Flood-hit UK to face record wheat prices

CROP failures in Britain and globally are pushing grain prices to record highs. Floods in the UK have forced it to depend on foreign grain imports. The country is expected to import more than 2m tons of wheat in the 2012-2013 season – a 30 year high. But prices have also been driven up by droughts in the major US grain producing regions and reduced output in the Black Sea region.

CHALLENGING CONDITIONS
The Agriculture and Horticulture Development Board (AHDB) released a paper stating that, due to a wet summer and a late harvest, autumn 2012 has proven to be challenging for the establishment of winter crops in the UK. “Very wet conditions from the end of September until the end of November kept fields saturated with flooding and water logging in many places,” says the AHDB in its cereal and oilseed crop development report. It adds that of the crops drilled to date – around 80 per cent of the 2012 harvest – most were drilled within the optimum window, but often into wet seedbeds with high levels of slug damage. The AHDB estimates that 7 per cent of the wheat drilled, and 20 per cent of the winter barley, is in an area of questionable viability.

LOW YIELDS ON HIGH PLANES
The US, which accounts for a third of global corn exports had the opposite problem. It experienced its worst drought since 1956, and winter wheat had its worst yield since 1985 as dry, cold weather slowed seed germination and early plant growth. More than half of the High Plains – the grain producing regions between Kansas and North Dakota – were in drought. Crops, which last year survived a dry summer because of surplus soil-moisture reserves, were destroyed by wind and cold damage this time around.

REBALANCING FUNDAMENTALS
Grain prices are expected to rise for the first half of next year, before production recovers from the poor weather conditions of 2012 and drives the market into surplus. At times of high grain prices, farmers often ramp up production, only to see oversupply weaken prices over the next cycle.

Last week, Rabobank predicted that corn prices will average $7.90 a bushel in the first quarter of 2013 and then fall to around the $6 mark during the US harvest in the fourth quarter. The bank predicts that wheat prices will rise to $9.10 in the first quarter, before falling to the $7 a bushel area by the fourth quarter.

But the problem for the UK is that grain is not fungible in the same way as many other commodities. This means that a levelling off of supply in one region does not directly draw down UK prices. As a result, record wholesale UK grain prices will filter down to drive up prices of many foodstuffs, such as bread and meat, accelerating food inflation. To have a net import of grain is an anomaly for Britain – the last time it happened was in 2001-2002, but on a much lower scale than this year. Britain usually sources most of its wheat imports when needed from Germany, which has had a relatively good crop. But British consumers will still face a premium over domestic wheat production. This means that traders should not just look to the effects of these prices on wheat and corn futures, but also on foodstuff producers and brewers, which will likely be hit by drastically increased production costs.