Over the past five years, farmers and the food processing sector have faced significant increases in input costs.

Diesel, fertilizer, steel and other input costs have risen twofold. During the same period there was a big increase in output prices for crops, cattle and dairy, which to some extent offset higher production costs.

So, despite a background of higher output prices, farmers only saw a marginal increase in income. In the second half of 2013, input prices for most commodities began to fall. Output prices for meat and dairy were rising and cereals falling. As we begin 2014, we look at the prospects for input and output prices and how they will impact on the profitability of farmers and agribusinesses.

Global demand

Economic growth is a key factor in input and output prices. Global economic growth is expected to pick up pace during 2014. The IMF predicts that the global economy will grow by 3.6% this year compared to 2.9% last year.

Notwithstanding the string of recent positive news about the Eurozone economy such as better than expected employment figures in Germany, the weak economies of the periphery will constrain growth, with GDP only expected to expand by 1.0% this year. Closer to home, the UK’s growth is projected to be 2%. Developing and emerging economies will grow by 0.6% to reach 5.1%. While this is well above that of developed economies, it is below the high levels seen in recent years.

Some economies will contract. China’s growth is expected to fall from 7.6% to 7.3%. If the US tapers off quantitative easing, growth could fall substantially in emerging and developing economies as capital flows back to dollar denominated assets.

Despite lower growth rates in China, the country will continue to have a huge impact on global agricultural markets, both from an input and output perspective.

In recent years, China has been a key driver of rising global agricultural demand, as well as the upward trend in input prices. Growth in per capita Chinese meat consumption has outpaced other emerging economies, while Chinese per capita dairy consumption is also growing strongly. As incomes continue rising, demand will continue rising for protein, dairy and soyabeans.

Output prices

In December, the UN Food and Agriculture Organisation’s food index showed that global dairy prices had reached their highest level since 2007 on foot of higher demand from the Chinese for milk powder, which has led New Zealand and other Southern Hemisphere countries to concentrate on producing that product.

This pushed up the price of butter and cheese, due to the lower global supplies. Prices are forecast to remain at these elevated levels during 2014. As in last year, China will again have a big bearing on the market in 2014. Local milk production in China is falling and rising income will see imports of dairy products increase.

Meat prices also edged upwards at the end of last year. Prices for beef and pork rose substantially in 2013 and there is an expectation that price growth will continue throughout 2014. The uptick in the global economy will lead to higher demand, particularly in developing and emerging markets in Asia and the Middle East. Prices will in particular get support from higher demand from China as it faces a supply deficit. Mature markets such as Japan are also expected to have increased import requirements during 2014, which should benefit Irish producers, after the lifting of the restrictions on Irish beef imports.

Global supplies are expected to be tighter during 2014, with the US in particular set to experience a sharp fall in beef production. If, as hoped, both the US and China open their markets to Irish beef imports, Irish producers will benefit greatly from diversification of their export markets and take greater advantage of the rising prices due to the global supply/demand imbalance.

While the dairy and meat sectors are set to see price growth during 2014, the cereal sector is expected to experience a downward movement in prices.

The FAO Cereal Price Index averaged 191.5 points in December, 1.4% lower than November and the lowest monthly value since August 2010.

Large global inventories following bumper harvests in 2013 will continue to exert downward pressure on global prices of wheat and maize during 2014. And demand is predicted to remain flat.

Furthermore, another exceptional harvest is expected in 2014. According to data from the US Department of Agriculture, farmers increased seeding by 4.5% from last year. There are similar predictions for Canada and Australia. Maize production will follow the same trend as wheat. Other crops, such as soyabeans are also expected to drop in price due to higher production.

Input prices

Iron ore is the primary raw material used in the production of steel and any movements in its price will directly affect the price for steel. After falling steadily during the first half of 2013, the iron ore price increased during the second half of 2013, but is expected to decline this year from its current level of $135 per dry metric ton to average $100 during 2014. While the predicted price will be significantly lower than the historic peak of $170 reached during 2011, it is a third above the pre-2009 price.

The main driver behind the expected price fall is the slowdown in the Chinese economy and fewer infrastructure projects in that country. A higher US dollar should also weaken demand. Farmers engaged in capital projects such as farm buildings and purchasers of equipment should benefit from this fall.

The North Sea Brent crude oil spot price averaged near $108 per barrel (bbl) in 2013. An increase in oil production from other counties outside of Organization of the Petroleum Exporting Countries (OPEC) will boost supplies and is forecast to push prices down to $103/bbl during 2014. The increased production will mainly come from the US and Canada.

A strengthening dollar, leading to a reduction in demand, will also be a factor dampening prices. This should lead to lower prices for agricultural and commercial diesel.

During 2013 there was a downward slide in fertilizer prices. The break-up of the Russian-Belorussian, potash cartel Belaruskali led to a plunge in prices of the raw material. As current stock inventories are depleted, Irish farmers should benefit from the potash price drop in the second half of 2014.

Potash supplies are likely to increase in 2014, putting forward downward pressure on prices. European nitrogen supplies may also decline in 2014, as natural gas prices ease and production capacity increases. Urea prices will also remain at low levels in 2014 due to high exports from China and Algeria, combined with the general fertilizer market uncertainty.

Conclusion

The decline in input prices will continue during 2014. A key factor in the downward pressure is the lower oil price, which impacts on fertilisers and machinery and transportation costs.

Falling steel prices should translate into lower costs for farm equipment and steel products for farm buildings.

The drop in soyabean prices should see lower compound animal feed prices. However, the extent to which farmers will benefit will depend on the current supplier inventory levels of these products.

Output prices for dairy and beef will continue on an upward trajectory, enhancing profitability for the industry, but for cereal farmers their incomes are likely to remain stagnant in 2014.