Economic Briefing August 2007

Summary
The strong wheat price increases seen in June and early July have continued. Every day appears to bring a further increase with bread wheat now at approximately £190 per tonne, which is an all-time high. Forward bread wheat prices for November 2007 are projected to be at least £192, which is approximately £90 per tonne above the equivalent in 2006/7. Oil prices have also risen and now stand at $75 per barrel, back to the high levels seen in 2006, and freight rates recently reached record levels, which are now more than double their level of a year ago.

The UK harvest has progressed well during the past week with an estimated 70% of the crop harvested at 18th August. Average yields, specific (bushel) weights and Hagber Falling Numbers are variable with some growers reporting yield losses of up to 10%. Current wheat market conditions owe as much to growth in demand as shortfall in supply. While fluctuations are possible, it is likely that there will be a continuing upward price shift for the foreseeable future. Poor harvests (lower yields and a failure to meet milling specification) in France and Germany are beginning to have an adverse impact on grain prices.

Key Points

• In the UK, the benchmark price for bread wheat delivered to Liverpool has continued to rise sharply and is now at around £190 per tonne, £90 beyond the level last year (figures 1 & 4), with forward quotes for delivery to Liverpool in November 2007 at £192 per tonne. Quality premiums are at approximately £30 over feed wheat due to concerns over both quality and lower plantings.
• Variable quality has also resulted in biscuit wheat premiums increasing from the traditional £3/tonne to about £8-10/tonne.
• USDA figures indicate a 16% increase in the acreage of corn planted for harvest in the autumn of 2007. However, additional supply is matched by increased demand from the US biofuel sector, which is expected to consume around 80m tonnes of grain in 2007/8. The likely result is that year-end stocks are forecast to be at historical lows of 14%.
• Estimates of global wheat production 2007/8 from the USDA and IGC continue to fall to around 610m tonnes. This is 1.9Mt on the previous figure. This fall follows reductions in the US, EU and Canadian crop estimates.
• Consequently, global grain stocks will fall to a new record low level, providing continuing support for the entire market (figure 2). Stocks of both wheat and maize are at their lowest level since the early 1980s. World maize output is placed at 771.5Mt, which is a fall of 5.6Mt from last month. The EU-27 crop estimate is the main reason for this, falling 6.8Mt to 48.4Mt (12% below last season). Maize stocks were placed at 102.2Mt, down 6% on the last estimate but 2Mt above closing stocks in 2006/7.
• EU27 soft wheat production is now forecast to fall by 3Mt to 114Mt (source "Strategie Grains"). This is significantly lower than earlier estimates of 122Mt.
• Production shortfalls of wheat in Bulgaria, Romania, Ukraine and Russia have had an impact on the market. Disappointing wheat yields in France (estimated 1.0Mt lower than 2006) have led to an increase in MATIF values (now €230/tonne plus €10 milling premium, for November wheat). It is also worth noting that the Ukraine government has embargoed wheat exports for the foreseeable future. There is still significant uncertainty regarding yield estimates of this year's Australian wheat crop.
• EU intervention stocks have largely been sold down during 2006/7 making the market vulnerable to lower than expected harvest volumes.
• Despite an increase in the planted area for 2007 harvest, dry weather in April and flooding/wet weather in July has resulted in very variable yields. Rainfall in England between May and July was 210% of the long-term average. Anecdotal evidence now points towards approximate yield losses of 5-10%. Similar comment suggests that yield penalties in the north of England may be greater.
• Coupled with the commissioning of a new wheat starch plant in Manchester traders now estimate our exportable surplus could be less than 1Mt. Planned biofuel facilities now seem unlikely to come online before 2008/9.
• Oil prices continue to fluctuate; having fallen close to $50 early in 2007, they now remain close to $75 per barrel.
• International grain freight rates rose sharply through the autumn of 2006 as global demand for shipping picked up. This strength has continued into 2007 and rates are now more than double the level of April 2006 (figure 3).

Trends UK breadmaking wheat prices for 2007
(source: HGCA)

Stocks/usage ratio
(source: USDA)

Freight costs
(source: BDI)

Average prices for UK bread wheat, delivered Liverpool
(source: HGCA)

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