Lower world stocks, rising domestic demand and crop concerns overseas, are fuelling expectations concerning prices for the 2018 wheat crop.
With good prices on offer for new crop wheat, it makes sense, from a risk management perspective, to lock in a proportion of new crop, even though prices could go higher.
This is the view of Rupert Somerscales, consultant at grain market analysts, ODA. “We are already around import parity, which means prices will be more influenced by what’s going on the Continent and in the wider world. Since French wheat is competitive, there is little reason for the price to go down significantly.”
Mr Somerscales says the 2018/19 crop marketing year has parallels with 2017/18. “There are some similarities on the balance sheet. Production level is likely to be similar, with a similar type of structure on the usage side of things, particularly for wheat.”
While he has a high degree of confidence in Defra’s wheat consumption data, he says wheat production figures from the Defra June agricultural survey have shaken his confidence in this data source.
ODA’s data indicates a production figure of 14.47 million tonnes for 2017/18 with Defra predicting 15.2mt initially, later revising this to 14.84mt. Data subsequently published for the first time by the RPA backed up ODA’s prediction.
“With Defra’s production number still wrong by around 400,000t I will have less confidence in this [June survey] data in future. We’ll rely on our own data and RPA data but RPA data comes too late in the marketing year. We will rely on farmers more to tell us what is going on in terms of yield.”
Usage wise, bioethanol plants and compound feed mills had been ‘fighting it out’ for feed wheat this selling season, particularly in the North, says Mr Somerscales. “Basis levels have been through the roof because of these guys [bioethanol producers]. And they are not going away unless politicians come in and say it is creating problems for the consumer.”
He says demand from bioethanol plants has seen some extreme movements of wheat within the UK with it travelling to the Teeside-based Ensus plant by road from as far away as Southampton. “At these current prices, it may pay for supplies to be shipped by coasters from the South and East.”
On the UK wheat consumption side, Mr Somerscales says animal feed usage is growing year by year and that markets for milling wheat, brewing and distilling are seeing a linear increase year on year. “They are not a particularly volatile data series and I would not be surprised to see another small increase in demand in all sectors.”
Whereas in the past, higher prices would normally encourage farmers to grow more wheat, issues such as black-grass, which have forced rotational changes, mean this market mechanism is ‘almost broken’, says Mr Somerscales.
“Demand for wheat [2018/19 marketing year] is strong again. Markets have already moved to around import parity and will likely stay there all season. Perhaps there will be four times more imports than exports and the new crop basis is already strong. Import parity will be a key metric - world prices will dictate our local market.”
Factors affecting world prices include a reduction in stock levels after five years of rising levels. “Excluding China, it is the third year stocks are getting lower. This is supportive for prices,” adds Mr Somerscales.
Spring sowings have been delayed in Russia and one-third of its crop is at risk of not being planted, he says. “This has seen European and UK prices well supported in the last six weeks.”
Adding to price support are drought conditions in the US which means production in the eight key exporting nations is likely to be down by 9mt year-on-year, adding to the 28mt reduction in harvest 2017.
A decline in world stocks is also likely to make for more volatile trading conditions, augmented by political, economic and financial market risks, adds Mr Somerscales.