A global surge in prices of agricultural commodities have sent Irish prices for milk, meat and grains soaring, says head of Agri Sector at Bank of Ireland Eoin Lowry.
A bull run on agricultural commodities is not necessarily the best news for farmers in the long run as it may lead to a period of increased volatility in the months and years ahead.
In his latest analysis as part of the June Sectors Development & Insight report by Bank of Ireland’s Sectors team, head of Agri Sector Eoin Lowry warned that periods of high prices historically are generally followed by periods of low prices.
“Periods of high prices, generally are followed by periods of low prices – as high prices drive more farmers to plant grain, pushing up supply and driving down prices. We may be therefore going to come into a period of increased volatility in the months and years ahead”
Lowry reported that the prices of a range of agricultural commodities traded on the global stage, have reached their highest levels in a decade, lifted by the global economic rebound and improved growth prospects. Last month, the Food and Agriculture Organisation of the United Nations (FAO) reported that global food prices rose at their fastest monthly rate since September 2011.
Supply and demand
In Ireland, prices for milk, meat and grains have been surging. Farm gate milk prices are at over 34c/l, harvest prices for barley are heading towards €175/t and quotes for beef are currently at €4.20/kg- all significantly higher than last year. This is to be expected as countries start returning to normal after over a year of the pandemic.
The question now is how long they will remain at this level?
“The fundamental factors of supply and demand are the largest drivers,” Lowry explained.
“Firstly, on the supply side, which is driven by weather, and particularly dry weather across grain growing regions earlier in the year such as South America and the mid-west in USA. This is reducing supply of grains and keeping prices high. High grain prices mean that feed prices are high for animals which impacts supply of meat and milk and hence keeps these prices higher.
“Secondly, on the demand side, we are seeing continued high demand that is growing and especially from Asia and China’s insatiable appetite for food. Particularly true as China’s economy rebounds. Coupled to this as import demand rises for commodities such as grain, large exporting regions such as Russia has introduced export taxes to hold back exports.”
And, of course, there is the pandemic factor. “Covid has led to an amount of stock building along the supply chain, especially by major food companies and retailers wary of running out of product and aiming to avoid any future Covid-19 disruptions. This is leading to the supply chain being refilled as countries seek to build up their domestic stocks of commodities like wheat, maize, and soya beans. “Highest among them is China as its economy rebounds leading to high demand for grains used in animal feed.”
Lowry added that speculators, in a low returns environment, are also looking at agricultural commodities as investment assets, driving prices up.
“While nowhere near the levels seen in 2007-to-2008, these speculators have been buying up record amounts of agri commodity futures over the year.”
In his analysis Lowry pointed out that challenging weather conditions globally have worsened the availability of various commodities. Is this the threat of global warming coming true?
“This is difficult to say for certain but there is no doubt that it seems we are getting more extreme weather conditions which makes farming more difficult. While the first four months of this year were cooler than every year since 2015, this year is expected to be one of the top 10 warmest years since records began. The recent unprecedented heatwave centred near the US/Canada border may also impact grain yields in that region.”
What goes up …
With various countries are holding stocks back, the impact on local farmers will be financial.
“The biggest impact for Irish farmers is price,” Lowry explained. “This curtails supply on the global market, therefore pushing up prices. This can be positive or negative depending what type of farmer you are. For example, if you are a tillage farmer getting ready to harvest crops in the coming weeks, the outlook for price looks very positive- with prices likely to be up on last year and at highest level in the last number of years.
“However, if you are a beef, pig, or poultry farmer that buys a lot of grain to feed your animals, that cost has significantly gone up. An important observation however is that as prices increase on grains it generally is positive for milk price as the majority of the worlds milk is produced in intensive systems that require a lot of grains.
“Generally, as grain goes up, less is fed (due to cost) and supply of milk reduces. Therefore, rising grain prices can actually be a positive and lead to rising milk prices. All this being said, it is important to realise that periods of high prices, generally are followed by periods of low prices – as high prices drive more farmers to plant grain, pushing up supply and driving down prices. We may be therefore going to come into a period of increased volatility in the months and years ahead.
By John Kennedy (email@example.com)
Published: 7 July 2021