Analyst Insight: Grain Market Outlook Conference presents picture of squeezed margins

Wednesday, 29 November 2023

Market commentary

  • UK feed wheat futures (May-24) gained £1.50/t yesterday, to close at £195.20/t. New crop (Nov-24) futures gained £1.60/t over the same period, to close at £206.90/t.
  • Domestic markets followed Chicago and Paris wheat markets up yesterday. In Monday’s latest European Commission Crop Monitoring Report, wetter-than-usual conditions in most of western, northern, and parts of central Europe has delayed winter crop sowing, plus impacted crop establishment and initial growth. On top of this, a storm hitting the Black Sea region is creating significant disruptions and leading to export delay concerns.
  • Though Russian wheat production in 2024 could reach 90 Mt according to Agritel yesterday, after favourable autumn sowing.
  • Paris rapeseed futures (May-24) closed at €449.75/t, up €3.75/t from Monday’s close and gaining support from Chicago soyabeans.
  • Chicago soyabeans felt support yesterday on Brazilian dry weather conditions and the USDA confirmation of US soyabean export sales of 123.3 Kt to unknown destinations in 2023/24.

Grain Market Outlook Conference presents picture of squeezed margins

Yesterday, we held our annual Grain Market Outlook (GMO) Conference in York. The theme of the day was optimising business potential, with featured sessions looking at the grain and oilseed market outlook, latest insights into the characteristics of top performing farms, a mindset session with Becki Leach, and of course our afternoon panel discussion, bringing theory into practice on decision making. We will be sharing as much content as possible over the coming days and weeks, so look out for this.

We received some fantastic feedback from delegates attending yesterday. It was great to see so many joining and engaging in some productive discussion.

Within the market outlook session, we were able to release the latest insights on the full economic cost of production and margin picture for both harvest 2023 and harvest 2024, which I am going to delve into for today’s grain market daily.

Rising costs from higher fertiliser and overhead costs

The average full economic cost of production over a variety of crop types for the middle 50% in Farmbench is estimated to have risen 17 - 22% from harvest 2022 to harvest 2023, as shown in the figure below. The projections are formed using anonymised and amalgamated data from the Farmbench tool from previous harvests, estimating forward using Defra’s Agricultural Price Index information for the harvest 2023 growing season (Oct – Sep) with insights helping to form projections for harvest 2024.

Cost of production for middle 50% higher for harvest 2023

For harvest 2024, this full economic cost of production is forecast to ease back between 7 – 10%, though remaining at elevated levels.

Importantly, these numbers include full overheads, including labour, machinery, property and energy, rent and imputed rent for owned land, plus finance. Across many of these areas we have been seeing price rises, and overhead costs are forecast to rise into harvest 2024 too on the back of this. Finance especially is a key area to consider, with high borrowing rates working their way through. Finance will vary hugely by farm, and therefore, doing your own figures for your business will be extremely important to accurately forecast full economic cost of production.

On top of rising overheads, significantly higher GB fertiliser prices has been a key factor in spiked cost of production figures in harvest 2023, and the main reason for easing costs in harvest 2024. After the outbreak of war in Ukraine, European and UK natural gas prices saw significant volatility, peaking in August 2022 at over 500 pence/therm. Natural gas makes up around 60-80% of nitrogen fertiliser production costs in Europe, and as such we saw significant price rises in GB fertiliser. From the peak recorded in July 2022 for UK produced AN (34%) at £841/t, prices have eased back significantly and are more in line with values in 2021. Imported AN (34%) was quoted in October at £361/t, having stabilised for a few months but remaining elevated.

Margins squeezed for middle 50%

After assessing the full economic cost of production, we can forecast margins for harvest 2023 and harvest 2024. Your prices and yields might look very different to these, the figures are designed to give an indication of margins, and again shows the importance of running your own figures.

Shown below are the calculated average prices and yields assumed within this margin calculation. I have included the full methodology to look through here. For prices, average UK feed wheat futures and Paris rapeseed futures values have been used, translated into ex-farm values, and adjusted for performance bracket on Farmbench.

A table showing AHDB prices -  gross margin work

Going into the net margin picture for 2023, unfortunately these figures paint a difficult story for many in the middle 50%. One that may not be too surprising considering the high-cost climate, output prices being significantly lower year-on-year, and disappointing spring yields many saw.

Margins middle 50% Farmbench shown squeezed for harvest 2023

For the middle 50%, margins are forecast as negative for both spring feed barley and oilseed rape in harvest 2023, with winter wheat showing a more breakeven story in comparison. For harvest 2024, negative positions are still forecast for the middle 50% for spring feed barley and oilseed rape, based on elevated costs of production we explored earlier. Winter feed wheat looks again more positive looking ahead. Though for the top 25%, margins look to turn positive across the board for all three crops, based on price and yield performance and keeping overhead costs in check.

For all information on the top 25% and middle 50% performers cost and margins, you can access the slides and methodology below.

A note to leave on, harvest 2023 tells a difficult story for many. A key takeaway is running your own figures will be crucial, as every farm will be different. Utilise the AHDB tools available to you, including Farmbench or joining an Arable Business Group. On top of this, considering the commodity price cycles that we see, instead of looking at harvest 2023 in isolation, could we consider business profitability over a longer period like a five-year cycle? And does this change outlooks on decision-making considering cash flow driven decisions versus long term business profitability.

• Full economic cost of production is estimated and forecasted from Farmbench 2022 data, using Defra’s Agricultural Price Index (API). Harvest 2023 is estimated from published API data, with 2024 forecasts derived from API data alongside projections for individual costs.
• The growing season includes October to September.
• Full economic cost of production includes variable costs and full overhead costs. Overheads include machinery and equipment, labour, property and energy, administration, rental value (including an imputed rent on owned land) and finance costs.
• Fertiliser costs are estimated from a buying period May to September. A reduction in application has been applied based on anecdotal insight.
• Yields have been calculated using Defra published yield data. Harvest 2023 is estimated using published yield data, and harvest 2024 a Defra UK five-year average. Yields have been adjusted for the middle 50% and top 25%, according to previous season data for Farmbench results versus national averages.
• Grain prices are calculated using the Nearby and Nov-24 UK feed wheat futures season to date average. Futures prices have been adjusted to produce an ex-farm price, using ex-farm UK values recorded in the AHDB Corn Returns dataset.
• Rapeseed prices are calculated using the Nearby and Nov-24 Paris rapeseed futures season to date average, adjusted for an ex-farm value.
• Income per hectare only includes crop sales and not straw sales.

Download Grain Market Outlook Conference Market Outlook slides

Download Mindset Session slides

  • Steven Covey – 7 habits of highly effective people
  • Jim Collins – Good to great
  • Carol Dweck – Mindset
  • Michael Heppel – Flip it

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