Overview
Strong global demand for cereals, other raw materials and utilities, as well as tightness in the UK wheat and haulage markets has led to a range of inflationary pressures.
Whilst the UK wheat crop is estimated at approximately 48% higher than in 2020, prices remain elevated owing to strong domestic demand and global pressures, with quoted October prices for delivered breadmaking wheat (North West - same month) standing at £268/t, £49.50/t higher than equivalent quotation in 2020.
UK breadmaking wheat quality and condition is lower year on year resulting in higher premiums over feed wheat prices, now standing £27-32/t higher than at the same point in 2020.
At a global level, weather concerns and strong demand for grains have kept prices high. Severe drought has significantly reduced Canadian wheat production resulting in an increase in pricing of 46% year-on-year.
Freight costs for bulk wheat and commodities have risen up to 80% from 2020 which also impacts many other raw material input costs.
Utility prices have also escalated substantially year on year with increases in gas (+140%) and electricity (+54%)
The lack of HGV drivers has also impacted our sector in both flour and wheat.
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UK wheat harvest 2021
The first Defra production estimate for the 2021 UK wheat crop pegs the size at 14.0Mt (Figure 1), around 0.5Mt lower than some of the earlier industry estimates based off the estimated wheat area and early average yields. Whilst the predicted crop size is well above the 2020 harvest, it is only 2% above the 5-year average. AHDB figures indicate a carryover stock into the 2021/22 season of only 1.2Mt, 44% below the 5-year average.
Increased UK demand for cereals is expected this season, as the Vivergo bioethanol plant restarts and animal feed usage is expected to recover from the lows seen in 2020/21. These factors combined with the small carryover stocks and the moderate size of the 2021 crop means supply and demand is finely balanced and any changes in world pricing will be replicated in UK values.
In addition to the volume concerns, the quality of the 2021 wheat crop is also restricting the availability of milling wheat. The initial results of the AHDB cereal quality survey found that only 48% of UKFM Group 1 wheat met the standard breadmaking specific weight specification of 76.0kg/hl (Figure 2). The average specific weight of UKFM Group 1 wheats was 75.4kg/hl, the lowest seen over the past five years.
Lower specific weights reduce flour extraction rates, increasing the volume of wheat needed to produce a given quantity of flour, exacerbating milling wheat supply concerns. These quality concerns are being reflected in the rising premium for milling wheat, with November delivered breadmaking wheat (North West, nearby) quoted at £60-65/t over feed wheat futures, £27-32/t higher than the premium for the equivalent quote comparison in 2020.
Supply concerns at home and abroad
The tight UK wheat market is reflected in historically high prices. October 2021 delivered quotations for breadmaking wheat (North West, same month) are reported at £268/t, up £49.50/t (+23%) on the same quotation in 2020, which was already a year of elevated prices owing to the exceptionally small UK harvest.
As the UK trades cereals on the global market, domestic prices are affected by global cereal supply and demand which is forecast to be tight for the 2021/22 season, especially on higher quality grades. At the global level, wheat stocks are estimated to be at their lowest since 2007/08 (excluding China), with production materially lower in key exporters such as the US and Canada, as well as Russia and Kazakhstan. Although the global maize area is at its second highest level, concerns remain about the impact of a La Niña weather event on South American production. China and India are also anticipated to have a strong demand for wheat and maize in 2021/22 and consequently forecasters expecting another tight year.
The reduction in Canadian wheat production is severe, with USDA forecasting production at its lowest in 14 years due to drought damage. This development is particularly significant for the UK market, as millers import approximately 500kt of high protein Canadian spring wheat each year. The forward cost of Canadian wheat for 2022 averages £373/t, an increase of £117/t (+46%) on the equivalent quotation in the previous year.
Inflationary pressures
In addition to the elevated wheat prices, the cost of energy has risen significantly this year, affecting mill production. Electricity prices have been affected by the rise in global gas prices, which are sitting at their highest level for seven years in real terms owing to a drop in exports of Russian gas. Additionally, low wind output has contributed to rising European electricity prices. Data from Ofgem (Figure 4) show that forward electricity prices have risen 54% in the past seven months. The rise in spot electricity prices has been even more significant, increasing by 186% from over the past 12 months (August 2020 to August 2021).
Gas is a key feedstock for fertiliser production and the significant rise in cost has affected fertiliser prices. These cost concerns were keenly felt in the UK (Figure 5), where the two main fertiliser sites had to cease production as a result, leading to a shortage of the co-product carbon dioxide. Global demand for fertiliser has also been high, as farmers have sought to capitalise on elevated cereal prices by increasing fertiliser applications, adding further pressure to input costs.
The cost of transport has also risen significantly in 2021. The UK is in the midst of a haulage crisis and an industry survey in September found that the rate of wheat delivery failures had doubled on usual levels, with mills having to over order wheat to compensate. The shortage of drivers has led to a significant increase in rates, up by 150% in some regions. For mills sourcing wheat over longer distances, this pressure can be seen in an increase of the premium for milling wheat over feed wheat. There is little sign the haulage issues can be resolved in the short-term and it is likely that the lead up to Christmas period and the start of the sugar beet campaign will add demand pressure to the already limited pool of drivers.
Alongside the domestic crop, UK millers also use imported wheat, which has been affected global increases in shipping costs. An increase in demand for bulk shipping has caused rates to soar since the beginning of 2021. Figure 6 shows the year to date of the Baltic Dry index, which tracks rates for the largest class of bulk transport ships and provides a benchmark for moving raw materials by sea. Since the beginning of January, the index has risen 278%.
Summary
UK and global wheat prices have risen very sharply year on year, owing to tight supply and demand. Against a backdrop of rising transport and energy costs, the 2021/22 season looks to be challenging, despite a significant rebound in the size of the UK wheat crop. Separately from rising costs, the bulk commodity supply chain is challenged by the current shortage of HGV drivers able to collect from farms and deliver to mills and other cereal processing facilities.
