Is the UK wheat price too low?

With wheat prices as good as they are at present, and the best prospects for years, it might be a little churlish to suggest that prices might be better.  However, UK wheat prices have fallen relative to US and French wheat, and the fact that wheat prices are not higher might suggest that we are in the process of structural market change as UK wheat is replaced in animal rations by cheaper ingredients.

For many years concern has been expressed that our relatively poor quality wheat might one day be priced relative to maize rather than against internationally traded wheat.  This was unlikely to occur while the EU was in deficit for maize and maize support arrangements were the same as for wheat. 

Wheat is now a premium product – potentially good news for UK farmers but only if UK wheat is perceived as too good for animal feed.  Around 45–50% of the wheat consumed in the UK is used for animal feed, with 99% of this UK produced.  This is hardly surprising given that wheat is our main feed grain and EU support, including import tariffs and export restitutions, treat most grains equally.  In addition there is the cost of import.

In contrast, most wheat in the world is used for human consumption.

Source FAO

Support arrangements have now changed.  Maize intervention is now limited to purchases of 1.5mt in 2007/08, 0.7mt in 2008/09 and zero tonnes from 2009/10.  In addition, the EU has moved from being a net importer of maize to a net exporter.

As a result, and in less than a year, a number of changes have occurred:

·         EU maize is trading at below the wheat price

·         US wheat is trading at a variable but high premium over maize

·         UK wheat is falling in price relative to US and French wheat.

The lower UK LIFFE wheat price is perhaps slightly more surprising given the negligible exportable surplus expected and the surpluses in both France and the US.

The French MATIF maize price is still some way above the US CBOT price but the prices are converging.

While there is still so much feed wheat to be replaced in EU rations it is unlikely that the MATIF maize price will fall to match the US CBOT price.  Export markets for US maize are also limited by the GM ban in some countries.

According to HGCA data, maize imported from the EU into the UK has varied from £162.50/t to £171/t over the last month.

The current ratio between maize and wheat prices are as abnormal as they were this time last year: EXCEPT last year’s maize prices were abnormally high compared with the wheat price while this year wheat is abnormally high compared with the maize price.  Despite this, any reduction in EU maize area is likely to be small since maize yields tend to be so much higher than wheat yields (for example, Coceral estimates French maize yields were 20% higher than wheat yields in 2006 and 47% higher in 2007).

So for the 2008 harvest it is reasonable to assume that wheat production will be higher than the current year (supported by estimated increased winter wheat areas in the US and in the UK (see December survey data)).  It is also reasonable to      assume that there will be less maize produced in the EU, but with tightening intervention there is still likely to be a surplus over traditional requirements.  Compounders are likely to respond more quickly in future by using the lowest priced inputs.

We still expect to see a greater reduction in grain use in animal feed due to the rise in grain price, which is much greater than the rate of economic growth.  Internationally, we can still     expect that wheat production will increase in 2008, although we are still doubtful that overall grain production will be sufficient to allow significant increase in stocks.

Longer term, maize production will continue to expand at the expense of wheat.

	35 year ave. increase (%)	10 year ave. increase (%)	5 year ave. increase (%)
Maize production	3.29	3.12	5.21
Wheat production	2.30	0.11	1.62
Rice production	2.27	0.89	2.21
Maize yield	2.22	1.60	2.43
Wheat yield	1.75	0.77	1.27
Rice yield	2.06	0.46	1.04

 

 

 

 

 

 

Source USDA Production, Supply & Demand Database

In 2008 the additional wheat will reduce the premium over maize but, overall, grain shortage may well maintain price.  In the longer term in the UK we can expect further market differentiation, with much greater importance being given to export characteristics.  However, purely feed wheat is likely to trade closer to the maize price with perhaps no more than a £6–10/t differential, depending on location and cost of import to the consumer. 

Wheat is becoming too good for animal feed or biofuel!