Nogger's Blog

23/12/10 -- Can we safely throw the record books in the bin now? With London wheat slipping into uncharted territory with front month January having closed at a hitherto unseen GBP196.25/tonne last night and July closing above GBP200/tonne for the first time for any contract ever.

The six million dollar question now must be where do we go from here of course. Perhaps amazingly there is a notion that UK wheat is still cheap, even at these levels, relative to French grain.

So before I do put those record books into the bin, a quick check back tells me that at the end of August Paris wheat was running at a premium over London of around GBP45/tonne. Last night that differential had narrowed to a little over GBP14/tonne. Even so that is still a larger gap than the one we had at the end of 2009 - GBP10.70/tonne.

For what it's worth the pound has been in a range of 1.10 to 1.20 against the euro for most of the year. By the way the exchange rates used in my little calculations above were 1.12 at the end of 2009, 1.20 at the end of August and 1.1750 last night.

Despite the widely publicised problems within some eurozone countries, the one advantage that they have over us here in the UK is that they aren't a one man band. Strength in the economies of some of the larger and more robust nations, can help offset weakness elsewhere.

In the case if the UK of course, we are very much more in charge of sailing - or sinking - our own ship.

A morning's Christmas Shopping on Tuesday told me that the High Street isn't doing very well at all. I was shocked to see how quiet everywhere was just a few days before the big day. Whether we can blame it all on the weather or not I'm not sure, but the point is that the retail sales figures that will start to filter through in the new year aren't likely to make good reading.

Will we make it all back in the January sales? Somehow I don't think so, not with the impending VAT increase and rising utility bills against a background of increased job uncertainty.

I envisage a raft of poor economic data for the UK in the first half of 2011, coupled with increased unrest from students and council workers just for starters. The impact of the recent harsh wintry weather will also filter through presenting a "double whammy" to the economy of reduced consumer spending and further budget cuts down the line as the cost of trying to keep the country running through the snow bites local authority spending even more.

That paints a bearish picture for the pound, and the possibility of the spectre of the dreaded "double dip" recession.

Meanwhile UK wheat (and rapeseed too) exports are tearing away and consumer demand seems to have been relatively unaffected by the price increases that we've seen in the second half of the year.

Scraping last night's Chicken Piri Piri off the record books, I can see that wheat usage in the UK from the animal feed sector has been relatively stable at around 6.5 MMT per annum during the past ten years. Even in 2007/08, the only previous occasion that we've seen prices at these levels, wheat usage in this sector only fell by 10% to around 6 MMT.

In contrast, demand for Human & Industrial use has been creeping up steadily, and that rise is set to become more precipitous as more demand from our new bioethanol chums kicks in.

There has clearly been some resistance from the livestock sector to the steep rise in feed costs, in many cases this has meant feeding their own forage at an accelerated rate. The harsh wintry conditions have exacerbated the problem, meaning that there could be an unexpected spike in feed demand at the tail end of the winter. Whether they can afford to pay for it is another matter. Maybe the supermarkets will have a whip round?

Meanwhile the traditional turnout time of Easter falls quite late in 2011, with Good Friday not until April 22nd. There will be plenty of cattlemen looking to break that tradition and turf them out earlier than that - if conditions allow it.

A weak pound, strong exports and a hard winter, combined with enough uncertainty over wheat prospects from Russia, Ukraine and the US paint a scenario for higher prices during the first half of 2011.

If you put a gun to my head right now I'd go for London wheat peaking around May time at somewhere in the region of GBP225/230.