Grain markets are currently in a relatively benign mood. Looking forward to a new crop, however, an increase in both the basic wheat and bread wheat prices can be expected.

Other costs, such as energy, remain at or close to peak levels and are significantly higher on an annual comparison. Volatility in all cost factors for millers looks likely to remain a major feature in 2006.

The UK wheat market is quiet at the moment, with some farmers selling to meet financial commitments in the absence of Single Farm Payments. According to data from the Home Grown Cereals Association, bread wheat prices have traded in a narrow range through the season of £85 to £87, delivered Liverpool basis (a standard industry example).

Forward quotations for the remainder of the season are slightly higher than these levels. Feed wheat prices have risen steadily since harvest to around £75 (delivered Liverpool basis, end of January) and are on a par with last season.

Grain prices

Looking forward to a new crop, the market is currently anticipating an increase in basic feed wheat prices of some £4 per tonne and a widening of the bread wheat premium to £17 per tonne. This is on the basis of reduced plantings of Group 1 bread-making wheats, implying a £10-£12 increase in November bread wheat costs.

Plantings for the 2006 harvest are very similar to the previous year across the EU. Drought has led to much-reduced plantings in the Ukraine and Russia, which will, in turn, reduce availability to the southern EU countries and therefore help sustain demand for UK wheat. Cold weather and minimal snow cover have also increased fears of substantial winter kill in these areas.

With regard to quality wheat, the US hard red winter plantings are slightly lower than anticipated and there are early worries about drought in the south.

Southern hemisphere and spring wheat sowing has not yet begun. It is very early to report on crop prospects, but there are again concerns about drought in Iberia and the maize-growing region of France, which could have a significant impact on overall EU grain availability in 2006/7.

Looking even further ahead, new demand for wheat is developing in the UK. Wessex Grain has gained planning permission for its proposed bio-fuel plant in Somerset, which is expected to come on-stream in the spring of 2007. Cargill is reportedly working on a similar timescale for its new Manchester starch plant, which will also be using wheat as a raw material.

Together, these sites will use one million tonnes of grain a year. It is expected that there will be further developments in relation to wheat usage for industrial purposes in the next two to three years.

Energy prices peak

During the autumn, prices fell slightly from their peak levels but have since returned to their peaks and remain well up year-on-year. The government’s energy regulator reports that wholesale electricity prices rose to over £100 per megawatt hour in November, while spot gas prices rose to £1.50 per therm. More conservatively, one-year baseload contracts show year-on-year increases of about 90%.

Beyond energy prices, last year saw a near 7.7% fall in the value of sterling against the

dollar, pushing up the cost of quality wheat imports from outside the EU.

By contrast, there was a 2.7% appreciation of sterling against the euro, slightly reducing the basic support price for wheat in the UK.

Overall, currency movements had a small adverse impact on wheat costs during 2005. There is much uncertainty about the future direction of currency markets in 2006, so the effect on wheat costs is very unpredictable.

International grain freight rates, as measured by the Baltic Dry Freight Index, have been extremely volatile since 2003. The index has fallen from its recent peak, but is still double the pre-2003 level. Much will depend on the strength of demand for freight in the Far East in 2006.

More locally, according to the Freight Transport Association’s (FTA) October 2005 survey, overall vehicle costs rose by about 6.2% in 2005, attributable to both fuel and running cost increases. The FTA anticipates further increases in 2006 as both diesel prices and other costs are expected to rise further.

Market volatility

The last three years have seen a great deal of volatility in relation to all the factors highlighted above. The increase in energy costs is well-known. Freight rates have spiked and dipped on several occasions, but remain relatively high, and the value of the dollar has dropped considerably and bounced. Wheat prices, especially for quality wheat, have varied enormously from season to season.

Although the current situation is relatively calm, there is plenty of potential for further big changes in each of these significant cost factors for millers.

Alex Waugh is director general of the National Association of British and Irish Millers.