EU Wheat Declines, Following US Lead, As Year-End Approaches

27/12/12 -- EU grains closed sharply lower with Jan 13 London wheat down GBP4.85/tonne to GBP205.65/tonne. Benchmark May 13 fell GBP3.20/tonne to GBP210.65/tonne and new crop Nov 13 was GBP2.55/tonne easier at GBP185.25/tonne. Jan 13 Paris wheat ended EUR5.75/tonne lower at EUR247.75/tonne.

For front month London wheat this was a 2-month closing low, whilst for Paris wheat it was the lowest on more than 5-months.

The markets were playing catch-up today with losses in Chicago from Boxing Day night generated by fund selling and year-end positioning. Paris wheat was under added pressure from the euro rising to it's best levels against the US dollar since April. Remember though that the markets are always pretty thin at this time of year, so price movements can be exaggerated.

Defra have confirmed the UK wheat crop in 2012 at 13.261 MMT, a 13% reduction on last year with yields down 14% to 6.7 MT/ha. The barley harvest was virtually unchanged from last year at 5.522 MMT, although yields were down 2.7% to 5.5 MT/ha. The OSR harvest was confirmed at 2.557 MMT, 7.3% down on last year with yields falling 13.6% to 3.4 MT/ha.

More heavy rain and widespread flooding over the Christmas period has the UK winter wheat crop for the 2013 harvest already looking pretty shoddy. Trade estimates over how much of the intended acreage had been planted are quite varied. If we use a mean of around 77.5% and yields similar to this year's disappointing result then we'd end up with a UK winter wheat crop of only 10.4 MMT in 2013. A return to the 7.7 MT/ha average yield of 2011 would still only return a crop of 11.9 MMT next year.

There will undoubtedly be an increase in spring wheat sowing, but even so the area planted is still likely to be relatively insignificant.

Of course many would argue that less than 77.5% of the intended 2 million hectares has been planted, and in addition that we will be lucky to get to 6.7 MT/ha next year - even if that was the lowest yield since 1988 - given the current state of the crop in the field.

Who knows what 2013 will throw at us, but we do know that there is a very long way to go yet. Whilst this degree of uncertainty remains supportive, along with the threat of at least the smallest wheat crop since 2001's 11.58 MMT, that doesn't necessarily mean that for UK wheat the only way is up.

The cost of imports will decide what, if any, upside there is for UK wheat prices in 2013 and many pundits are forecasting significantly lower world wheat prices in the second half of the year.

Chicago wheat futures meanwhile slumped to new 6-month lows overnight on continued fund selling on a combination of year-end related activity and continued concerns on whether an 11th hour deal can be done to avert the US tumbling over the edge of the rapidly approaching "fiscal cliff".

Whether fund money continues to exit the grains sector, or returns with renewed vigour in the New Year, may hold the key to price direction in Q1 of 2013.