A percentage of grain should be sold as seed leaves the drill

Tillage farmers across the country have been out sowing spring crops in the past few days. As those crops begin to establish farmers should be thinking of selling some grain.

This week, AgriLand spoke to Rory Deverell and the risk management consultant with INTL FCStone recommended farmers sell some of their crop if they haven’t done so already.

“I would always be recommending that 25-30% be hedged before April.”

He added that the practice usually works out well, but cautioned farmers to be careful of the amounts they are selling in this type of season.

That 25-30% should be based on pessimistic yields in a season like this when winter crops will not reach any outstanding yields due to the tough weather they faced over the past number of months.

At present, wheat prices are performing well, but barley is lagging approximately €15 behind. However, Rory explained to AgriLand why he is a little less bearish of barley in recent weeks.

The first reason for this was that Saudi Arabia – the world’s biggest buyer of barley – recently tendered and bought over 1.2 million tonnes of barley. The country’s tenders generally range between 0.5 million tonnes and 2 million tonnes; so this was a big purchase.

Rory explained that this can be good for barley prices as it takes a lot of barley out of the system and creates demand to take away some of the surplus as traders buy bigger volumes to ensure they are not left short.

Wheat to barley or wheat to maize?

Another reason he is cautiously optimistic for barley may come from the continent. As Ireland and the UK struggled to sow winter crops, the default option now is spring barley and fallow.

However, the main area of France which struggled to plant winter wheat was towards the south of the country and a region where the default crop is maize.

Staying with barley and Rory noted: “Barley is relatively cheap versus wheat and that means it should find a bit more demand. I think it ultimately boils back to what the wheat market does.”

The effect of Covid-19 on markets

In the past few weeks, Rory explained that “everything fell – from stock markets to crude oil; even gold fell, but two things have bucked the trend and they are wheat and soybean meal”.

What’s been interesting is gold was always thought of as the safe haven asset in terms of a crisis, but it’s turned out so far, at least during this crisis, that wheat is a safe haven because people didn’t run out and buy gold; they went out and bought pasta and flour.

“It took a little while for the market to figure that one out, because, in the early weeks of this pandemic, wheat did fall with everything else; we had much lower prices only a few weeks ago.”

He cautioned that this can have two impacts on wheat markets – short and long-term.

The short-term impact is that flour mills and pasta producers become strong buyers of wheat. They need to restock as consumers demand these wheat-based products.

They’re strong buyers of wheat at the moment and they’re one of the reasons why the wheat market has rallied.

However, that flour and pasta will last a long time at home in people’s kitchens.

“It’s probably going to be a short-term demand cycle. Everybody has rushed to buy pasta and flour. They have stocked up for a couple of weeks and months.

“The shelves will get restocked and the off-takes from the flour mills will decline and they won’t be the strong buyers anymore.

I think that’s where we need to get careful as farmers – to remember that once demand is satisfied the elevated prices don’t need to stay elevated.

In the longer term

The risk manager explained that in the longer term countries building grain reserves may help to tighten wheat supplies. He commented that many countries are now looking at building their strategic reserves of wheat.

There’s a lot of countries around the world which want to build stocks of wheat.

He noted that countries feel vulnerable at the moment.

“If everybody wants to stock build a bit more that’s good for demand for the next season, and then after that it’s worth just playing the weather game and seeing how the weather fares in Russia and Europe and all the main regions.”

Tight supplies in the EU with no incentive to store

From 2010 to 2019, the EU had approximately 10 million tonnes less wheat in stock than it had from 2000 to 2009.

The fact that Europe doesn’t physically carry much surplus wheat means that supplies are generally tight and therefore if there is a problem in the season, like a drought for example, then tight supplies have the potential to increase prices.

Rory continued to describe how supplies are now tight in Europe because the focus has been on exports.

We’ve run ourselves very low. That means there’s very little buffer there if there is a problem.

However, he says this with caution and is not advising farmers to hold out on a grain price in case there is a drought as, he adds, “farmers have to remember that the usual thing to happen is a normal harvest”.

Price insurance

Many farmers across Europe are concerned about yields and the possibility for higher prices so are opting to use price insurance rather than locking fixed prices and this is a service now being offered through some merchants to Irish growers too.

The insurance can give growers some comfort when making sales decisions and can help to control risk when selling grain.

CAP and storage

Rory also noted that the current situation might encourage the EU to rethink the Common Agricultural Policy (CAP) and incentivise farmers and traders to store grain. He noted that at present the market is almost structured to disincentivise storage.

In the coming months…

In the coming months, Rory advised farmers to keep an eye to the weather in May and June and large wheat producers like Russia and Australia, adding that Australia is now out of a drought and may get back to normal production.