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Friday 9 December 2016

Alarm bells are ringing

Milk, meat and grain prices continue to thrive, but could rising costs turn the boom into a bubble? Darragh McCullough reports

Published 11/01/2011 | 05:00

The memories are too fresh to forget. In 2008, we were all told commodity prices had entered a new era, when booming demand from a growing world population would cause a paradigm shift in food prices. Milk soared to 40c/l and grain surged to €270/t. Inputs surged in tandem, with bulk CAN prices touching €375/t in the summer of 2008.

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Farmers were told not to worry, since they'd still make it at the other end.

Then the bubble burst. The financial binge the world had embarked on finally caught up with the man on the street. He stopped buying. Suddenly, the price of everything began to fall even more quickly than it had risen. CAN prices collapsed to as little as €150/t only months after they had hit record highs. Demand for dairy product, grain, meat and virtually every output that Irish farmers relied on fell off a cliff. Milk price halved, while grain prices fell to a third of their peak. Beef and lamb languished in the doldrums.

Suddenly farmers are noticing the warning signs again. Global milk prices are up another 7pc in the last week on already strong base prices. Beef and lamb producers are looking at some of the best prices in years, while grain producers are still trying to get used to the fact that their grain has doubled in value in the past 12 months.

A growing concern among farmers now is whether steep rises in input costs are going to take all the good out of higher output costs. Food industry analysts and economists are also wondering just how far rising food prices can be pushed on a fragile world economy that is supposedly only beginning to recover from one the biggest financial crises ever.

Appropiately, this whole issue will be a central theme of the Teagasc Outlook Conference in Portlaoise on January 20.

"It seems that 2011 is beginning to look like 2008," said Teagasc economist Trevor Donnellan. Rising input costs mean that relatively good output prices need to rise even further to maintain margins and profitability at farm level.

"While this might be a possibility in milk and cereals due to widespread rising demand for these products, it is not as likely in beef or lamb since consumption is trending downwards in Europe for these products."

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But he was optimistic about our farmers' prospects in another global commodities boom.

"Rising feed prices are not entirely bad news for the grass-based systems that predominate in Ireland," he said. "Rising grain costs will affect grain reliant dairy and beef production systems that we see a lot of in Britain, the US and in continental Europe much harder."

So what are his thoughts on farm commodity prices in the medium term?

"It's difficult to know," said Mr Donnellan. "In 2007, the consensus was that we were going into a new era for food but this unravelled very quickly as the global financial crisis took hold. If there isn't another economic crisis around the next corner, then we may well be entering a more sustained period of commodity higher prices.

"However, higher output prices, on the back of the improving global economy invariably mean higher input prices. We've seen evidence of this already with farm expenditure on fertiliser, fuel and feed all up in 2010 and it seems further increases are likely again in 2011. Direct input expenditures for dairy farms were up by about 5pc in 2010 and will rise further in 2011.

"The accompanying graphs show the rise in fertiliser sales in 2010 following several years of decline, along with the fairly high level of dairy feed use in 2010 compared to previous years. Soil tests in 2010 seemed to be showing a need for more fertiliser use and low prices added to the incentive to increase usage levels.

"The volume of feed use may drop [this year]. The reason for this is that silage was in short supply in 2010 which, weather permitting, should not be the case this year. Higher feed prices are another disincentive for farmers to buy concentrates in 2011.

"Fuel use varies little year by year so expenditure is tied to diesel prices which looks like being higher again [this year].

"Overall, milk production costs will rise in 2011 so farmers will be relying on further milk price improvements to maintain margins."

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