July 10, 2008

Challenge of Meeting Growing World Demands

F ood inflation is outstripping economic growth for the first time in many years, but soaring input costs have left many South West farmers facing another year of pain.

The new report from Savills Rural Research team has revealed that the rapid increases in the cost of fuel, feed and fertiliser have more than outweighed rising commodity prices for many livestock producers. Fertiliser prices have risen by as much as 200 per cent this year and will almost double again in 2009. Livestock feed is nearly 40 per cent dearer than in 2006, and will rise further next year, while energy prices are almost 60 per cent above 2006 levels, rising to over 90 per cent in 2009.

Although the report predicted that tighter supply would boost meat prices from now on, it did not expect South West livestock farmers' profitability to improve significantly until 2010. UK stock numbers have declined, but the impact on price increases has been small, mainly because of competing imports.

Looking forward, an increase in feed price is a virtual certainty, and higher meat prices will require a large fall in production around the world to reduce supply. This has yet to occur and we believe that there will be another year of pain before stock numbers have reduced sufficiently for prices to rise enough to make up for the higher input costs.

Pig and poultry producers are being particularly badly affected by the high feed costs and low returns. It is likely that production will fall over the next year. This should improve prices post 2009, and will reduce the demand for feed grain at the same time as production of grain increases.

This, in turn, will lead to a drop in grain values after 2010, reducing feed costs, and lead to higher margins for the livestock sector. So the longer-term future does look brighter for Westcountry livestock producers. Extensive beef and lamb grazers will be the first to benefit from improving meat prices, and there is a possibility that pigs and poultry could become a premium meat as supply tightens.

And prospects for the dairy sector are considerably brighter. The recent milk price rises will make a significant improvement to the output of dairy farms compared with recent years. World dairy product demand has risen consistently and this is positive for the long-term milk price.

Although the international price index for milk products has fallen from its peak, there is no indication that the market will fall to levels recorded in January 2006 or 2007.

We expect UK dairy profits to be as much as 70 per cent higher this year than in 2006. Higher feed prices are likely to knock profitability slightly in 2009, but will then fall in 2010, boosting returns once again.

Although arable farmers are enjoying a massive 140 per cent increase in cereal prices since 2006, higher fuel, fertiliser and energy costs have eroded some of these returns. However, arable farming is still more profitable than it has been for some time. Forward prices provide some degree of certainty about the future, and with 2009 cereal prices likely to be almost 130 per cent above 2006 levels, arable producers will be more profitable over the next three years than the past three.

However, we anticipate that the UK wheat market will again be under threat from cheaper feed grains, as the world wheat area falls in favour of maize. Around half of our wheat crop is used for animal feed, leaving us vulnerable to imported cheaper grains.

World grain production is also likely to more than comfortably meet demand in the coming year. We expect world production to increase as Russia, Ukraine, the EU and other nations expand their crop area, and yields increase following higher input applications.

But with such firm forward futures prices, growers still have the option of taking some protection against falling markets. World factors will inevitably continue to dominate the future - and surprises such as climatic events and political action, including a change in biofuel policy, can distort the outcome.

(c) 2008 Western Morning News, The Plymouth (UK). Provided by ProQuest Information and Learning. All rights Reserved.