Grain prices are under pressure in a well supplied market again in 2015-16 and producers need to make sure they’re keeping costs down, delegates were told at the recent conference of the U.K. Agricultural and Horticultural Development Board’s (AHDB) Cereals and Oilseeds division, the organization formerly known as the Home Grown Cereals Authority.
“It comes after what has been a truly fascinating growing season,” said AHDB Cereals and Oilseeds chairman Paul Temple. “Now we have the process of physically marketing this crop. We have had now three seasons of good global grain crops that have put prices back to the levels of 2009.”
Jack Watts, AHDB Cereals and Oilseeds lead analyst, looked at the effect of a series of large grain crops. “We have seen some pretty big crops in recent years,” he said. “We have seen another good year, not a record year. You can really see the impact of those fundamentals on the prices. The impact of that on arable margins is going to be marked.
“This part of the commodity cycle is a signal for arable businesses to implement their low-price strategies. Low prices shouldn’t come as a surprise to anyone.”
He explained how an abundance of exportable wheat has forced prices to consolidate on to the maize base. “A year ago wheat was a very interesting market,” he said. “Polarizing forces gave us a huge range. This year prices have consolidated and it’s much easier to generalize.”
He described it as another big year of record wheat production and a big crop that kept getting bigger. Demand has crept up.
“I expect the market to turn a surplus for the third year in a row. In general terms, there is a global abundance of wheat,” Watts said.
The E.U. is expected to be the world’s biggest exporter again, he said.
“The E.U. has a huge responsibility in terms of global food security,” Watts said. “The U.S. is going to be a victim of currency when it comes to wheat this year. Hard red winter is the problem child for U.S. wheat. I wouldn’t be surprised to see U.S. wheat stocks creeping higher.”
He highlighted India and the potential reduction in stocks there, following a crop affected by a lack of moisture. “We start to see India pick up some imports,” he said. “India will begin to import its way out of this issue.”
The effect of the Russian export tax, a mechanism put in place to protect the Russian wheat market from currency weakness, depends on the world price, Watts said.
“The concern is that the weak currencies are going to drive the domestic prices,” he said.
Currently, the tax is having a limited impact. “At higher world prices you get a bigger implication from Russia’s export tax,” he said.
El Niño is an issue for Australia.
“I’m sorry if you are waiting on a bullish run on the back of a decimated Australian wheat crop,” he said. “I don’t think it is going to happen. I cannot see it falling below 20 million tonnes.”
In the E.U., a large French crop was offset by lower crops in Germany and Poland.
“In the last four years, Europe has impressed forecasters,” he said. “It is now issued that Europe will have a good export pace.”
He looked at French supply and demand, with a crop of over 40 million tonnes. “It is having to find more feed demand,” he said, although he noted the French have a better quality crop than in the previous year.
“Maize is something that we can’t ignore,” he said. “It is best described as a dormant volcano.”
Long-term growth in maize production has been phenomenal, he said. It is dwarfing every other crop. He said there is some risk, partly because there are so few global producer exporters.
“The message in this is not to get complacent on feed grain prices,” Watts said.
He added that Europe has had a lucky escape with maize being able to run down stocks to make up for a production shortfall.
“We know barley is not going to break any records in terms of supply and demand,” he said. “It’s becoming less of a commodity feed grain; more of a niche, specialty feed grain.
He also pointed out how farmers in the United States, looking for drought-tolerant crops, are growing more sorghum which will compete with barley.
British market impacted by maize
Maize is having a direct impact on the U.K. grain situation, Watts said, noting that the U.K. was importing maize at a time when there was an abundance of wheat.
“It emphasizes the competitiveness of maize,” he said. “What yield is having to do is compensate for the fact that there is a decreasing opportunity to grow wheat in the U.K. arable rotation.”
“The challenge is huge,” he said of the U.K. surplus. “The carry is the key incentive increasing long-term storage of crops. Traditionally, we relied on intervention to provide this balancing.”
In years with a good quality crop, he stressed the need to pay attention to the difference between full specification and low-grade milling wheat prices.
“This is going to fuel the debate on what the customer requirement is,” he said.
He also highlighted the shift in varieties as new high yielding milling varieties have become available.
“This market is not a one-variety wonder,” he said.
In the past, high yields have encouraged farmers to focus on a low-quality feed wheat, seen as low risk.
“That yield gap is being challenged by three varieties,” he said. “The result likely would be that these varieties will be grown as dual-purpose varieties. It makes the crop more mobile and more marketable. It is giving the whole market more flexibility and more ability to adapt.
“Barley exports, I think, are a bit of a success story for the U.K. I don’t think we will avoid a stock build-up, but barley is in a much better position than wheat. The context of oats as a break crop with the demise of rapeseed economics will be one to watch.
“We are, from a seller’s point of view, on the ugly side of the commodity cycle. If the last 10 years haven’t convinced you that price risk management is an essential part of grain production, nothing will. I wish you the best of luck.”
Julian McGill of LMC international discussed the outlook for oilseeds.
“These markets have been transformed by biofuels policy,” he said. “The fundamental cause today of weak prices is the weak crude price and the lack of any push from biofuel policy.
“With high prices we have seen a huge growth in terms of area,” he said, referring to the period since 2002. “People, as they get richer, are not consuming more cereals.”
In Europe, rapeseed is becoming less attractive as a crop compared to wheat and coming up against agronomic constraints.
“People have cut back on production,” he said. “Markets are adjusting. They are seeing the problems of vegetable oil. The crude oil price is weak, but the palm oil price is holding up better than one would have hoped and that is giving some support to other crops.”
Dominic Watkins, partner and head of food group at lawyers DWF, explained the potential impact of the Transatlantic Trade and Investment Partnership (TTIP) currently being negotiated between the E.U. and U.S. and likely to have an effect on how foods are marketed in both places.
“It is a vast topic,” he said. “We have had lots of change in the food regulation area over the last decade. Pretty well every area that could be touched has been touched.”
The plan has proven to be controversial. “Only last week 300,000 people in Germany demonstrated against it,” he said. “There is a lot of anti-TTIP feeling out there. TTIP is not the only game in town. It is not the only bilateral or trilateral trade agreement the E.U. has. It’s been going on for the last two years, this negotiation process. There is quite a large degree of political oversight. It has still got quite a lot of negativity to overcome.
“In the absence of actual information, we have ended up with lots of myths. It is supposed to ensure the safety standards are maintained. If you have got an issue with food labeling… who is to say which one is better? There is a vacuum in which it is easy to be a scaremonger.”
He highlighted differences in claims that could be made between the E.U. in the U.S. For example, in the U.S. it’s possible to say that eating vegetables might reduce the risk of cancer. In the E.U., you cannot.
“There’s an entire chapter dedicated to food safety,” he said. “It is building on what we already have now. It is interesting to see that in recent months the U.S. stance on GM has shifted. There is an attempt to have greater labeling.”
He also noted how many E.U. member states are opting out of growing G.M. crops.
“It is interesting to see which way the tide is moving on this,” he said.