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Dismal talk on UK wheat prices looks misplaced

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Prospects for UK wheat prices are not as dismal as many have been making out.

Sure, bar an extreme early frost in the US, or imminent return of La Nina, events on which growers would be unwise to bet the farm, UK wheat values look unlikely to have too much upside, let alone return anywhere near £200 a tonne.

Indeed, it is not difficult to see them returning below £150 a tonne for the first time since 2011.

But that will require help from external markets.

Domestic dynamics are not as weak as suggested by traders, many of whom have said, in strong terms, that such prices are already warranted.

Stocks not so big

Such talk is based one exaggeration and one omission.

The exaggeration is of inventories left over from the 2012 harvest, which one broker termed "almost unprecedented", with "close to 1m tonnes of surplus wheat, over and above what is normally required to keep consumers supplied, been carried over into the new season".

After all, add 1m tonnes to a harvest now pegged at 12.5m tonnes and, with imports expected to remain strong for now, that leaves supplies more than adequate to cover historic annual consumption of 13.6m tones.

But official data on Thursday spiked ideas of such huge carryover stocks.

The farm ministry, Defra, pegged inventories at the close of June on English and Welsh farms, and UK ports, merchants and co-operatives, some 230,000 tonnes higher than a year before.

While that does exclude some data, for example on stocks at Scottish and Northern Irish farms, or at mill inventories, the former look too small to move the needle much, and the latter are pretty constant at roughly 300,000 tonnes.

Biofuels factor

The omission is on ethanol, a potentially huge source of demand.

Historic consumption of 13.6m tonnes makes no allowance for the Ensus plant, expected to reopen this autumn, let alone that of the Vivergo site which should reach peak capacity in 2013-14 for the first time, providing teething problems can be ironed out.

They could swallow some 200,000 tonnes of wheat a month between them.

That UK wheat consumption reached 14.6m tonnes in 2012-13 was mainly down to the Ensus site being open for most of the season, as well as one-off effects from the poor quality of last year's harvest, and from the cold spring which lifted feed demand.

Too early

Factor lower stocks and potentially far higher consumption back into the mix, and it is not difficult to get a UK balance 1m tonnes, and more, tighter than that some traders have been touting.

Of course, there are some factors that could yet play into bears' hands.

Ensus could stay mothballed, and Vivergo continue to run well below capacity. Lower-priced maize could maintain a higher place in feed produced by mills more used to handling the grain, thanks to the poor domestic wheat offering from the 2012 harvest.

The harvest could exceed the current estimate of 12.5m tonnes, while continued bumper wheat imports would indeed force more UK wheat to seek buyers abroad, competing with foreign supplies.

But such factors, like the all-important US corn harvest, will not become clearer for a few weeks yet.

Farmers should question traders making a case for lower prices now.


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