Sterling drop props up prices

SURFACE WATER in fields is gradually getting less and daylight hours are noticeably increasing, which is always a good sign that spring is getting nearer.

Unfortunately, the same story keeps re-appearing each week as commodity prices continue to fall and it is only the weakness of UK currency that has reduced the impact of falls in international futures prices on UK values. Similarly, as sterling weakened against the euro, in the US the dollar value dropped as well which was viewed as a big fillip to prices of many assets, including wheat and soft commodities.

Sterling weakened against both the euro, equating to €1.299 and the US dollar, after the Bank of England downgraded UK economic growth forecasts and voted unanimously to keep interest rates on hold at 0.5%. GDP growth for this year has also been cut from 2.5% to 2.2%, primarily due to lower commodity prices.

Food prices have hit their lowest level in nearly seven years as prices last month dropped by 1.9% and prices now sit 37% below the high point reached in 2011. The fall was also fuelled by a retreat in cereal prices to a near nine year low and is due to heavy stocks overhanging most markets and the economic outlook taking a turn for the worse.

The Liffe feed wheat futures for May, 2016, old crop fell by £2.05 last week to £108.45 and at the beginning of this week fell again to £107.20. November, 2016, new crop wheat futures were down £1 to £119.95. In comparison with Paris futures, which fell by 4% and Chicago which fell by 3%, UK feed futures fell by 2% and only the devaluation of sterling reduced the impact of falls in international futures prices.

US weekly export sales hit their lowest level since the marketing year commenced on June 1 and US wheat ending stocks are already forecast at the highest level in five years and sluggish export sales won’t help. The US has struggled to secure demand in global wheat export markets this year due to sheer volumes of supplies available.

An increase in competitive supplies from Argentina has also made exporting challenging for the US. In comparison, Canadian wheat stocks have fallen by 19% compared to December, 2014 and is down to an eight-year low. A weak Canadian dollar has helped Canadian wheat exports so far this season which could see domestic supplies tightening.

World cereal production has been forecast up for 2015/16 by 3.9m tonnes to 2531m tonnes due to an increase in output in both Canada and Russia. World cereal usage has been lowered by 2.3m tonnes to 2527m tonnes which is 0.8% more than in 2014/15. Wheat usage is thought to increase by 2% driven by a rise in animal feed usage.

The global wheat stocks-to-use ratio comfortably stands at 30%, so any news of weather problems causing a shortage elsewhere in the world is not going to give cause for concern. Problems such as a sharp reduction of wheat plantings in Ukraine due to dry conditions, a fall in winter wheat sowing in the US, a likely 25% drop in crop output in South Africa and reduced plantings in India due to poor 2015 monsoon season, won’t have much impact.

The Northern hemisphere crops remain vulnerable to a winter freeze due to a warmer winter and lack of snow. However, the EU is poised for a third successive bumper wheat crop. Forecast of a soft wheat harvest of 148m tonnes would be the second largest crop on record, narrowly behind last year’s 148.7m tonnes.

Total wheat used for the UK milling industry, starch and bioethanol so far this season is 8% down on the year at 3.28m tonnes. Home-grown milled wheat is down 4% since last year at 2.8m tonnes, however imported wheat milled for the first half of this season has seen a greater decline of 26% and is now just under 0.5M tonnes.

The proportion of home-grown wheat used by millers equates to 85% of the total, with imported at 15% and this proportionally higher use of home grown wheat could be due to the better quality that was achieved last year.

UK ex-farm bread milling wheat was down slightly to £111.40, compared to feed wheat at £103.50 and feed barley at £96.10. The spread between ex-farm UK feed wheat and feed barley prices has decreased by £10.40 per tonne since the start of the season to £7.40 per tonne.

In January, 2015, the gap between the two feed ingredients was £10.80 per tonne. As the gap between the two feed ingredients tightens, barley will become less attractive and will lose favour to wheat, as it has higher nutritional value and so offers better value for money.

Some UK barley exports are taking place, mainly to Spain and Portugal, and farmer selling has increased but there is a lack of domestic demand at present. Malting barley is also coming onto the market but there are very few buyers as the prospect of a big barley crop this harvest across Europe looks likely.

EU-28 rapeseed area for this coming harvest looks likely to be reduced by 100,000 ha due to winter kill in Poland and Germany. This puts the area now 120,000ha below that harvested in 2015 and output could fall by 3% year-on-year from the 22m tonnes harvested in 2015.

Currency continues to exert influence on UK rapeseed prices and, with sterling weakening again, this has the effect of holding up UK oilseed rape prices. Oilseed rape delivered Erith is up slightly to £270.50 per tonne and oil futures have picked up with Brent Crude up 1.3% to $33.29 per barrel.