Wednesday, 3 July 2019
Unsurprisingly the gross margin for winter milling wheat is once again one of the strongest at £737/ha, owing to good yields and firm prices. Current market conditions are offering a strong incentive to plant wheat for 2020/21. That said, if the UK leaves the EU without a deal tariffs and having to price competitively on a world stage could pressure wheat prices.
Market snapshot – feed wheat
- Recent rises in the value of wheat (driven by maize planting challenges in the US), but the global wheat market continues to look well supplied.
- If good conditions are experienced in the UK through to harvest then we could see a large crop, with increased exports. Increasingly true if the Vivergo biofuel plant remains offline into the 2019/20 crop.
- Prices could be further pressured if the UK faces a tariff on wheat exports into the EU of €12/t (in TRQ volume).
- As an exporter the UK will be dependent on pricing competitively against other global exporters.
Market snapshot - milling wheat
- Driven by the underlying feed wheat market, and changes in the crop quality come harvest.
- If the quality of milling wheat for harvest 2019 is good it is possible that milling premiums will remain relatively stable, given the good milling availability seen this season.
- If Vivergo were to come back online we may see milling premiums for the north of England rise as mills look to guarantee supplies.
Elsewhere good margins are seen for premium crops. The margins for winter malting barley and winter milling oats show improvements in returns for 2020 harvest. The winter malting barley margin has climbed up one place to third at £652/ha, whilst the margin for winter milling oats has jumped three places with an estimated margin of £455/ha for harvest 2020.
Whilst these margins are attractive, the open market tends to be more limited. This increases the importance of both understanding and supplying the variety and quality that your end user requires.
Market snapshot - feed barley
- Planted barley area for 2019 harvest is down slightly year-on-year, but a big crop is still likely if the weather is favourable.
- Domestic demand could absorb some of the surplus. However, there are challenges for barley exports.
- In the event of a no deal, barley will face tariffs to enter the EU of between €16/t (first 307Kt of EU imports from any third country origin not just UK) and €93/t, the UK typical exports 1.35Mt of barley per year to the EU.
Market snapshot - malting barley
- The picture for malting barley will largely be driven by the underlying feed market and crop quality from 2019 harvest.
- Export market challenges: exports are a typically strong market for UK malting barley and there may be challenges with malting barley facing the same tariff schedule as feed barley.
Market snapshot - oats
- The oat market has been very well supplied in recent years owing to a rise in spring oats to combat grass weeds.
- Demand for oats is finite, English mills typically use winter oats, while Scottish use spring oats.
- If the UK leaves the EU without a trade deal then the oat market surplus will increase. The tariff on oats is set at €89/t per tonne.
Oilseed rape – favourable margin, high costs
In spite of the rising agronomic challenges facing oilseed rape, the popular break crop continues to perform competitively relative to feed wheat. Purely from a numbers perspective, gross margin data suggests the area of winter oilseed rape should increase. However, we have seen the area planted to the crop fall in recent years.
This fall is due to the variable costs associated with growing OSR and the agronomic challenges the crop has faced. The margin for oilseed rape is estimated to fall from harvest 2019 to harvest 2020 (£606/ha vs £626/ha), which has been driven by a reduced price outlook for harvest 2020 and generally higher variable costs over the two years.
Market snapshot - OSR
- Faced with many well documented challenges this year both in the UK and on the continent.
- Cabbage stem flea beetle will continue to be a challenge for UK growers, particularly given reduced access to certain actives. This will constrain area growth despite competitive gross margins.
- With crushers and blenders able, in some cases, to switch from rapeseed to other, cheaper oilseeds, price support may be capped.
With challenges for oilseed rape it is important to consider what alternative break crops are available. We have looked into some niche crops that may offer opportunities for diversified cropping.
The headline margin figures for the likes of linseed and beans are lower, however it is the cost of growing these crops which may make them more attractive options. This is particularly true where access to working capital may be tight, and the future of support payments questionable.
Looking at the return on variable costs (i.e. the pound of gross revenue for each pound of variable cost) spring linseed, winter feed beans and feed wheat all have a good return on variable cost relative to their headline gross margin. Where access to capital becomes tighter, crops like these could have an increasing importance in the rotation.
The return on variable cost for malting barley and human consumption spring beans is also favourable. Spring and winter malting barley have a return on variable cost of £2.72/ha and £2.63/ha respectively, whilst spring beans have a return of £2.51/ha. As mentioned previously though, these markets come with an associated risk of meeting specification.
Market snapshot - linseed
- The linseed market is closely linked to the oilseed rape market and movements in oilseed rape will move the base price for linseed.
- The ban of diquat used as a desiccant on linseed could pose some challenges, although alternative desiccants are being explored.
Market snapshot - field beans
- Prices of beans have been good over the past year following challenging yields during harvest 2018. The picture for prices looks set to continue this season.
- The export market for human consumption remains good, with North Africa a key home for UK HC beans.
- The UK will be able to export human consumption beans into most existing, non-EU homes at the same rate as EU nations, with Most Favoured Nation status.
As well as the headline figures it is important to consider the role that some crops may play in the wider rotation. For example, field beans and soyabeans offer the added advantage of fixing nitrogen, this in turn offers advantages to the following wheat crop. While the bean margin may be lower, it could offer a saving on nitrogen which may help improve the margin in following wheat crops.
Market snapshot - soyabeans
- One of the more niche markets, which given its relative infancy in the UK is somewhat unknown.
- Prices track at a premium to imported “any origin” soyabeans.
- The gross margins for soyabeans are fairly favourable but this does rely on an end market being available.
- With more niche crops it is more important to grow with a guaranteed end market.
With some of the smaller crops we’ve explored in our analysis (including soyabeans which have a particularly attractive margin) it is important to consider the relative demand for the product. The margin of a crop is only as good as your ability to be able to sell the crop.
Whatever decisions you make about planting this autumn need to be made with agronomics, economics and the end market in mind.
Assumptions behind 2020 gross margins
The gross margins we produce show the patterns we expect to see in future cropping rather than identifying which crop is the most profitable on any particular farm. The margins have been collated using the most accurate information available up to 17 June 2019.
As we find ourselves in a volatile grain market, the margins we have calculated are subject to change. Later in the season we will produce an updated set of spring crop gross margins, to further identify the patterns we might see in cropping for harvest 2020.
There are a number of assumptions behind the gross margins. One of the main ones relates to Brexit, a lot could change between now and 31 October 2019. However, we have assumed that the UK is due to leave the EU on 31 October, furthermore, we assume that some form of deal will be reached and as such trade will continue near to how it presently does.
Should the UK leave the EU without a deal, there will be important ramifications for grain markets. These are covered in the individual crop market snapshots.
Other select assumptions:
- Gross margins do not include straw.
Oilseed rape, linseed and soyabean margins do not include oil bonuses.