United Kingdom
December 3, 2015
Source: AHDB Cereals & Oilseeds
The first 2015/16 UK supply and demand cereal estimates by Defra identified a drop in human and industrial usage, as well as for animal feed. Despite a forecast reduction in total cereal imports, the surplus available for either export or free stock is almost double the five-year average.
Introduction
Defra’s first official UK cereals balance sheet for 2015/16 was published on Wednesday (25 November). These estimates build on the early insight provided for wheat and barley by the AHDB Early Balance Sheet in mid-October, as well as providing the first outlook on the 2015/16 supply and demand situation for maize and oats. The balance sheets take account of the latest Defra crop production and cereals statistics, as well as up to date industry intelligence.
Dip in human & industrial demand
The latest forecasts suggest that human and industrial (H&I) demand for cereals in 2015/16 will decline by 7%, compared with last year. While we’re expecting reductions in the demand for H&I use of wheat, barley and maize, the opposite is true for oats – more on this later.
The final AHDB Cereals & Oilseeds Cereal Quality Survey results revealed that average GB wheat specific weights for this year’s harvest were the highest since 2011. Bigger grains suggest an improved extraction rate for the flour milling industry.
Early usage data and anecdotal evidence indicate that we’re unlikely to see growth in flour production this year. Consequently, it is assumed that less wheat will need to be milled in order to achieve a similar level of flour production to last year.
Short term capacity reductions also shrink demand
It’s important to note that some of the decline in H&I consumption is attributed to short-term reductions in capacity. For example, while in general brewing, malting and distilling (BMD) plants are expected to keep operating at full capacity, some of them now need to close for a period of time to undertake maintenance.
There is only so long that plants can keep operating at ‘full steam’, before refurbishments are needed. As a result, the industry as a whole is facing temporary reductions in capacity this season, which has impacted the forecasted demand for barley, wheat and maize. This has already been reflected in early barley usage data to end-September, which shows a 7% reduction year-on-year – shown in Figure 1.
In the second half of 2014/15, one of the UK’s key biofuels plants, ceased operations for an undisclosed period of time. Others in the industry have been operating at fairly stable levels since, however, further temporary reductions in capacity, due to maintenance, are now expected.
Nevertheless, since October, European (Platts, T2 FOB Rotterdam) ethanol prices have risen by around 30%, providing an opportunity for the industry to achieve attractive margins. This suggests that it would make economic sense to maintain operations at present, or get any essential maintenance done as quickly as possible, this is an area which will need to be closely monitored.
Record volume of oats expected to be milled
H&I usage of oats is expected to be 4% up compared with last season, at 518Kt as demand for oat products continues to grow. If realised, this would be a record high for oat milling demand. Usage data for the first quarter of 2015/16 (July-Sept) shows that oat millers used 6% more oats in comparison to the same period last season (Figure 2). Furthermore, this was the biggest volume of oats milled in the first quarter of any season on record.
Compound feed production forecast up for 2015/16
In the first quarter of 2015/16, total compound animal feed production was up 5% compared to the same time last year. Nevertheless, total cereals used in all animal feed demand (including on farm) for 2015/16 are forecast slightly lower (-2%) than in 2014/15 at 11.598Mt.
Higher demand for feed by pigs and poultry
The AHDB livestock outlook forecasts suggest that beef and lamb production is going to increase by 2% each in 2016, driven by higher carcase weights rather than an increase in herd/flock size. However, despite the moderate growth in production, it is thought that mild weather at the beginning of the season combined with good quality forage may contribute to a reduction in compound feed consumption by cattle and sheep for 2015/16.
On the other hand, pig and poultry compound feed consumption is forecast to increase in 2015/16. While the UK pig breeding herd is anticipated to remain stable throughout the season, an increase in sow productivity is the driver behind an estimated increase in pork production for 2016. With slightly more pigs expected to be reared, compound feed demand is expected to increase.
It is expected that feed production by integrated poultry units (IPU) will stabilise this season. In contrast, poultry feed produced by the compound sector is expected to continue to grow, albeit at a slower pace than in previous years.
It’s important to note that Defra have recently carried out a review of the IPU survey and found that there needed to be a switch of company returns from IPU to compound within this. While this has caused substantial swings in feed production for these categories, overall poultry feed production is forecast to increase on the year.
Wheat has the edge over other cereals in feed rations
Despite an expected decrease to the total amount of cereals fed to animals this season, wheat usage is forecast to increase by 2% compared to a year earlier, due to its current price competitiveness with other feed grains.
Barley usage is forecast slightly lower (-1%) for this season compared to last, at 3.264Mt, but is still at a higher level than the five year average. Currently ex-farm feed barley is priced around £10/t lower than feed wheat (Figure 3), meaning it is currently included at relatively high rations. However, if the price gap between barley and wheat tightens, barley will become less attractive and will lose favour to wheat, as it has a higher nutritional value and better value for money.
Maize usage for animal feed is expected to decrease by 23% in 2015/16 due to more competitively priced domestic grains. Additionally, the volume of oats used in animal feed production is also expected to decline by 30%. This is likely to be a result of a relatively good quality domestic oat crop recorded for harvest 2015 and growing H&I demand, suggesting less will be used for animal feed.
Inclusions of soyameal and field beans on the up
As total cereal usage in animal feed is forecast to decline this season, the increase in total compound feed production can be attributed to a forecast increase in use of other raw materials. The inclusion of soya cake and meal in feed rations for the first quarter of this season has increased by 13% compared to the same time last season.
Similarly the presence of field beans in retail animal feed in July to September has increased by 79% year on year, reflecting the sharp increase in the area grown for harvest 2015. This trend is thought likely to continue as more UK farmers are using pulses, such as field beans, as break crops in their rotations.
Concluding comments
A slowdown in of demand for domestic grains from both H&I processors and animal feed producers has led to the situation whereby the estimated surplus available for either free stock or to export is almost double the previous five year average. The latest balance sheet forecasts thus adds emphasis to the importance of UK exports, to prevent high levels of stock rolling into next season (2016/17).
A key watch point will be whether a shift in demand between commodities for animal feed production will happen due to price relationships, especially between domestic wheat and barley.
Key points
- Reduced demand means strong exports are needed to prevent large cereal surplus rolling into next season
- Despite an expected fall in cereals usage in animal feed rations, the quantity of different cereals used depends on price relationships
- A reduction in demand from the bioethanol industry is one to watch as EU ethanol prices rocket
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