Cereals market outlook

January 2021

Production

UK cereal prices have ridden the supportive global wave over recent months. The market has turned in a demand driven direction and concerns that supply may become tighter have supported prices.

We know that the UK posted its smallest wheat crop since the early 1980’s for the 20/21 marketing season. As well as reduced domestic availability supporting prices, the domestic crop has had to price at import parity to attract wheat from overseas and deter exports.

So what factors are on the horizon that might influence the UK price going forwards?

South American weather has been driving much of the grain market movement of late. Concerns have been building around the availability of maize due to La Niña’s drought impact on Brazil and Argentina.

Global wheat prices have ridden on the coat tails of the support recorded for maize. Brazil’s key safrinha crop, responsible for c.80% of Brazilian corn production, is starting it is planting around now (end-January). A first look at the progress of this will come in mid-February. Any concerns around the rate or area of planting or soil conditions at planting, could well lend further support to global, and therefore UK prices. Conversely, timely rains may just put a dampener on any upswings.

With trepidations over global availability, exacerbated by the coronavirus pandemic causing countries to shore up their own domestic supply, we have started to see export caps and tariffs implemented by key exporters. Russia has introduced such a mechanism, to begin 15 February and now Ukraine has followed suit with an export cap on corn. The potential of more supply pressure has further elevated prices. Equally, with Ukraine being a key importer into the UK, the effect could be felt more immediately in domestic markets.

These impacts are most keenly felt on old-crop prices; but what about new crop availability?

Domestically, we are expecting a rebound in production. The AHDB Early Bird Survey shows a 23% increase in the intended wheat planted area this season, just shy of 1.8Mha.

By applying the highest, lowest and average yield recorded over the previous seasons, we could post a domestic wheat crop of between 12.4-15.8Mt. We know that, as at the end of November, wheat crops were looking considerably better than last season (57% rated good/excellent), although behind November 2018 conditions.

If average yields are achieved, and given that we will see minimal carry out stocks (if not a deficit) from this season, domestic supply could remain tight for the marketing season ahead. Of course, we have much of the growing season to come, so yield potential and outcomes are by no means a certainty yet.

Barley

The planted winter and intended spring  area to barley for marketing season 21/22 paints a split picture.

A rebound has been estimated in the winter barley area, up 25% on the year. Conversely, spring barley is estimated back 30%, to 756kHa. Given the challenges during winter drilling last year, where many growers turning to spring barley after being unable to winter drill, this area rebound is perhaps unsurprising. Applying the yield range from the past five years, we could see a barley crop of between 6.55Mt and 7.98Mt.

Ending stocks for the current marketing year are forecast back 7% on the year, driven by increased animal feed demand. The strong wheat prices so far this season have resulted in increased attractiveness of barley usage for feed compounders, given the record discounts being recorded.

While barley supplies are currently plentiful, any threat to the home-grown crop, of which two thirds is yet to be planted, could provide domestic price support.

Trade

Prior to the signing of the UK-EU trade deal on 24 December, uncertainty remained as to whether feed wheat would face an import tariff. This, combined with the domestic tightness, led to a strong start for the 2020/21 import campaign. For the remainder of the season, we would expect this pace to be largely maintained to meet requirements.

However, due to the “front-loading” of imports, we may see this start to draw back in the short term. With global wheat prices at a strong level, and nearby domestic prices recently reaching 8 year highs, purchasers may well be pausing while they are relatively well covered to await more bearish news on the market.

Despite another 8Mt crop in 2020, barley exports are some way behind levels recorded last season. Barley has had to fight for export trade, which has helped mute prices. That said, November recorded barley export levels above the same month last year. This was likely from many trying to circumvent a potential EU export tariff.

The negotiated trade deal with the EU means that there will be no tariffs or quotas on UK barley exports to the continent. Logistical issues remain, but we are in the early days of the new trading relationship, with the industry working hard to iron these out.

Demand

For the rest of the season, barley could remain more attractive to feed compounders if wheat prices stay supported. With domestic tightness and the strong wheat price, there has been an added incentive for increased use of barley in feed rations.

While barley prices have risen off the back of increasing wheat and maize prices, they remain at a significant discount to wheat. This discount reached record levels by the end of December, at £54.30/t. If this discount remains strong, with elevated wheat and maize prices, then barley prices should also filter some of this support.

However, there will be a ceiling to this, due to the sizeable barley crop this marketing year and the need to price at export competitiveness.

Cereals consumption trends

As a result of the COVID-19 pandemic and subsequent governmental restrictions throughout 2020, we have seen a sustained increase in demand for cereal-based products in retail. This is a welcome change in consumer demand as prior to COVID-19, cereal categories such as bread and breakfast cereal were struggling.

