High Contrast
Comment from the Feed Mill – April 2011
On the 15th February, May wheat futures hit £214. Exactly a month later, May wheat futures hit a low of £169.50. A fall of almost £45/t! Ever since the last price spike of 2007/8, we have said that the funds inflated our markets by about £40/t; here then is the proof. The fundamentals of supply and demand have been unchanged over that time; the world has very tight stocks of cotton, maize, soya and wheat; and the combined stocks of maize, soya and wheat are at their tightest levels since the mid 1990’s. What has changed is the political horizon in North Africa and the Middle East, and the plight of Japan following its earthquake, tsunami and now nuclear incidents. The only reason why these latter events affect commodities, is that the funds have sold their long holdings in agricultural ‘softs’ and invested elsewhere (particularly crude oil). So there you have it, the funds inflate the prices we all pay for our feed and food.
In the real world, raw material buyers around the world are trying to explain to their bosses that they could not have foreseen a £45 drop in wheat futures prices.
What is strange is that whilst wheat futures dipped so sharply, it is not possible to buy physical wheat at similarly lower prices – why would arable farmers sell at lower levels when they too believe that prices will have to rise again to reflect the current shortage of wheat? Over the last two days (16th & 17th of March) wheat futures have lifted over £20 – that really is `volatility’!
Some form of price rationing still has to take place, otherwise the US will run out of maize; however the price increase will now start from a lower level, and may even hit a much lower high that would have been previously expected. Worryingly, there is still time for the funds to switch back into `agriculturals’, to take advantage yet again. It would seem that volatility is here to stay.
Although soya, like wheat, has also been blown about in the aftermath of the Japanese tsunami, the downside has been much more subdued. Soya bean meal hit a high of $391/b on 1st February, and is currently $345/b. When filtered through currency, that equates to a fall of £22/t from £318/t to £296/t for GM soya delivered to the mill.
For the last three months we have said ‘this is probably going to be a very difficult year’ and suggested that everyone ‘batten down the hatches’. As far as raw materials are concerned, we stand by that advice. We also expect problems with legislation pertaining to the cage ban, organic pullet standards, and the forthcoming change from 95 to 100% organic feed.