Grain Market Commentary – May 2016

Arable farmers, having seen farm commodity prices tumble since Summer 2014, are now faced with the lowest crop values for seven years, with levels close to, or below, the cost of production for many growers. There are barely 12 weeks left until harvest will start again in northern Europe – so any market rally in the short term offers a selling opportunity.

UK farmers with 2015 crops left to sell – and there are plenty out there – could do well to look at the current market closely, as the nearest thing to a price rally seen this spring seems to be underway.

But the effects are modest, and for many growers it will be an opportunity to mitigate the extent of the losses, rather than maximise profits.

Both the London futures contracts for May (the "nearby" contract), and May 2017, show a small uptick and GB ex-farm wheat has clearly moved off the bottom.

Dry weather conditions are starting to become a concern in eastern Australia, with winter planting expected to get underway soon. Many areas have received far below normal rainfall over the past month, a pattern typically associated with the currently weakening El Nino weather event. Winter planting typically begins in mid-April in central Queensland, while the bulk of crops are planted in May and June across southern Queensland, New South Wales, Victoria and South Australia. Without rain soon, the start of planting could be delayed and some farmers may look again at cropping options.

Dry weather is forecast to continue in the short term. While there is still a very long way to go, the extent of the current oversupply in the global wheat market means growers should watch carefully for any piece of bullish news, and its subsequent effect on 2016 and 2017 prices, however transitory and brief any recovery may be. This seems to be a marketing season where a strategy of "do nothing" will only leave one on the bottom of the market.

Despite major stocks and a relatively strong pound against the euro. UK wheat exports have achieved a surprising amount of business this season. Combined UK wheat and barley exports hit the highest monthly level since November 2011, in February this year, according to latest figures from HM Revenue and Customs. Although the UK does not exist in a domestic market bubble – far from it – these exports are important. Uncertainty around future exchange rates in a Brexit-event, combined with UK price competitiveness, will have a bearing on the level of grain stocks the UK will carry into next season. It is quite possible, based on some trade estimates, that this could be the thick end of 3m tonnes (the minimum commercial carry-in is generally pegged at 1.8m) and exports between March and the end of the season will have to work hard to erode this significantly.

For more information please contact Ian Ashbridge, Jonathan Armitage, Ralph Peters or Diana Nettleton.

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