Information is the most valuable commodity…not wheat: Grain Market Daily

Tuesday, 18 February 2020

Market Commentary

  • Yesterday, UK feed wheat futures (May-20) closed up £0.25/t from Friday 14 Feb to close at £152.50/t. Sterling has begun to withdraw from earlier highs against the Euro which has given opportunity for wheat prices to regain some ground. Global wheat prices have been boosted by the news of Australia’s 19/20 wheat production figures being at the lowest in 12 years.

  • China has announced today its intention to grant exemptions on tariffs imposed on 696 US products. This comes as part of a move to fulfil commitments made in the ‘Phase 1’ trade deal between China and the US. China’s soyabean imports are a watch point as currently Brazilian soyabeans are cheaper and of ‘good quality’ so would be the preferred choice.

Information is the most valuable commodity…not wheat

I may be paraphrasing Gordon Gekko when I say that information is the most valuable commodity. But it is true. And the required information is becoming available for all market participants, and especially growers, to start planning for the future.

We know 2020 will be a small wheat harvest and this will likely keep prices close to import parity. We know there are still threats to our wheat price from cheaper maize imports and a potentially bountiful Russian harvest for 2020. We also know that 2020 is the last year of full BPS payments with reductions to start in 2021.

So if all of this is known, what are your plans for the future to head off these risks?

Whilst 2020 has been difficult from a weather point of view so far, 2021 is shaping up to be even more challenging from a financial point of view. We’ve had a large crop and relatively good prices from 2019/20, but the economics of arable farming will be challenged as we head into 2021.

In my opinion, the key thing isn’t getting focused on what we can’t control in terms of the here and now of weather, but the longer-term uncertainty which we can start to manage, don’t let anyone tell you otherwise.

Two days of valuable data

Over the next two days we will see key pieces of market data released. Firstly, tomorrow at 2pm, we will release an update to our Early Bird Survey. This will cover what is planted and what still intends to be planted through the spring.

From a trade perspective, the regional spread of plantings across the UK will determine the domestic supply and demand balance. This as well as imported values, sets the domestic price structure for delivered markets and ex-farm prices will be a function of haulage.

We are already seeing strong delivered premiums over futures for new-crop along the East coast and into East Anglia. It would be no surprise to see domestic wheat having to move long distances in a northerly direction as markets incentivise movement of grain into deficit areas. Imported prices will set the value of grain in the north and haulage rates set the value of grain as we head south.

So if the trade are using this information to determine markets, an individual grower should use this data to better understand where their grain may go and how their domestic prices are being formed. In years of tight supply, high prices don’t mean high margins and every trade needs to be carefully evaluated.

Questions surround data accuracy

Thursday sees the release of the next set of experimental data from the RPA showing the area of crops claimed under BPS for 2019 harvest.

This raises two questions in my mind.

Firstly, does this give an accurate representation of domestic production for the trade, government, ourselves at AHDB, and growers to use? Personally, I still have reservations about the accuracy of the data to be 100% confident that it is the most robust measure.

Yes, the data in theory should provide clarity as it is a dataset based on an area to be paid a subsidy. Yet I still have concerns over the true accuracy of the data being eligible land rather than a cropped area as well as structural issues with the data gathering and management.

I’m not saying the June Survey is the definitive answer either, any statistical survey has its own risks which lead to inaccuracies as well.

Secondly, the longer-term question surrounds data requirements for the industry. If this is a dataset that is going to be eroded over the coming years as BPS payments are actively managed out of businesses, what do we have instead?

The answer lies in a requirement for all sectors of the industry to proactively engage with one another to find a viable solution. As technology evolves so should the information we use. And we should act upon this information to ensure robust forward business planning to set a course through the challenging waters ahead.

Don’t wait, start now

I urge all farmers to use this data to better understand the domestic market. Then, use this to set a marketing strategy for 2020 harvest based on future market expectations and, more importantly in my mind, cash-flow requirements for 2021.

Going out of a small-crop, high-cost year into one where BPS payments are definitively going to reduce is a major risk. Let’s start to manage this now, not in a year’s time when the cash-flow starts to show signs of grinding to a halt.

Next week on Thursday 27th our Senior Analyst James Webster will be releasing a new piece of analysis into the complexities of cash-flows on arable businesses to help offer more insight into this area.


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