Photo by Chris Lyddon.
Paul Temple, chairman of the AHDB Cereals & Oilseeds, reminded delegates that the end of Britain’s E.U. membership is coming in 17 months.
“The wheat I am putting in the ground now will be part of this new world,” he said, referring to the “the reality of what we face collectively as an industry.”
He expressed frustration with the many British farmers who think that Brexit has started well simply because the price of wheat has risen as the currency has fallen.
“We have a weak currency,” he said. “It is different in many ways to the global position. Russia is seemingly capable of producing more wheat every year. That is the competition I will be facing.
“It is really easy to simply feel lost and inclined to sit back and wait and see. Brexit success will be allowed managing and facing change.”
Farms are getting bigger, a trend expected to continue.
“It’s the direction of travel,” he said.
Referring to AHDB’s role in this, he said “we have a sense of realism and a sense of ambition.”
AHDB used the conference to publish a paper modeling the potential outcomes of Brexit on income in the industry. “Brexit Scenarios: an impact assessment” looks at an evolutionary position with the same support for farmers and regulation and a free trade agreement with the E.U., a “unilateral liberalization,” in which the U.K. cut all tariffs to zero with no trade deal with the E.U., combined with a 50% cut in payments to farmers, and what it called a “Fortress Britain” outcome with no trade deal, WTO tariff levels and a 75% cut in support for farmers.
For the average farm, starting with a farm business income of £38,405, the evolutionary scenario would increase it to £41,197, unilateral liberalization cut it to £15,401, while the Fortress Britain approach would cut income to £20,162.
The average figures were improved by the assumption that there would be import substitution opportunities for pork and potatoes. All three scenarios modeled produced a reduction in income for cereals growers. AHDB stressed that the most efficient 25% of producers were viable in all situations.
Jack Watts, lead analyst at AHDB, considered global markets.
“The world is in its fifth year of consecutive surplus,” he said.
He identified five key risk areas: complacency about supply; declining transparency; inaccessible stocks; speculation; and deglobalization.
“The catalyst for these risks coming to the surface will likely be weather at some point,” he said, predicting a volatile market. “The U.K. market will still be heavily influenced by what’s happening on the world stage. We still see quite a disparity in the world grain market. Over the last 18 months U.K. wheat has moved from some of the cheapest in the world to some of the most expensive.”
He looked at the period between September 2015 and September 2017.
“In dollar terms, Chicago has fallen 10%,” he said.
In the same period the U.K. wheat market has risen by 25%.
“We can’t really use the global market as a proxy to understand how prices change in the U.K.,” he said.
He focused on the risk of deglobalization, a potential move away from highly integrated markets as countries turn in on themselves.
“Around 25% of wheat production has to be globally traded,” he said.
The risk with accessibility of stocks centered on the increasing proportion of world stocks that are held in China.
“What we are seeing is a real divergence in headline wheat stocks and accessible wheat stocks,” he said. “It is very unlikely any of that stock in China is going to find its way out to solve a problem.”
He warned politicians in particular against taking the wrong action over a perceived speculation.
“Addressing speculation is not a way of fixing market activity,” he said. “It’s addressing the symptom, not the cause.”
Potential Russian supply issues
His warnings on complacency focused on Russia and the potential for a supply problem.
“Russia really is steaming ahead,” he said, looking at the last five years. “We see a consistent improvement in the Russian wheat crop. The market is growing in confidence in the reliability of supplies coming out of Russia.”
He reminded delegates that Russian weather could be unreliable.
“It’s a continental climate,” he said, suggesting that although the current season looks good, Russian crops could be hit again by weather similar to 2012 when drought hampered production.
Currency problem in the E.U.
The E.U.’s wheat production is up, but a strong currency creates a problem.
“It is on a bit of a rebound in wheat production,” he said. “From an export point of view, we are not necessarily going to see a huge amount of increased activity out of the E.U.”
The euro is now seen as a safe hanging on by currency markets.
“That will hamper the ability of the E.U. to be competitive,” he said.
With area and production higher, maize is becoming more influential in the world grain market.
“The area of maize around the world is now plateauing,” he said. “The rise is driven by yield alone.”
Over the last 10 years the world has seen a move away from U.S. dominance, particularly as Russia has built up its livestock industry.
“We are starting to see early sensitivities coming back into stocks-to-use ratio,” he said.
He pointed out geopolitical risks.
“North Korea has potential ramifications,” he said, explaining that 20% of the world’s maize market is in Japan and South Korea.
For barley, he stressed the importance of the Chinese market. Europe faced uncertainty about the malting barley market, particularly as quality in the U.K. is uncertain with Scotland still harvesting.
U.K. supply and demand tight
The U.K. wheat crop has surprised analysts with the latest estimates putting it at 15.2 million tonnes, 1 million more than many were expecting. But Watts pointed out that opening stocks have been revised downward.
“The decline in opening stocks has more than offset the fact that there’s a big crop number,” he said. “You have the balance that is down by half a million tonnes.”
That leaves U.K. supply and demand on a knife’s edge.
“You can no longer assume the U.K. will be a net exporter,” he said, explaining that it was partially the result of the change in cropping with farmers choosing to grow more spring crops. The area planted with Group 1 and Group 2 wheats, the varieties classified in the U.K. as bread-making wheat, has risen, with a rise in the premiums paid.
“A higher area of Group 1 and 2 is offering a bit of resilience,” he said. “A big area of concern for me is what has happened to Group 3. The economic signals are there for farmers to grow more Group 3s. What we need is group 3 varieties to go through the same revolution as Group 1 and 2.”
Breeders have been able to offer bread-making varieties with greatly improved yields and disease resistance.
He looked at the potential effects of Brexit on wheat, something he described as complex.
“At any one time we are importing and exporting,” he said. “Currency is going to have a big role to play.”
Watts noted that the British pound is being bolstered by the expectation of rising interest rates. The pound’s rate to the dollar depended on what was happening in the United States.
“It is very likely that the U.K. could become a third country trying to access the E.U. market,” he said. In that case Ukraine would be a cheaper supplier and it was likely Ukraine would have preferential access.
“The crop going in the ground now faces a marketing period that will partly take place in a post-Brexit world if we stick to current timings,” he said.
There was a need to plan.
“No idea is a bad idea right now,” he said.
Amandeep Kaur Purewal, senior analyst with AHDB, outlined the situation in the oilseeds market. In 2017-18, the world is seeing a deficit year for rapeseed while soybeans are in surplus.
“Rapeseed is usually at a premium to soybeans,” she said. “That premium is increasing further.”
However, she pointed out that the weight of global soybean supplies will cap rapeseed prices.
“Major exporter stocks have all risen,” she said. “China is going to be the importer mopping up those excess oilseeds.”
But China’s pig herd is expected to decline and the country has an excess of soybean stock.
For the oils, stocks are expected to contract for the third consecutive year. Rapeseed oil is affected by factors outside agricultural commodities.
“It is the premium for vegetable oil over crude oil that matters,” she said. “It’s becoming less price competitive against crude oil, less price competitive against other vegetable oil.”
It depended on E.U. policy, she said.
“There is no official biodiesel mandate in place post 2020,” she said. “That is the risk for rapeseed oil.”