Assessing the future grain market
Mark Smith, Trading Director at Saxon Agriculture, shares his views on the key market drivers of the next 12 months and how they will affect UK growers.....
Supply and demand – global production potential
When looking forward to a new marketing season the demand prospects from the various sectors that use a particular commodity need to be fully assessed. Research the amount of stock being held for that particular commodity. Demand has taken a knock in certain sectors as a result of the recession, people continue to eat but patterns have changed. Less organic food is being purchased and beer consumption has declined.
Overall, consumption numbers for grain continue to increase (2009/2010 forecast is an increase of 15 million tonnes to approx 1.75 billion. This is 120 million tonnes higher than 4 years ago) and demand prospects in the medium to long term look good.
Demand from the food and bio-fuels sector will continue to grow.
It is important to be aware of not only the situation in the UK, but also the rest of the world, especially in grain exporting countries that compete with the UK – Australia and the USA in particular. The Black Sea region - encompassing Russia, Ukraine and Kazakhstan, is having an increasing influence on the global grain markets through increased production, better infrastructure, improved farming practises and aggressive grain export marketing campaigns. Their capacity for production looks certain to continue to significantly outstrip domestic requirements (during 2009/2010 they are expected to export approx 45 million tonnes of grain) and as a result we will see an increase in the global surplus of exportable grain coming from that region.
Some stunning figures that have recently been released claim we are going to need to produce another billion tonnes of grain by 2050 to satisfy growing demand from a growing global population.
A longer term view
Volatility is here to stay. The market allows farmers to manage that volatility through contracts, futures and hedging options that can now be offered for 2 years forward. It is already possible to trade wheat for November 2011 on the London futures market. If farmers are serious about continuing to grow cereals in the UK then they cannot ignore forward opportunities and should at least be aware of what can be marketed.
Crop choice
Looking at the UK wheat market, two new bio-ethanol plants will be coming on stream in 2010, on Teesside and one on the Humber. When both are working to capacity they have the potential to take 2 million tonnes of wheat per year. Therefore producers in the North should obviously consider wheat varieties that those 2 plants will consume - essentially high yielding feed varieties.
However, demand from the domestic milling market is very stable and consumes over 3.5 million tonnes of UK grown wheat every season. Premiums can be secured forward for group 1, 2, 3 and 4 varieties, into a range of destinations. There are some good new varieties with high yields for growers who wish to tap into these traditional markets e.g Gallant milling wheat, a high yielding variety with a full group 1 milling premium.
The weather
The key factor we have no control over is the weather. The price spike of two years ago, when grain prices doubled, was triggered by droughts in Europe and Australia, stocks fell and prices went up. Subsequently the good weather enjoyed over the last 2 seasons has seen stocks build back up and consequently this oversupply results in prices coming down. As traders we are constantly monitoring global weather patterns and growers should also be aware of weather conditions in key producing areas of the globe and how these directly impact on grain prices in the UK market
Politics.
The European Commission has a major part to play in shaping global markets. The EU is still protected by quota’s set each year that determine the amount of non EU grain allowed into the UK – currently approx 600,000 tonnes per quarter at a tariff of €12 per tonne. The result is that Black Sea Wheat, which is relatively cheap, pours into Europe and Spain in particular. Spain, one of the traditional UK export markets, has been aggressively targeted by Black Sea exporters who use the quota system to flood grain into the country, thus reducing UK opportunities. The EU is constantly reviewing all import and export policies and quotas and has the power to change them at relatively short notice, which can have a dramatic effect on prices.
Another example is the Intervention System, the cornerstone of grain price underwriting across Europe for many years. Following this season there will be no guaranteed intervention support mechanism in place for feed barley with the quota for the 2010/2011 season being initially set at zero - feed barley will have to find its own market price. Growers in the UK should be aware of these sorts of changes to EU policy and take a view on the likely consequences to their business.
Summary
It would only take another year of bad weather, in a key producing region, to trigger another bull run. The challenge for farmers is to take advantage of these opportunities and be savvy with hedging and marketing to provide protection during bear periods. The last 2 years have been a good example of this where by sharp price increases have set up some great forward selling opportunities but the majority of growers failed to take advantage of them.
As a merchant we are happy to share any information with our farming customers. Saxon Agriculture issues a free weekly Grain Market Executive Summary which gives information about key national, EU and global market developments. We are easily accessible should famers require greater clarification or have any further questions and we would encourage them to contact us.
