Retail and Wholesale
This article is part of our collection on Agriculture
With adverse weather conditions and the impact of coronavirus resulting in lower yields for cereals, the risks for businesses are heightened, write Alice Bailey and James Webster, senior analysts at the Agriculture & Horticulture Development Board (AHDB).
Last updated: 10 Sep 2020 3 min read
Harvest in the UK is rolling on and, at the time of writing, the most recent AHDB harvest progress report suggested that the wheat harvest to the week ending 11 August was 43% complete. The harvest of winter barley and winter oilseed rape has understandably progressed faster, with 98% and 89% complete, respectively.
This year’s crop has seen more than its fair share of challenges, from the rainfall that persevered during planting to the heat that hit during June and early July. As a result, early yield estimates are significantly down year on year and against average.
Yields of winter wheat are estimated to be averaging 7.3 – 7.8t/ha versus an average of 8.4t/ha. If those yields were to remain consistent across both winter and spring wheat for the rest of harvest we could see production of 9.95 – 10.63 million tonnes (Mt).
The midpoint between the two figures above would place UK production at 10.29Mt, a crop size in stark contrast with last year’s 16.23Mt and the five-year average of 15.09Mt. In fact, it would be the smallest UK wheat crop since 1982.
If the UK were operating in isolation, supply and demand economics would dictate a rampant rise in domestic prices, but it is operating in a global commodity market and, as such, once UK prices move to import parity they are driven by movements in the global market.
Global wheat futures have seen a modicum of support in recent weeks, following storm damage in the US, however for the most part, markets are under pressure. The global wheat stocks-to-use ratio, is, on the face of things, the best supplied it has been on records going back to 1960/61.
Global wheat prices (nearby futures) are presently trading at close to levels seen a year ago, and with a larger wheat crop on the horizon, more pressure is eminently possible. There are a number of factors that could change the current trajectory of global wheat markets. They include the size of the Russian spring wheat harvest, which was severely affected by drought; if yields are poor come harvest we could see markets move higher.
Similarly, we are expecting large southern hemisphere wheat crops (Australia and Argentina). With harvests in the southern hemisphere not taking place for a number of months – the weather will be watched closely.
So, UK prices are at import parity. The global price level is falling. Is there anything to support on farm prices?
We will see some regional support for physical prices in the UK, the nature of the harvest and the challenges for plantings have meant a number of regions will need to price in order to incentivise the movement of wheat up the country. This in turn will support prices in surplus regions. We are already seeing the effect of this within areas that would typically price physical wheat at a discount to futures markets, such as East Anglia, which is now pricing at a premium.
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