that may occur. World stocks of wheat and coarse grains are still very low in terms of stocks to use, and very little has changed."

Although grain stocks are expected to recover, they would still be near a 30-year low. At the same time there had been sharp rises in input costs.

"It is in the last year that things have changed dramatically," he said. "It’s the fertilizer that shot up." According to Bell, the annual increase in fertilizer cost in the U.K. from July 2007 to July 2008 was 161%. Fuel prices had almost doubled in a year, but they are now coming down. "The real massive increases have been in phosphates," he said. In the 12-month period through September, phosphate prices were up 169%, potash was up 268%, and nitrogen was up 132%.

Variable costs had risen by 70% to £300 ($513) a hectare for the 2009 harvest, equating to £90 ($154) a tonne at a national average yield of eight tonnes per hectare. "That is money that if you don’t grow, you don’t have to spend," he said. "Once you get to £90 a tonne for costs you don’t have to spend, it’s not leaving you much the way the market is at the moment. The real issue is for 2009. Based on current costs and current prices, it’s looking very tight."

However, 2008 was unusual in having a margin that looked positive at the time of planting. "2008 sticks out like a sore thumb," Bell said. "We seem to be right back where we were."

In 2008, the estimated production cost at the time of planting had been £107 with the price at £128, giving a £21-a-tonne margin. For 2009, the costs were £141 with the price at £110, giving an apparent loss of £31.

"Farmers surely have got to bring to the wheat area down," he said. "That poorer ground is not going to pay."

There is also going to be an effect from the credit crunch. "In Scotland, people haven’t been communicating," he said. "Farmers didn’t tell the banks that they were going to need three times as much money for their fertilizer. Banks didn’t tell their farmers that they were going to halve their overdraft limit."

Bell said he didn’t believe the credit problems were limited to the U.K. "The same thing has been happening everywhere," he said.

He said there are ways in which farmers can cut costs, such as lowering fertilizer inputs. "Many soils are well supplied with P (phosphorus) and K (potassium)," he said. "A holiday is an option."

At current prices, a sharp reduction in nitrogen use could be justified. "The economic option for nitrogen at the moment suggests that probably 40 kilograms could come off," he said.

Martin Todd, managing director of consultancy, LMC International, pointed out that the world had coped with increased demand by getting more yield, rather than increasing area. "The growth in demand for these crops has been met through growth in yield," he said. "The amount of land has not grown that much."

However, with biofuels accelerating demand for crops and with land area fixed in Europe, North America and most of Asia, it may be difficult to maintain the desired supply/demand balance. He suggested that Argentina, Brazil and Indonesia could be key locations for expansion.

But he also pointed out that biofuels might not achieve governmental plans for increased usage. "Governments mandate certain inclusion rates," he said. "They have targets. These targets will only be met if biofuels can compete with petrol and diesel on price."

In effect, the oil companies had a choice. "These mandates are soft," he said. "They can choose not to blend."

Where the motorist has a choice, then biofuels would have to compete on price. "In Brazil, demand is based on a flex-fuel vehicle, which means the motorist can choose," he said. "It has to be competitive every time."

Heike Hintze-Gharres, manager of the HGCA’s market analysis team, outlined the volatile background of the grain markets. "The markets have become very complex these days," she said. "The nearby LIFFE (London wheat) futures price was below £90 a tonne on Friday, the lowest since May 2007."

The U.K. has more wheat to export, with an exportable surplus of 3 to 3.5 million tonnes, compared to 1.5 million tonnes for 2007-08 after production had risen to 16 to 17 million tonnes from last year’s 13.2 million.

"More wheat is available and the lower price has made wheat more competitive when compared with the other feed ingredients," she said. "But quality is an issue here. It may take some effort to find quality wheat this year."

VARIABLE COSTS LEAP HIGHER
According to Hintze-Gharres’ calculations, variable costs for wheat for harvest in 2009 had risen by £200 to £450 a hectare compared with the previous season. "In order to get an idea of plantings, it is important to look at margin calculations," she said. "Margins have fallen a lot. Lower market prices and rising in puts have lowered profitability."

The most profitable crop for harvest 2009, according to her calculations, would be milling wheat. "Forward prices need to be a little bit better to encourage farmers to grow the crop," she said.

There was still uncertainty. "Stocks are currently being rebuilt, but a turn in the weather can turn the whole situation," she said.

Currencies could also change the situation. "A cheaper euro against the dollar could help E.U. exports," she said. "A cheaper pound against the euro should help the U.K. exports to the continent."

Hintze-Gharres believes that investment trade has contributed to the fall in grains. "Fundamentals started the price slide, but there has to be little doubt that fund selling activity contributed," she said.

E.U. CHANGES ADD UNCERTAINTY
The European grain industry faces further uncertainty with plans for change to the E.U.’s Common Agricultural Policy under what the E.U. has called the "Health Check," with some changes due to be applied next year. Marsha Ribeiro, manager and policy analyst in the HGCA’s Crop Marketing department, insisted it would not be a full-scale reform. "It’s about fine tuning, modernizing, making adjustments," Ribeiro said.

Paul Temple, vice-president of the National Farmers Union, which covers farmers in England and Wales, said he was eager to see the E.U.’s policy of set-aside go. "If we want to choose one thing that can complicate things, it will be set aside if we don’t scrap it," he said. Sonia Phippard, director of food and farming at the U.K.’s agriculture ministry, the Department for Environment, Food and Rural Affairs, said that the French, who hold the rotating presidency of the E.U. for the second half of 2008, were keen to get the changes made in November. "I think they’ll succeed," she said. "We’re going to have to keep pushing to ensure we have simplification."

Set-aside was a market management measure. Most countries want it abolished, although some have argued that it should be set at zero, which would mean keeping the bureaucracy in place.

The "Health Check" also includes a proposal for a new intervention system, replacing the current buying in at a fixed intervention price with a tendering system like that used for the E.U.’s export tenders. "It’s very clear that a lot of member states are very concerned both about the abolition of some sort of intervention and possibly more about the tendering process," said Phippard.

From the HGCA’s director of crop marketing, Alastair Dickie, came a warning that anyone involved in grain markets today had to know how to deal with uncertainty. "These markets will only give you a steady living if you exploit volatility instead of reeling under into its blows," he said.

Chris Lyddon is World Grain’s European editor. He may be contacted at: chris.lyddon@ntlworld.com.

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