What to watch: The closure of biofuels plants raises the potential of a major shift in UK marketing dynamics
Uncertainty dominates the UK market following the closure of the Ensus plant in North Yorkshire and a lack of clarity on exports for the UK post-Brexit.
Global wheat prices have continued to edge lower.
And European rapeseed prices are still being underpinned by robust demand for rapeseed oil from the biodiesel industry.
May 19 LIFFE wheat futures closed on Wednesday, October 31, at £173.95/tonne, a fall of £1.05/t on the week.
The UK demand side of the balance sheet was dealt another blow recently with the announcement that German biofuels producer CropEnergies plans to suspend operations at the Ensus plant in North Yorkshire from late November.
The company commented that the length of suspension would depend on market conditions, saying lower ethanol prices were behind the decision. The plant will remain ready for production, so it can react swiftly to changing market conditions.
The move follows the closure of the Vivergo plant in Hull. The combined effect will place an additional 300,000t-500,000t onto the UK balance sheet, already swelled by the heavy import programme reported over the first two months of the marketing season.
End-users were very reluctant about extending coverage even before the announcement, based on talk of UK supplies increasing and the previous non-competitiveness of UK wheat onto the export markets.
The long-term uncertainty over the closure raises the potential of a major shift in UK marketing dynamics for 2019 and the 2019-20 marketing season. Assuming both plants remain closed and with the wheat area expected to increase, the UK will have to become export-competitive at some time this season and for a part of the 2019-20 campaign.
However, with the Brexit deal far from complete, exactly on what terms the UK can export, and to whom, still remains unknown past March.
Matif Paris wheat futures have fallen to six-week lows. With no fresh bullish news to spark life into wheat markets, the direction of travel has been downwards this week.
European wheat exports have reached 5.02 million tonnes so far this season.
The latest update from analysts, Stratégie Grains suggested a total export target of 19.4mt. This means that 26 per cent of the export target has been met so far, versus 28 per cent this time last year.
The Russian Agriculture Ministry announced it expects total grain exports to reach 38-39mt this season, with 33-34mt of that being wheat. It also recognised a need to balance export growth with the needs of the domestic market.
Therefore, the possibility of export restrictions later in the season is still a watch point, but the story feels stale at the moment and is not adding support to drifting values.
Russia’s wheat exports have reached 16.7mt for the season so far – the wheat harvest is now complete with an average yield of 2.79t/hectare amounting to a crop of 73.1mt. Its corn harvest is 74 per cent complete and averaging 4.74t/ha.
Global wheat prices continued to edge lower last week, with Chicago wheat down more than 20 per cent since the summer highs and trading at its lowest since early 2018. Consequently, coupled with a sharp rise in the greenback, the competitiveness of the US origin has greatly improved against the Black Sea origins.
As such, Egypt’s GASC purchased a hefty 470,000t, of which 350,000t of Russian, 60,000t of Ukrainian and more noticeably 60,000t of US origin - the first shipment of American wheat to Egypt since May 2017.
Both American and European wheat have become more competitive than the Russian origin while historically, a bull trend is seen during the winter months for the FSU country where wheat across the region is in need for moisture before entering into dormancy.
In Australia, the government indicated that the winter crop production in New South Wales is ‘forecast to be 65 per cent below the 20-year average’ while nationally production would be some 23 per cent below the 20-year average. As such, the USDA will likely keep lowering its 2018/19 Australian wheat estimate in its WASDE report to be release on November 8.
In South America, conditions remain mostly good for both soy/corn plantings and early growth stages, with El Niño, very favourable historically for yields, set to be established by the end of the year.
European rapeseed prices consolidated last week with the relatively tight fundamentals fighting against declines on crude oil, vegetable oils and the soybean complex.
In Europe, rapeseed prices are still being underpinned by the robust demand for rapeseed oil from the biodiesel industry. With rapeseed oil replacing palm oil in biodiesel over winter, the supply of rapeseed oil is still down because of low crush activity.
Rapeseed crush is down by 5.6 per cent over the first three months of the season because the crush margins for soybean are more attractive.
Given the lack of rapeseed oil, however, crush margins are gradually converging and could soon benefit rapeseed prices, thus stimulating demand for seed.
New crop production forecasts are already compromised in Europe. Ongoing dry conditions mean that a significant proportion of the rapeseed acreage which did not have enough moisture for germination or development has been ploughed back in.