Economic Briefing April 2007

After the steep increase in the autumn of 2006, UK wheat prices slipped a little in February before recovering to their November levels. Although prices are historically high, there is currently little expectation that they will come down as UK supply and demand look well balanced. Quotations for bread wheat deliveries in November 2007 are at very similar levels to current prices. This may reflect an element of “weather premium”, but with world and EU wheat stocks at historically low levels, new crop markets will be very jittery over the next few months depending on reports on weather and crop conditions in the Northern hemisphere.

• In the UK, the benchmark price for bread wheat delivered to Liverpool remains around £115 per tonne, 35% higher than a year ago (figure 1).
• The market is not expecting much change with the new crop. Current (20 April) quotes for delivery to Liverpool in November 2007 are around £117-118 per tonne.
• USDA figures released at the end of March indicate a 15% increase in the acreage of corn to be 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 International Grain Council’s first estimate is that global wheat production will rise by 34m tonnes to 624m tonnes. This will match consumption, which is projected to rise by 15m tonnes to 622m tonnes.
• Global grain stocks at a record low level continue to support the entire market, despite expectations of increased supplies from the 2007 harvest (figure 2). Stocks of both wheat and maize are at their lowest level since the early 1980s. US maize stocks are expected to fall very sharply to 22m tonnes in 2006/7 from 50m tonnes the year before.
• In the EU, increased plantings and anticipated improvement in yield means that expectations are for higher soft wheat production in 2007 at 128m tonnes. However, demand is also expected to rise.
• EU intervention stocks have largely been sold down during 2006/7. Consequently the market is vulnerable should harvest volumes come in below (increased) expectations. Markets can therefore be expected to respond to good or bad news about the growing crop.
• 2007 UK wheat production is forecast to rise by 0.5 million tonnes due to an increase in area planted. However, a new wheat starch plant in Manchester is expected to come online in August 2007, which will absorb the increase. Planned biofuel facilities seem unlikely to come online before 2008/9.
• Oil prices continue to fluctuate; having fallen close to $50 early in 2007, they are now back over $60 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).

Source: HGCA

Source: USDA

Source: BDI

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