National lockdowns generated a significant increase in the number of in-home consumption occasions. This has impacted breakfast and lunch products, which prior to the pandemic may have been consumed on-the-go. The increase in at-home consumption has been reflected in both the retail volumes of breakfast cereals, up 7.1% year-on-year, and retail volumes of bread, up 8.5% year-on-year (Kantar, 52 w/e 27th Dec 2020).

Reduced consumer confidence often leads to an increase in snack occasions. Kantar data shows that biscuits have continued to benefit throughout the pandemic, with increases in spend +8.2% and volume +8.4% (Kantar, 52 w/e 27th Dec 2020). As a result of current economic uncertainty, lowering consumer confidence, we expect snacking and biscuit sales to benefit throughout 2021.

Pizza has proved to be a go to in-home meal option during the COVID-19 pandemic. Due to their convenience, pizzas have maintained consistent growth in retail spend and volume throughout 2020. In terms of volume, frozen pizzas performed better than fresh, as consumers kept their freezers well stocked. We have also seen a 50.3% year-on-year growth in takeaway pizza occasions (AHDB/Kantar, Out of Home, 52 w/e 4th Oct 2020), as many consumers increased their number of takeaways and pizza delivery businesses remained operational throughout the pandemic.

When restrictions ease, in-home occasions may still be heightened, as more people are working from home. Also, some consumers are still concerned about the safety of restaurants and saving money so do not plan on eating out to the same extent as they did prior to the pandemic. Therefore, spend on bread, breakfast cereals, and pizza is expected to continue at heightened levels compared to pre-pandemic.  

Home baking became a major trend throughout the national lockdowns. This trend was reflected in retail volumes of pre-packed flour, up 48% year-on-year, however this only represents a small section of the overall cereals retail market (Kantar, 52 w/e 27th Dec 2020). As restrictions were gradually lifted, the increase in at-home baking occasions eased. As we enter another lockdown, we could see home baking start to rise again but, we expect, not to the same levels as we saw in the first lockdown.

As a result of closures and restrictions of pubs and restaurants, in-home alcohol consumption increased, with beer and lager seeing significant growth in retail volumes, up 31% year-on-year. Additionally, spirits have also seen double digit increases in volume up 26% year-on-year (Kantar, 52 w/e 27th Dec 2020). As restrictions eased and pubs re-opened, in-home alcohol consumption remained elevated, as consumers were still reluctant to go out.

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Cereals consumption trends

Before COVID-19, many cereal-based products were struggling. Kantar data shows that volume sales of bread and breakfast cereals were down but biscuits and pizzas were in growth.

During lockdown, we have seen a huge increase in demand for cereal-based products. An increase in lunches eaten in home is good news for sandwiches with more than 200 million additional sandwiches consumed in May than February (Kantar Usage). This is reflected in the retail volumes of bread which grew 16% compared to last year (Kantar, 12 w/e 17 May 2020).

Due to their convenience, pizzas have continued to see growth in both spend and volume, with frozen pizzas performing better than fresh, as consumers kept their freezers well stocked. We have also seen a 99% growth in pizza takeaways (Kantar Out of Home, 12 w/e 17 May 2020), as many pizza delivery businesses remained operational throughout lockdown.

Once lockdown is eased, the number of in home occasions may still be heightened due to people working more often from home and not eating out to the same extent as they did pre-lockdown. Therefore, we expect to see continued heighted levels of spend for bread, breakfast cereals and pizza.

Home baking has been a big trend in lockdown. According to Kantar Usage there were an additional 37 million baking occasions this April compared to last year. This baking trend meant pre-packed flour sales more than doubled, but it is still a tiny section of the cereals retail market. As lockdown eases, we expect the baking trend to return to normal.

Pub closures have meant people have increased their in-home alcohol consumption, with beer and lager seeing significant growth and spirits also seeing double digit increases in volumes, according to Kantar data. As pubs start to reopen, we expect the growth to slow but remain elevated, as some consumers may still be reluctant to go out.

Falls in consumer confidence often lead to an increase in snack occasions. Biscuits have continued to benefit from this trend with increases in spend and volume. We expect a long period of low consumer confidence due to economic uncertainty which will likely continue to benefit snacking and biscuits.

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Cereals & Oilseeds: At A Glance

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Gallery: Cereals & Oilseeds at a glance

Click on the thumbnail images below for simple visual explanations as to how the cereals and oilseeds markets have performed, according to the latest data. Here we look at measures including UK ex-farm prices, futures prices, production, trade and the GB cereals quality survey.

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