Information is key to successful crop marketing

This year’s exceptionally wet winter and spring in the UK might lead some to think that domestic production will be lower and higher prices will result. But with agriculture now a global industry, that may not be the case, says Darrell Yarwood, Trading & Logistics Manager for our crop marketing partner ADM Direct.

Darrell Yarwood, ADM Direct

When looking at the supply and demand balance we must consider potential threats to production. World wheat stocks are good, and with supply and demand finely balanced the factor most likely to lift prices is a threat to production. Currently, these include drought in North America where most of the Plains are officially in this category. Four of the five key Hard Red Wheat (HRW) States reduced their crop ratings from December to January and in February Kansas crop ratings were the lowest for 12 years.

What happens in the US doesn’t necessarily impact on world prices because their large stocks act as a buffer. However, the US markets, including Chicago, often trade in insular fashion, but if Chicago prices rise on the back of continued drought conditions this could provide a selling opportunity.

“It is vital to have a grasp of the fundamentals that drive today’s agricultural commodity markets, from crop plantings, growing conditions and weather, to currencies and politics. ADM’s in-depth knowledge and leading analytical, technical, economic and human resources go way beyond anything that even the largest farming businesses could contemplate, and are a major reason why Fram Farmers’ Crop Marketing Department is so effective.

At the start of 2017 we advised clients that world demand was predicted to exceed supply, world stocks were not quite what they seemed, the UK balance sheet was likely to be tight, and quality and currency would play a major role in determining prices. All but one of those predictions proved correct. Going into harvest prices increased when it appeared – briefly - that world demand would exceed supply, providing an excellent selling opportunity.

However, when instead of the 70 Million Metric Tonnes (MMT) wheat crop that Russia had been expected to produce, it was 85MMT, prices fell back from their July peak and continued down until the end of 2017. So, what lies ahead?

The total world wheat supply has increased every year for the last five years, from 660MMT in 2012/13 to around 754MMT for 2017/2018. Currently, it is the greatest on record, while total demand continues on an upward trend and is likely to be slightly higher in 2017/18 than 2016/17. World wheat ending stocks have increased every year since 2012/13 and are predicted to rise further. Increased stocks generally lead to more market stability and lower prices.”

RUSSIA IS KEY

“Russia remains the focus due to its large exportable wheat surplus which will keep global prices in check, so growers should monitor the pace of their exports for the rest of this season. From 2016/17 to 2017/18, the country increased wheat production by over 15%, and recorded the highest percentage increase in carryout, whereas in the US it fell by around 25% and in Australia by almost 30%.

Looking ahead to 2018/19, world demand for wheat is likely to increase by around 10MT to 745MT, largely due to increases across the human, industrial and feed sectors in Africa and Asia. World supply is predicted at 740MT, with lower production in Russia and India, but higher levels in the USA, Canada and Australia, while exporting countries are expected to reduce stocks. When looking at the supply and demand balance we must consider potential threats to production. World wheat stocks are good, and with supply and demand finely balanced the factor most likely to lift prices is a threat to production. Currently, these include drought in North America where most of the Plains are officially in this category. Four of the five key Hard Red Wheat (HRW) States reduced their crop ratings from December to January and in February Kansas crop ratings were the lowest for 12 years.

Winterkill in Eastern EU and Russia earlier in the year is no longer a concern, but unusually wet spring weather in parts of northern EU, including Poland, Germany and the Baltic States has reduced the planted area by up to 30%, and the EU has revised its production estimate downwards by around 600,000 tonnes.”

WHAT ABOUT THE UK?

In the UK, we estimate 2017/18 production at 14.5MMT, similar to the 14.46MMT in 2016/17, but lower than the DEFRA/ AHDB figures of 14.8-15.1MMT

Demand is higher due to increased animal feed and industrial use, and with a high level of imports not readily available, the balance sheet is likely to remain tight all season, unless we see a large drop-off in prices in Northern Europe or a further rally in Sterling.

Looking ahead to UK prospects for 2018/19, the AHDB Early Bird Survey puts the winter wheat area at 1.748 million hectares, 2% less than last year. Based on the average 5-year yield of 8.0t/ha, that equates to a crop of 14.00MMT, but demand is unknown and might change depending on the requirement for bioethanol use. With the bread wheat area unchanged we can expect a tight balance sheet and the 2018 planted area is 2% lower, so yield and quality will be key factors. As ever, currency will play its part.”

SUMMARY

“Markets are subject to constant changes, so it is important to stay in touch with what is happening globally and have current information at your fingertips on which to make well-informed decisions.”

The Global View

Marc Ostwald, Global Strategist, ADM Investor Services International

The global economy is the strongest in a decade, but UK growth looks sluggish and is forecast to remain below 2017’s level (1.7%) for at least five years.

Financial markets often ride roughshod over political risk, but the Brexit referendum and US election results provided a wake-up call. In terms of Brexit, time is now of the essence and visibility is low. The second stage of negotiations relating to the future UK/EU trade negotiation is underway, but there’s still too much talking ‘at’ rather than ‘to’ each other, both with the EU and within the Conservative Party.

The OECD-FAO Agricultural Outlook for 2017-2026 projects that global demand will grow more slowly, with future growth in crop production attained mostly by increasing yields, and growth in meat/dairy production. Agricultural trade is expected to grow more slowly but remain less sensitive to weak economic conditions than other sectors. Real prices are expected to remain flat or decline for most commodities.

It’s very surprising that the EU/Canada trade agreement is said to be the favoured model, even more so as financial and other services would not be covered by this and c. 80% of the UK economy comes from services.

The UK is not unique in having infrastructure challenges, but these are likely to be exacerbated by leaving the EU. Agriculture is very problematic, particularly given the rather delusional UK and EU suggestion that the existing WTO tariff could simply be divided up. The US, Brazil, Argentina, Australia and New Zealand have already voiced very strong opinions, which hardly bodes well for non-EU post-Brexit Free Trade Agreements.

How CPA payments are realigned is also not un-problematical, seasonal labourers are an issue and how will all of this be integrated with food quality and safety standards, and incorporate climate change and environmental sustainability issues?

Other problem areas, such as ‘Rules of origin’, add another layer of red tape for processors and industry, and while the transition agreement does buy time it’s creating major tensions in UK government.