United Kingdom
September 1, 2016
On top of the higher planted area for nabim group 1 & 2 varieties, UK milling wheat availability looks like it will also be supported by good quality, especially protein, this season. While milling prices are under pressure, it presents a number of opportunities for the UK crop.
Introduction
Earlier in August, we looked at what could be seen of the milling wheat market outlook this season. A few weeks on, we now have further harvest indications for UK milling quality and yields, giving a better picture of UK availability. After rising into July, milling wheat prices began to fall back in August…
…But these all provide opportunities for UK milling wheat this season.
UK quality and weather
As we covered in the previous instalment of our 2016 milling wheat outlook, weather (especially in June) had been dull and wet, causing concern for crops. However, July turned out better and August looks to have been even sunnier and drier. This looks to have been beneficial for UK wheat quality.
Despite the earlier fears, the latest ADAS harvest report shows good specific weights for milling wheat and high Hagberg Falling Numbers (HFN) on average. Most importantly, protein, the main limiting factor for UK milling wheat supply in recent years, is higher on average than estimated at the same point last year (12.9% vs 12.6%), suggesting another good quality season for milling wheat again.
Also in our previous instalment, we looked at scenarios for UK milling wheat supply in the event of various quality outcomes. Even an average full-specification pass rate for nabim group 1 samples would lead to relatively good milling wheat supplies – a good quality season could add further to this and potentially mean the highest domestic bread wheat supply in at least 10 years (yields notwithstanding).
Can looking at recorded weather conditions add anything to this outlook for UK milling wheat quality?
In most cases, no. For example, any correlation between the proportion of nabim group 1 samples reaching 13% protein and weather conditions recorded by the MET office is difficult to establish. But there are two aspects of quality where a noticeable link can be established:
- Hagberg: A clear correlation emerges when looking at June-August rainfall in England and the percentage of GB nabim group 1 wheat with meeting full specification HFN requirements (250 seconds) (see Figure 1). Below 210mm rainfall in total in these three months and over 80% of samples tend to meet the specification, while higher levels have often led to a lower proportion achieving a HFN of 250s. Despite very high June rainfall, much lower levels in July mean that average August rainfall would keep this year within the zone typically associated with 80%+ of samples meeting specification.
- Mycotoxins: High rainfall in the weeks during flowering for individual crops led to an unusually high fusarium risk for many UK wheat crops, especially in southern and eastern regions. However, ADAS suggest that this risk has been well managed. Mycotoxin levels are reported as mostly within tolerances, suggesting that there should not be any unusual risk to milling wheat availability based on mycotoxin levels.
Effects on prices
Naturally, the positive outlook for UK milling wheat supply is weighing on milling wheat prices and the milling premium – but this doesn’t tell the whole story. The combination of factors this season opens up a range of opportunities.
Aside from looking at the milling premium over feed alone, milling wheat prices need to be considered as a separate market (as we looked at last year).
As has been the case for the past two seasons, an ample world feed grain supply will likely continue to weigh on price levels in general. However, by putting pressure on the feed grain price floor, this tends to actually support UK milling premiums over feed (but not actual milling prices) – as shown in zones A/B and W/X in Figure 2.
This could be especially noticeable this year on the back of record world harvests forecast for both wheat and maize.
But through much of August we seem to have been in exactly the opposite situation. Milling premiums were falling on the back of good UK quality indications, while a rising UK feed wheat floor price also ate into the premium – but this is supporting actual milling wheat prices from below (see Figure 3).
Going forward, higher milling premiums are probably most likely to emerge if UK feed wheat prices fall on the back of the world outlook. But as shown above (zone X in Figure 2), this would not mean support for actual milling wheat prices.
While there are signs of change, until recently there’s a bit of a paradox going on – UK feed wheat prices rising, while global feed grain prices fell– there are two reasons for this:
- A weakening pound has shielded the UK market from falling global prices
- The fact that a greater share of UK wheat is likely to be of milling grade, means that there is likely to be less feed wheat so less need for the UK to be competitive in the global feed grain market.
It is the second of these points that is important to keep in mind to avoid becoming too fixated on the milling premium alone. Essentially, a falling milling premium is a function of both falling milling wheat prices and/or rising feed wheat prices.
Opportunities for UK wheat to displace imports
Meanwhile, there is a wide gap between domestic bread wheat prices and the ceiling price of imported German ‘A’ wheat. The falls in UK full-spec bread milling wheat prices provide an opportunity for UK wheat to continue to displace imports on the domestic market. As shown in Figure 3, the average ex-farm price of Eastern region full-specification bread milling wheat has reached around a £40/t discount to the imported price of German ‘A’ wheat. This is higher than at any point last season.
This opportunity is covered in more detail in a recent Analyst’s Insight.
But, with the International Grains Council highlighting the tight picture for milling wheat on the global scale in their latest world wheat outlook, could there be even more opportunities for good quality UK wheat to take this season?
Concluding comments
The outlook for UK milling wheat availability appears to be good this season, in contrast to some of our near neighbours. Quality reports (especially protein levels) seem very good, yields are reported close to average, while the area planted to nabim group 1 varieties is the highest in at least 10 years.
Of course all this feeding into UK milling wheat prices, but therein lies further opportunity. With domestic bread milling wheat prices at a greater discount to comparable imported German wheat values than at any time last season, the market is providing a strong incentive for the UK to finally tackle the challenge of high import levels. And while milling premiums have been narrowing, this has been partly due to rising feed wheat prices – not a bad thing for milling wheat values.
Key points
- UK milling wheat quality, especially protein, looks good this season.
- Alongside increased area, this could lead to the highest UK full-specification bread wheat availability for at least 10 years.
- As a result, prices are making domestic bread milling wheat very attractive to consumers.
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