Business Farming

Thursday 29 September 2016

Volatility is the price we pay for free trade

Kevin Bellamy

Published 16/09/2015 | 02:30

Rabobank's Kevin Bellamy
Rabobank's Kevin Bellamy

In the past few years there has been a lot of talk about the free market. With agricultural markets deregulating but also experiencing severe volatility, some commentators are asking if policy-makers have made the wrong call? What happened to all of those new consumers we were supposed to be serving?

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The truth is those new consumers are going through difficult times as well. While the IMF is forecasting 3.3pc for the global economy this year, growing to 3.8pc next year, it predicts much slower growth in emerging markets, some of which, Nigeria and Malaysia for example, are oil exporters. The current oversupply and large stocks have bought oil prices down to below $50 per barrel once again.

Oil exporters have become poorer and they are less able to afford our food exports. In places like Mexico and Algeria lower oil revenues have meant reduced government spending on food subsidy programmes.

The strong dollar is another reason for the slowdown in demand from emerging markets. Most food commodities globally are sold in dollars and for emerging markets products have become much more expensive as the dollar has strengthened.

Then there is the turmoil in China. While Rabobank do not expect economic collapse in China, the slowing of growth will impact demand for imports. A good example is beef with imports rising rapidly since 2012 but now weakening considerably.

Russia has removed itself from the market by embargoing products from many Western suppliers, but even if that were not the case, low oil prices have weakened the rouble.

When demand is weak, supply also needs to weaken to balance the market. 2014/15 has seen good growth conditions in most regions.

The wheat harvest has been good in both the US and Black Sea areas and stocks are high. Plentiful stocks of corn are also available, and the US Department of Agriculture forecasts the second highest ever soya harvest. Add to this the rapid reduction of the Chinese pig herd which will cut their need for feedstuffs and we can conclude that feed costs are likely to remain low through the winter.

So, how will this all impact on Irish farming? Despite reduced demand, dairy supply has continued to rise around the world - there is too much milk and not enough market.

Global dairy prices are down 60pc year on year to levels not seen since at least 2009, with many farmers losing money.

But it could be far worse. Irish prices are at least partially protected by the weak euro easing exports and co-operatives subsidising milk payments from reserves.

In New Zealand, the milk price for the new season will be the equivalent of 22c per litre - far worse than in Ireland. It seems highly likely that farmers there will reduce production through their season as they cut out feed and other costs. The question is how much, and how long will it take to use up all the stocks?

For the beef market, certainly in Ireland the cutting of supply has already taken place. There will possibly be 100,000 less cattle slaughtered this year than last.

This reduction has helped maintain prices from an export market that is also short, despite the closing of the Russian market.

Ironically the big threat to Irish beef exports stems from other farmers protesting in Europe about reducing incomes. In turn this has led governments and consumers to become much more protectionist promoting domestic supplies above imports.

That leaves the question as to whether the pundits and policy makers promoting the 'nirvana' of free markets were wrong to do so. Probably not - strong currencies tend to correct themselves over time, as exports from those countries are expensive and choke off demand.

Low oil prices will eventually slow supply and prices will rise, and as always weather events somewhere will disrupt agricultural supplies. Any or all of those factors will eventually help rebalance markets.

Long term estimates of population growth and economic growth strongly suggest that demand for food will continue to grow, in the case of dairy at more than 2pc per year.

Distressing though it might be, the current stress for farmers is part of the 'deal' which goes with global markets.

Therefore the question facing the Irish industry will continue to be not can we survive low prices, but how do we cope with price volatility?

Kevin Bellamy is a global dairy analyst with Rabobank

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