Cereals market outlook
The 2019/20 growing season has been a challenging one. With the wet autumn/winter leading to a dry spring stressing crops, we know there has been a large shift to spring cropping and can expect yields to be back significantly on last year.
With harvest approaching, it seems prudent to consider that wheat yields will be on the lower side of average at best. Realistically, we could be looking at yields of around 7.4t/ha, which were recorded in the 2012/13 season. That year also saw a wet autumn/winter and a dry spring. With all of these factors in play, we could see a wheat crop of just over 10Mt, the smallest this millennium.
With the swing to spring plantings, a bumper barley crop was forecast earlier in the year. Again, the dry spring stressed winter crops, but the rain came in time for many to revive spring-sown crops. Therefore, although we might see lower yielding winter barley, spring barley still has the potential to produce average yields.
This would result in a second successive year of an 8Mt+ crop. If realised, when added to a sizeable carry from the 19/20 marketing season, another large supply of domestic barley could be available needing to find a home.
The UK will be a net importer of wheat during 2020/21 and a net exporter of barley.
For wheat, this will be quite the contrast to the harvest 2019 season! To April 2020, the UK had exported around 1.05Mt of wheat, almost 4 times more than the same period a year earlier. This will reverse completely for next year. While we will still see small pockets of more niche exports, the UK industry will try to retain as much of the small domestic wheat crop as possible.
However, this won’t necessarily translate into a bonanza for the UK wheat price. Import parity will keep these capped, so the global availability of wheat will be essential to watch next season to see what might be coming down the road to affect the UK price.
The large crop forecast for barley this harvest, coupled with the sizeable carry from the current season, will see the UK exporting large volumes of barley next year. Moreover, there are factors at play that could increase the size of this exportable surplus.
Firstly, Brexit. Currently export tariffs could be implemented from 1 January 2021. Therefore, exports might be front loaded to circumvent tariffs, as they were this season. Secondly, for malting barley, many maltsters are still well covered from their harvest 2019 purchases, due to the hospitality sector largely closing in the height of the coronavirus pandemic. A drop in harvest ’20 purchases will see more crop available for an exportable surplus.
Finally, the availability and price of maize. If we remain in global surplus, maize could be more attractive to feed compounders than barley. In addition, from 01 January 2021, the UK global tariff for maize imports has been set at 0%. With no tariff barriers planned for the commodity, it could maintain its price attractiveness to UK purchasers and could once again increase the volumes of UK barley needing to find a home.
All of these factors will continue to pressurise the domestic price.
The coronavirus pandemic has had a monumental effect on demand, with the closure of the hospitality industry for 3 months. As the country begins to emerge from the lockdown, and none withstanding a second wave resulting in further lockdowns, how might demand patterns be affected for the rest of 2020?
Bioethanol demand recorded a significant decline during the early days of lockdown. As the country started to emerge from these measures, demand started to recover. However, with the decreased availability of wheat next season, it may become uneconomical for UK bioethanol plants to consume wheat, so we may see the wheat demand from this sector further reduce in the coming marketing season.
During the peak of the pandemic, we saw a spike in retail flour demand. Although only accounting for c.3-4% of production, we can expect this demand to fall back as lockdown eases. It may reduce from pre-pandemic levels, as people work through surpluses and spend less time at home.
About a third of barley is used to produce beer, with just over half of beer demand sold through the retail sector. The uptick seen in “at home” demand during the lockdown period can be expected to diminish as lockdown measures ease.
Previous analysis has highlighted that for each week food service remained closed, an estimated 5Kt of lost demand for malting barley was felt by the industry. With pubs and restaurants to reopen from 4 July, we would expect to see some of this demand recouped. However, with social distancing measures in place, any recovery will be a slow process.
Food service demand for flour is hard to separate, but with outlets reopening demand will be stimulated again.
Much of this is dependent on the length of time social distancing measures are in place, and the size of the economic fallout post pandemic.
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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