October 9, 2008

Prices to Ease After Record World Harvest

F armers across the country have faced their own crisis this year with the wettest harvest for more than 20 years.

The optimism of the spring has been replaced by despair - and although we have experienced an Indian summer, it came along too late for many.

The financial impact of the wet harvest is likely to be severe, with many businesses having lost tens of thousands of pounds. Yet as farmers begin to face the financial consequences, reports suggest that consumers should see food prices ease, as the world wheat harvest is predicted to be a record - the implication being that cheap grain will be available to import, with the resulting downward impact on food prices. While as a consumer I would normally welcome any easing of food prices, I fear that if we are not careful there will be a much higher long-term price to pay if the country becomes even more dependent upon imported food.

The effects of the UK's attitude toward energy security is being felt by us all as we face higher utility bills than European consumers. When gas was readily available to import at cheap prices, energy security was not considered an issue. But now, with Russia controlling much of Europe's gas supplies, how comfortable do we feel?

Food has the potential to become tomorrow's energy crisis. We need to be increasing food self-sufficiency, not reducing it. To rely on imported food when the worldwide population is forecast to grow by over two billion to nine billion by 2050 is short sighted in the extreme.

Demand threatens to outstrip supply and the impact on price will only be one way. It is vital, therefore, that UK farming is supported over this winter if long-term damage to the supply chain is not to result - with consequences for us all.

How farmers react to events of the last couple of months and the financial consequences is very important. A common response in times of difficulty is to cut costs, but often the wrong costs are cut, which only make's things worse. A properly planned response is needed to avoid these pitfalls.

Technical efficiency must remain at the heart of whatever farming system is adopted, as must the production of what the market will want, not what you can get away with. Price rises will never compensate for (and nor should they) poor technical performance.

A carefully considered response is also needed, and not overreaction. How many farmers wish they had not overreacted to the high cereal prices of autumn 2007?

There are grounds for optimism: the global economy is still relatively healthy with GDP forecast to grow by 4.1 per cent this year and 3.9 per cent next year - both above the long-term average of 3.5 per cent.

The UK situation is different to that in the United States, where it was injudicious lending to the housing sector that precipitated the crash in prices and the resulting credit crunch from sub-prime exposure. In the UK it has been the credit crunch itself that has precipitated the economic downturn. Thus if an end to the credit crunch can be seen, we may just witness a downturn, as opposed to an out-and-out recession.

The demand for agricultural commodities will be underpinned by the growth in the world population and the Westernisation of diets. Although the 2008 world harvest will see some recovery in grain stocks, they will still remain at historically very low levels - less than two months' consumption. The outlook for agricultural commodity prices is therefore benign.

The outlook for world dairy prices will be influenced by the shocking baby-milk scandal in China - supplies from New Zealand in particular are being diverted to China away from EU markets.

Oil prices have fallen back from their spike of 147 per barrel, and with the world having reacted to this spike by reducing consumption, we are likely to see the price settle in the 80 to 110 range, historically high but a long way from the position earlier this year.

By early 2009, inflation is expected to be falling. We may not notice this with more money in our pockets as we shall all have experienced a fall in living standards as a result of the economic woes. We should experience relief from further price rises. What looks increasingly likely is a cut in the base rate before the end of the year.

Mike Rowe is the regional senior agribusiness partner with Clydesdale Bank, based in Exeter

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