Europe heat wave sparks surge in grain prices

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Surging European grain prices following a scorching heat wave in recent weeks are likely to raise flour prices, and farmers are facing higher bills for animal feed, industry executives and analysts said on Friday (23 July).

But some analysts say they doubt whether recent price rises are sustainable in view of large global grain stocks and the fact that overall grain supplies are currently still satisfactory.

European grain prices have jumped around 25% in the past three weeks as hot weather and drought have hit crops just before harvesting in Western and Eastern Europe. Key Paris wheat prices were around 178 euros a tonne on Friday.

“Up to four weeks ago the harvest outlook was very positive and flour mills had expected new crop wheat prices of around 110 to 114 euros a tonne,” said Manfred Weizbauer, chief executive of VDM, the association of German flour millers.

“This sort of rise in raw materials costs means a rise in flour prices looks unavoidable,” with the level of any rise depending on individual companies, he added.

Analysts do not expect an immediate rise in bread prices, however, because in most European countries energy and wages account for about 90% of the costs of producing bread.

Farmers, meanwhile, are likely to face a rise in animal feed costs, because grass has not grown in the hot and dry weather.

“There has been a massive increase in the cost of feeding,” said Hayley Campbell-Gibbons, chief dairy advisor to Britain’s National Farmers Union.

Europe’s fields ‘looking like Africa’

The heat wave has stalled grass growth, Campbell-Gibbons said. Yields on a first grass cut to make grass silage to feed to dairy cows were down 20 to 30% in early June and were down as much as 50% on a second cut in late June.

“The heat wave has left a lot of fields looking more like Africa rather than European meadows,” one grain trader said.

Hot weather has also meant cows had spent more time indoors, increasing the amount of straw needed for bedding.

Campbell-Gibbons said British straw prices had risen to up to 100 pounds a tonne from about 60 pounds last year.

She said farmers estimated the total increase in costs at about 1.0 to 1.5 pence per litre of milk.

France has authorised farmers to use set-aside land to feed animals to compensate for a drop in animal feed output after the heat wave in the country in past weeks.

Under the set-aside scheme, the EU pays farmers to leave land idle and not grow subsidised crops. France has given permission for the set-aside land to be used because of looming feed shortages.

But the picture is better in sun-drenched Spain, where farmers are not concerned about current hot weather, which they say is not unusual for the time and comes after cereals and other similar crops have finished ripening.

Will grain prices stay high?

Some observers are starting to question whether the surge in grain prices will hold.

“The fact that the high price level will have a visible impact on demand is largely being disregarded,” Germany’s Commerzbank said in a report on Friday. The latest figures indicate that EU wheat exports have dropped sharply, it said.

“We expect a sharp fall in prices as soon as the crop forecasts stabilise,” Commerzbank said.

Claus Keller, a grains analyst with German commodity analysts F.O. Licht, attributed the rise to a change in expectations, not any supply-demand imbalance.

“The recent sharp rise in wheat and other grains prices involved the market adjusting from the previous outlook for ample supplies in the new season, with a good global crop coupled with large old crop stocks, to a lower crop,” he said.

“It appears that less will be produced than last year, but the large stocks mean there should be no fundamental fear about supplies,” he added.

This summer’s wheat stocks in the US alone are at an enormous 27.5 million tonnes, larger than Germany’s 2009 wheat crop of 25.1 million tonnes.

“At the moment there is enough wheat available in the northern hemisphere, especially because of record stocks in the US and elsewhere, which were built up over the last two years,” Keller said.

(EURACTIV with Reuters.)

Soaring global food prices in 2007-2008 have prompted a renewed debate about maintaining sufficient subsidies for the EU farming sector, as some argue that feeding people cannot be left to the mercy of the market.

As global prices hit new highs, the European Commission sold its intervention stocks, removed the obligation to set aside 10% of arable land for the 2008 harvest, increased milk quotas by 2% and suspended import duties on cereals.

Furthermore, the Commission proposed policy measures aimed at improving market transparency (EURACTIV 11/12/09). It decided to enhance monitoring of developments in agricultural markets and analyse the impact of price speculation.

The EU executive also launched an investigation into the functioning of the food supply chain for potential unfair commercial practices, which may be holding back competition and driving up prices. The results highlighted were published in October last year (EURACTIV 28/10/09).

European Union

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