October 1, 2012

 

Decline in UK wheat quality affects farmers, grain industry

A decline in the UK wheat quality after a rain-plagued campaign has affected not just the hard-pressed farmers but also the wider grains industry.

 

According to market participants, the wet weather that hit this year's winter wheat harvest, resulting in a prevalence of thin and shrivelled grain means farmers are being penalised for missing contracted quality targets, while merchants, millers and even the futures market are also being affected.

 

The third-largest harvest in the EU is nearing completion, with around 60,000 hectares, or around 2% of the total area, left to gather mainly in Scotland and northern England, the Home Grown Cereals Authority said.

 

Provisional results confirm low specific weights, with an average of 70.7 kilogrammes a hectolitre (kg/hl), the HGCA said. A key measurement of quality, specific weights are the amount of grain that can be packed into a cylinder of fixed volume.

 

"It is clear that there is a significant amount of wheat that is below the minimum level of 65 kg/hl that some feed consumers will accept," said UK-based grain merchant Gleadell.

 

The merchant said that a significant amount of wheat still needs to be analysed to establish the most suited end user and reduce the risk of rejection. It warned this will require patience by all parties as laboratories work through the backlog.

 

Despite some farmers getting a bonus for produce that is well above the standard, Guy Gagen, chief arable crops adviser at the National Farmers' Union, said that if a crop is inappropriate for the market there is the potential for penalties to be "very, very big."

 

These contractual 'fall-backs' range between GBP1-1.50 (US$1.61-2.4) a tonne for produce of 72-68 kg/hl, quickly escalating towards GBP40 (US$64.5) per tonne for 60 kg/hl, he said. A tonne of wheat is currently selling at around GBP197.95 (US$319) on Liffe.

 

The quality issues mean imports of wheat are accelerating, as millers try to improve their grist and merchants look to blend foreign origins with UK feed wheat with a view to tendering in the next month, Gleadell said.

 

"The animal feed processor will have to take grain well outside their normal specification, which is lower energy or difficult to grind, and must meet the demands of feed customers," said the NFU's Gagen.

 

The problem is even trickling through to the Liffe feed wheat futures contract, which is suffering from a severe lack of liquidity problems due to difficulties matching the contract's specified weight of 72.5 kg/hl, said Edd Britton, trading manager at Wessex Grain.

 

He said there will likely be squeezes ahead, due to shorts being unable to deliver and longs keen to take delivery of high quality wheat "even if it only exists in silos on the east coast."

 

Karl Persson, of Handelsbanken's commodities sales desk, said there is even doubt over how much of this type of wheat there is.

 

"A lot of talk that this is the reason for the sharp decline in open interest over the last few weeks," he said. Open interest has fallen from more than 11,000 lots to around 4,700 since the end of July, although Persson believes that this is probably just hedgers closing out positions as they do at this time of the season.