UK wheat prices to fall, boding well for dairy

UK growers should prepare for a further fall in wheat prices but not enough to put livestock producers in profit, in contrast with their dairy peers, HSBC said.

The bank - which a year ago predicted, broadly correctly, a drop to 165 a tonne in wheat prices this year, from 227 a tonne at the time said that values will fall further next year, to 150 a tonne.

While the UK itself reaped a relatively small harvest this year, of 12.1m tonnes, after persistent rains hampered autumn sowings, the world picture for cereals supplies has improved, HSBC said, quoting estimates from the UN Food and Agriculture Organization that stocks, compared with use, has risen to an 11-year high.

"The improved harvest in Europe up around 10m tonnes from 2012, with a significantly improved Russian and Ukrainian harvest will put trading under pressure for the coming season," the bank said.

'Pressure on prices'

HSBC also noted that the European Union seen planting similar areas with cereals and oilseeds for the 2014 harvest, "following significantly improved production" in 2013, and potential pressure on values from a strong South American harvest early in the calendar year.

"Generally, the increases in world production are capable of replicating a better harvest and the commodity market is discounting on that basis.

"The pressure on prices seen at present is unlikely to show much change until the New Year and then weather will again play its part."

Into the red

The bank's forecasts compare with the 164.25 a tonne at which London feed wheat for January was trading on Wednesday, with the new crop November 2014 contract at 159.50 a tonne.

Farmgate prices ended last month at 161.40 a tonne for feed wheat, according to the HGCA crop bureau.

And the downturn in cereals prices may push producers of some grains into a loss, with winter barley farmers on track for a negative margin of 8.80 a tonne, before support payments, assuming even an above-average yield of 7.25 tonnes per hectare.

Rapeseed margins will come in at a negative 17.70 a tonne, factoring a yield of 3.4 tonnes per hectare, in line with average levels.

Dairy in clover

However, for some grain users the lower prices bode well for profitability, especially in the dairy sector, where world commodity prices are being boosted by Chinese demand, as highlighted by Tuesday's GlobalDairyTrade auction.

"Just 12 months ago, milk prices were 27.5p per litre and feed costs were increasing to over 300.00 per tonne.

"Today the average milk price is 31.37p per litre and the prospects are that average feed costs will be at or below 250.00 per tonne before long."

Livestock losses

However, beef producers looks set for losses in all but high-price scenarios.

"Industry costings point towards a cost of production of 3.20 per kilogramme live weight as compared with current market prices of around 2.10 per kilogramme, suggesting beef producers are recovering perhaps 65-70% of their production costs from the market," HSBC said.

For sheep farmers, prospects were a little better, thanks to the industry's greater reliance on exports, which account for some 35% of production compared with 15% for UK beef.

Supplies for the export market "look tighter for the year ahead, with the New Zealand lamb crop forecast to be considerably smaller".

Nonetheless, with prices pegged at 1.75-1.85 per kilogramme, and costs at about 2.30 per kilogramme "it can be seen that producers are typically only recovering 75-80% of their production costs from the market".

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