Friday 30 September 2016

The outlook for food prices gives us little reason for cheer

Published 11/05/2016 | 02:30

Chinese Premier Li Keqiang and his wife Prof Cheng Hong with Taoiseach Enda Kenny TD at the farm of Cathal Garvey (left of the Taoiseach) from Ower, Co Mayo.
Chinese Premier Li Keqiang and his wife Prof Cheng Hong with Taoiseach Enda Kenny TD at the farm of Cathal Garvey (left of the Taoiseach) from Ower, Co Mayo.

Irish farmers are price takers, not price makers. As the market for foodstuffs is so globalised, and because Ireland produces such a tiny fraction of the world's food output, farmers here have next to no influence over the prices they get for their output. That is true even for the two commodities - milk and beef - which are by a distance the most important for this island's farmers.

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While producers have always faced volatility in prices, movements in food prices and, for that matter, most other commodities, have been roller-coasting over the past decade and more. As anyone in the sector knows only too well, milk prices are on the floor at the moment and beef prices are threatening to fall.

This topsy turvy world of food prices over the past decade is illustrated in the accompanying graph. The data, collected by the Food and Agriculture Organization for the United Nations (FAO), shows the prices of baskets of cereal, dairy and meat products. So that they can be compared easily, all prices are indexed to the years 2002-04.

Buoyed by economic growth in emerging markets, food prices rose from the mid-2000s, with dairy and cereal prices jumping 80pc on the 2002-04 period. After a sharp fall during the financial crisis in 2008-09, they the surged again. Meat prices peaked in 2014, at 45pc above the level of early in the last decade.

But last year world food prices started tumbling, a development closely related to the slowdown in emerging markets, notably China.

Another reason is that like other commodities, food prices have a tendency to shadow movements in the price of oil, which has also crashed. Fuel is an important input in agriculture. Although it does not directly apply to Ireland, high energy prices incentivise more biofuel farming, in turn reducing supply for consumption. Putting all the pieces together, the modest increase in oil prices since the New Year may actually be welcome to food producers, however counter-intuitive that may appear.

But that may not be enough to offset other price-depressing effects. In its commodities market outlook released last week, the World Bank in Washington DC is forecasting that agriculture prices will decline again this year.

The slump in global food prices has hit the dairy industry the hardest. Prices have been falling since 2012 and are now close to levels of more than a decade ago.

This has hit farmers hard, including the significant number who expanded or switched to dairy in light of high international prices from the middle of the last decade to recently. Those who invested in capacity in the run up to the abolition of EU milk quotas last year are also facing tough times.

Many farmers will struggle to break even this year, and those with borrowings face trouble with cash-flow. In an agriculture debate in the Dail last Wednesday, Jackie Cahill of Fianna Fail and former president of the Irish Creamery Milk Suppliers Association, warned that a number of dairy farmers would go bankrupt this year.

Despite the fall in price and reflecting additional capacity, milk production is likely to increase this year in the EU.

Year-on-year milk deliveries have increased by 36pc in Ireland, 21pc in Belgium and 19pc in the Netherlands according to the Milk Market Observatory.

The supply glut has led to calls for the European Commission to do more, particularly in relation to the intervention price. In March the Commissioner Phil Hogan introduced some measures, including letting countries allow voluntary reductions in supply. There will no doubt be calls for more help.

It is perhaps worthwhile taking a step back and referring back to the arguments before the milk price crash (at the time, readers will no doubt recall, there was great optimism about 'white gold' on the eve of milk quotas being abolished).

The upbeat argument went that an increasingly affluent population in developing countries would want to switch their diet towards meat and dairy products.

With something of a comparative advantage in grazed grass, Ireland was well suited to export premium agricultural products.

In the longer-term many of these factors may turn out to be true.

Commodities and emerging markets will not be in a slump forever. Optimism or pessimism about Irish exports depends a lot on China. It is also a big player in agriculture trade and accounts for 40pc of world imports of milk powder.

Last year's FAO-OECD annual Agriculture Outlook noted that global dairy prices will in large part depend on whether China opts to become self-sufficient or continues to favour some imports. In separate visits to Ireland in recent years, the current Chinese President Xi Jingpin and second-in-command, Li Keqiang made noted visits to dairy farms. Those involved in the dairy industry will no doubt hope this was to boost trade rather than as a means of emulation.

Complete Chinese self-sufficiency appears unlikely in the short to medium term, and won't be helped by the damage done during its 2008-09 milk powder poisoning scandal. Nonetheless, it is probably worthwhile keeping a close eye on policy in Beijing.

Despite all the challenges the farming sector has been facing, it has not all been bad news. Last year was a banner year for exports. The value of food products sold abroad reached yet another record high, coming within a whisker of €10bn. With the exception of dairy, there was value growth in every sub sector.

From a recent low point during the depths of the global recession in 2009, exports have risen strongly every year. In the six years to last year, value growth stood at a very impressive 58pc. The strong performance in difficult times is evident in the jobs statistics: agriculture is one of the few sectors to have surpassed its pre-crisis employment level.

The growth continued despite the economic troubles and recent price declines is testament to efforts of Irish agri-food business in securing business abroad. For sure, the depreciation of the euro helped - half of Irish beef is sold in sterling. But the depreciation of the pound since last year has added to exporters' concerns - there are some indications that beef exports to the UK are down so far this year due to price effects. If such a trend continues, those in that industry will hope that there are increases in exports to the rest of Europe.

Indo Farming

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