Nogger's Blog

10/02/11 -- Maths, I was always good at maths and in a way that's how I landed up in the grain trade. I used to go to my Dad's club with him on a Saturday afternoon and watch the guys in there bemoaning the fact that they'd had five winners, only another two and they'd have scooped the jackpot on the ITV7 (seven televised horse races for the uninitiated).

I used to think to myself, I could do better than that. So despite no interest in horse racing from my Dad I started buying the Sporting Chronicle and studying the form. It was the maths of weighing up the likelihood of horse A beating horse B that intrigued me. All the known variables were there: distance, going, weight, course, draw, jockey etc, plus some unknown ones of course like had someone slipped the horse a kebab just before the off and a host of others.

I recall telling my Maths teacher Mr Dale to back Grundy to win the Derby in 1975. I also recall hanging out of the maths classroom window with Mr Dale whilst we listened to the race on his car radio that he'd driven up as close up as he could, whilst the rest of the class got on with some work. Needless to say a kebabless Grundy won, or I wouldn't remember the story in so much detail.

It was this same interest in probability that stirred an interest when I went to work at a Liverpool grain merchants aged 18. Instead of distance, going, weight etc the variables this time were supply, demand, weather, currency etc.

Which brings me round to today's countdown conundrum. Wheat, and in this case specifically UK wheat for Nov12, which closed at GBP154.50 last night. The reason I pick Nov12 rather than Nov11 is that is is further away (no kiddin' Sherlock?). As it is further away the chances are that it is more likely to be governed by the laws of normality than the nearer-by Nov11.

Now of course it is entirely possible that Russia might have another devastating drought in 2012, what I am interested in right now is probability. Right now it is neither no more likely that they will have a drought than it is likely that they will have a bumper crop. Right now the chances for 2012 are that they will have an average crop. Ditto everywhere else in the world.

Based on current prices I'd say it is fair to assume that the world will plant more wheat for the 2012 harvest, particularly in places like Russia. Considering that planting time isn't really that far away, if prices hold around where they are and planting conditions are conducive (50:50) then more wheat is likely to go into the ground.

Thus with average yields (the most likely scenario right now) the 2012 world wheat crop is likely to be higher than that in 2011. Considering that we currently know that US and Chinese crop conditions are worse than average for the 2011 crop then it is a fair assumption I think that 2012 will see a significant increase in global wheat output given just average growing conditions.

Of course there are other factors to consider, like demand. Specifically here in the UK we can assume that it is highly likely that Vivergo will be more or less fully operational by harvest 2012, so there will be potentially a domestic demand increase of 1 MMT/year by then. It would also seem a fair proposition that the lessons of this season mean that we won't be such aggressive exporters by then either.

Allowing for maybe a modest price-incentivised increase in plantings and average yields we could be looking at a crop of 16 MMT maybe. More than sufficient to meet domestic demand and still have a bit left for export too.

At this juncture it may also be worth considering that despite the rhetoric, the UK bioethanol refineries will import wheat if it is cheaper to do so than buying on the local market. They are not registered charities after all. Consequently the highest price that UK wheat can be realistically is parity with the cost of importing it in from Ukraine or wherever.

Going back to the balance of probability, it suggests to me that it is likely that Russia will replenish it's depleted grain reserves in 2011 with an average harvest. That also suggests that it is unlikely that they will still have an export embargo in place come the harvest of 2012. It also suggests that Ukraine will re-emerge as an aggressive exporter again as early as harvest 2011, and also be in there pitching come harvest 2012.

To summarise: It is more likely than not that the world will produce more wheat in 2012 than in 2011. By harvest 2012 it is more likely than not that Russia and Ukraine will be active exporters again. The UK will have a new 1 MMT mouth to feed, but is still likely to have an exportable surplus.

Q: How likely is it that the price of Nov12 UK wheat will still be GBP154.50/tonne (or better) by then?

A: Not very. Now bugger off you lot, and don't forget to do your homework, and straighten that tie will you Branson, you're a disgrace lad what are you, you'll never amount to anything much that's for sure...