Currency changes set to remain a major challenge

IT’S BEEN all over the news what a wet December we’ve had – record levels and all that – but in my part of the Borders we finished up with 648mm of rain.

In old money that’s 25.51 inches, compared to the 2014 total of 650mm or 25.59 inches.

Until December, 2015 was looking like a lot drier year than the previous one, but the 114mm, or 4.48 inches, we had made it the wettest month since July, 2012. The first few days of 2016 have continued in the same vein with dull, dreich, depressing weather with no sunshine or frost which we should have been seeing at this time of year.

Currency movements and the impact they’ve been having on grain prices have been well documented recently but it looks like we will see more of the same this coming year. The weaker ruble, hryvna, peso and real, have all pressured grain prices by increasing competitiveness of grain from Russia, Ukraine, Argentina and Brazil, while the strength of the US dollar brings down key benchmark prices.

The relative strength of sterling has hampered UK exports and added pressure to domestic values. However, the same currency movements could also bring a welcome reduction to part of the cost base for many growers. General declines in the prices for key fertilisers since mid-2015 due to currency changes and slow global demand will help.

Similarly, with Brent Crude now around $35 per barrel and supermarket prices for both petrol and diesel below £1 per litre, this all helps to reduce the cost base as well. Re-weakening of the pound against the euro recently is likely to be welcomed by sellers of commodities – although, from a grain perspective, it merely offsets falls in global/EU prices. Although the recent movements are a welcome reprieve for farmers and exporters, we should expect currency to remain a challenge into 2016 and indeed remain volatile. For exporters across the board, the strength of the pound has been a huge challenge, stifling competitiveness. Farmers with unpriced grain in store from harvest 2015 (and some have stock from 2014) might be hoping for a turnaround in prices in 2016.

However, the last 10 years’ history indicates that pinning hopes on a major rally in the second half of the marketing year has the odds stacked against it. For seven out of the last 10 the price at the end of the marketing year and, indeed, through much of later six-month period, was lower than that in early January.

For the three years that did end up above the January price levels, 2006, 2007 and 2012, the momentum was driven by relatively tight grain stocks and new crop weather issues. For 2016, it’s clear the world and UK has high stocks, so it will be down largely to weather issues this spring to bring life into the old crop market.

The potential of a La Nina weather pattern, which has often followed hot on the heels of an El Nino, looks one of the main prospects for bringing higher values at least for grains. La Ninas often bring, for instance, hot and dry weather for the US Mid-west, potentially a threat to corn and soyabean yields.

The El Nino phenomenon has been a major concern for some time now but its impact on grains and oilseeds seems limited, but the subsequent La Nina could inflict drought on the most important corn production areas in the US and the resulting fall in production could create upward price potential.

Storms across parts of the US Mid-west last weekend caused flooding and have raised concerns about both disease risk for wheat and grain transportation.

This has resulted in a rise for Chicago wheat futures and saw May, 2016, UK feed wheat futures follow the trend set by the US futures, which increased to a three-week high as a result.

However, market forecasters do not see a marked upturn in fortunes for grains and oilseeds in 2016 and prices are expected to remain at the current relatively low levels. High stock levels and sustained high output projections will keep prices under pressure, also in the coming year but prices should have bottomed out by then.

The stocks-to-use ratio for corn is slightly lower than for wheat and soya, but still relatively high at around 22%. Output is projected to remain high at 974m tonnes in 2015-16 and, whilst lower than in the past two record years, this is still 7% above the five-year average.