WHILE MANY areas of Scotland received welcome rain this week, the dry weather until then continued to have an impact and cereal prices took off in a big way this past week.

Wheat prices have risen by more than £8 per tonne in the last three weeks and the LIFFE wheat futures rose by £7.15 last week for November, 2010, delivery. On Monday, wheat prices rose by £4 per tonne and on Tuesday were up £3 per tonne! So, £7 in two days ain’t bad.

Volatility has always been caused by weather and currency, and that latter has also been on the move recently. Sterling hit a 19-month high against the euro last week, with £1 equating to €1.23, which made €1 worth 80p. This week, £1 equates to €1.20 making €1 worth 82.8p.

With forecasts of interest rate rises and increasing inflation, concerns over the Chinese economy and ongoing issues with European financial debt, this has seen heavy losses on equity, oil and general commodity markets, which would normally have affected the wheat market.

But the basic necessity of food has kept grains resilient in the face of that. It has been helped by the USDA report which put maize stocks 8.6m tonnes lower than expected and 2010 maize planted area 1.3m acres lower than expected plus poorer yield prospects due to heat waves in many areas of the world has caused a sharp rally in global cereal prices.

This was also exaggerated by fund money looking for a new home as share prices fell, including crude oil, which fell from $75 to $71 per barrel.

With the maize tonnage down, but US wheat stock position up by 1.17m tonnes from the last USDA report, the fact that maize was down by as much put a floor in the wheat market, even though there are still global wheat stocks of 201m tonnes.

Harvest is underway in Southern Europe now and winter barley cut in France is reported to be up to 10% down on last year’s yields.

Russia is also in the grip of a drought and yields are 10% down on last year, resulting in 5m tonnes less than 2009. Also fuelling the volatility is Canada, which continues with its depressing weather concerns.

For now, it looks like markets will be well supported until crops and yields can be better assessed. And, with some profit taking and hedge selling along the way, fund managers bought a reported 3.5m tonnes of Chicago wheat futures late last week which was a factor in prices rallying.

European spring barley production has been forecast down by 3m tonnes with the UK down by 1.1m tonnes. If UK barley yields are down 10% from last year, the domestic crop could be the smallest since 1960, at under 5m tonnes, the smallest crop since 1960.

As grain use for ethanol in Europe has increased by over 10m tonnes, 10% of this total will come from barley, 57% from wheat and maize 33%, so available barley tonnage will be even lower.

The 2009 UK malt requirement and production figures recently released show a reduction in the UK brewing malt demand of 15% and a reduction in distilling malt demand by 9% and, although exports of UK malt have increased by 30%, the overall production figure of 1.38m tonnes is a drop of 9% on 2008.

Normal UK export tonnage of barley into Spain from this harvest is being filled at present by barley from the Balkans, which will reduce our potential tonnage into Spain.