Is New Crop London Wheat Too Dear, Or Paris Wheat Too Cheap?

24/03/15 -- It is interesting to see the London wheat market continuing to offer a robust premium of GBP10/tonne currently to carry old crop May 15 into new crop Nov 15.

Yet the French market puts new crop Dec 15 Paris wheat at a small EUR1.50/tonne discount to nearby old crop May 15. That means that whilst Paris milling wheat is a premium of around GBP17.50/tonne, or 14%, to London feed wheat on the old crop, there's only an GBP8.50/tonne, or 6.4%, differential on the new crop.

What's the "normal" premium for Paris wheat over London wheat I hear you ask. Of course that depends on a lot of things, like the quality and size of both crops in any given year, plus of course the relative strength (or otherwise) of the pound versus the euro.

If only we knew somebody stupid enough to go back over the last five years say, and do all those calculations for us, that would be info worth having wouldn't it? Well luckily we do, I am Spartacus!

Based on prices and the exchange rates prevailing as of Nov 1 in each of the last five years, the premium held by Paris wheat over London was 14% in 2014; 7% in 2013; 2.3% in 2012; 9% in 2011 and 13% in 2010 - pretty diverse range, and one with an average of 9%.

French wheat production has been consistently around 38-40 MMT across the entire period, volume hasn't been a problem for them since 2007. So, in Nov 2014 the fact that French wheat commanded a large 14% premium over London wheat, we can I think attribute directly to the fact that a much larger proportion of the French crop last year wasn't up to milling specification.

In Nov 2013, we had a decent enough quality crop in the UK, but overall volume was very low due to reduced plantings caused by the appalling weather at planting time. That resulted in French wheat running at 7% over the London market.

Back in 2012, both quantity and quality were a problem for the UK (specific weights averaged below 70kg/hl you may recall), resulting in London wheat running at the smallest to the French market of all - the UK crop was so bad it even struggled to make normal feed wheat spec that year!

Both 2010 and 2011 were pretty good years for quality and quantity in the UK, seeing the premium for French wheat at Nov 1 running at 9% in 2011 and 13% in 2010 - the latter being when the market was abuzz with news of Russia's export ban and spec money was flooding into grains with gay abandon as the London market was en-route to GBP200/tonne for the first time in its history.

What, if anything, does all this tell us? Well, the current 6.4% difference between London and Paris wheat in new crop has only been lower once in the last five years come Nov 1 - and that was in the complete all round disaster year (as far as the UK crop was concerned) of 2012.

Either new crop London wheat is over valued, or Paris wheat is too cheap, but which is it?

Barring the UK wheat crop turning into another complete crock of the brown smelly stuff this year, which I'd suggest nobody is currently predicting, selling Nov 15 London wheat and buying Dec 15 Paris wheat is probably worth a punt at the very least.