I write this article only weeks after farmers locked down meat factories in search of better prices and transparency over specifications. Hopefully, the Beef Forum agreement can mark the beginning of a more positive working relationship, minimising the long-term fallout for the sector. However, if history has taught us one thing, it is that for as long as our beef industry remains totally void of transparency and leadership, it will continue to rumble on from one crisis to the next.
Back to the long-term outlook for Irish Agriculture. I imagine most readers will be looking through this publication to help gain an insight into where the various authors see the direction of farmgate prices over the next five years. However, we only have to look back over the past five years to see how futile such an exercise would be. During this period, the price of grain varied from peak to trough by almost €100/t, beef price by €1.20/kg and milk price by over 15c/l.
This price volatility has largely been due to the exposure of European and indeed Irish commodity prices to global market forces. The level of exposure reflects the fact that, over the last five to eight years, global market prices have increased at a pace that has eroded the price premium once returned to European farmers. At present we see US farmers receiving a price for both beef and dairy products that is significantly above the EU average, while Chinese dairy farmers are securing a price equivalent to 50c/l. Over the past 10 years, Brazilian beef prices have increased from 50% of the average EU price to 80-85%, having actually totally eroded the price gap in 2010.
Therefore, when we look to the future, we must do so in the context that we are now operating in a global market environment where we no longer have the buffer of a European premium to absorb global shocks. As we have learned in recent years, this new environment leads to price volatility.
The three main factors contributing to this price volatility are weather patterns, food scares and government policies. There is little point in trying to build weather patterns or food scares into any forecasts, other than to say that they will happen and when they do they will affect the market. However, in most cases, normalised trading conditions will return.
Government policies, on the other hand, are very different. Firstly we can analyse the trends that are developing. But, perhaps more importantly, it is decisions taken by national governments which have the potential to fundamentally shift the long-term direction of global agriculture. Therefore, in the context of looking ahead to the next five years for Irish agriculture, we must carefully study international policy developments and their impact on the production of agricultural commodities.
Direct supports under CAP
The World Trade Organisation (WTO) was officially established in 1995, having replaced the General Agreement on Tariffs and Trade (GATT), with a clear mandate to liberalise international trade. It has failed spectacularly and after almost 20 years, the current Doha round remains in a condition of stalemate. Not only is this scenario unlikely to change but there is now clear evidence that sectors which once viewed free trade as a panacea are revising their global ambitions. Even the financial sector is on a global retreat. In recent weeks the US banking giant Citigroup announced that it was pulling out of consumer banking in 11 different countries. HSBC and Barclays are both going down a similar route.
And just as the chief executives of these large finance institutions are drawing back from globalised markets, there is a growing realisation within Governments that the globalisation of agriculture, and the subsequent move to break the link between supports and production, is fraught with danger.
As one of the largest producers of agricultural commodities in the world, it is no surprise that the US has been first to realise the dangers. While still keen to be seen as a strong proponent of globalisation, Congress has shifted the focus of the US farm bill towards safeguarding domestic production from the challenges of a global market. The introduction of new support measures around margin protection and crop insurance reinstates the model of supporting active farmers. The new bill is widely accepted to be a retrograde step in the context of WTO and in reaching any agreement under the Doha round.
The policy shift is worth considering in the context of bi-lateral deals, particularly the Transatlantic Trade and Investment Partnership (TTIP) being negotiated between the US and EU. The US commitment to protecting domestic production and safeguarding the use of GM technology and growth hormones makes it difficult to see how any trade deal will be reached while agriculture remains on the table.
This shift in US focus is especially relevant in the context of the future of European Agriculture. We have just completed a reform process which, over time, will further erode the link between support and production within the EU. US policy has come back from this cliff. Europe will have to do the same as the need to reintroduce measures which safeguard primary production, in the face of global market challenges, becomes apparent.
When the heads of EU Governments met in Brussels at the end of October to agree a 15-year plan to tackle climate change, the agreement reached effectively paved the way for the reintroduction of direct supports under CAP. From an agricultural perspective the two key outcomes were:
The acknowledgement that food security should be viewed on an equal footing to climate change.That the positive impact of agriculture should be acknowledged in the climate change argument, eg the ability of permanent pasture and forestry land to sequester carbon. Both make a strong argument for the CAP to support the intensification of sustainable agricultural systems. Few could argue that breaking the link between production and supports, through the introduction of a flat area-based payment, will deliver this. Meanwhile, there is clear evidence to show that environmental and economic sustainability can be delivered through supporting improved technical efficiency at farm level. In my view, it would therefore be dangerous to look to the future of Irish agriculture in the context of the current reform package. We should be factoring in the reintroduction of direct payments when looking to the future.
Low energy prices
The ability of Irish agriculture to remain competitive in the global market will be essential to our future prosperity. Of course, any changes to support payments in future CAP reforms will only be one part of the actions needed to help achieve this. Costs of production at farm level will be the main driver. There is no doubt that it is our grass-based system that gives us a major competitive advantage over many of our global competitors.
However, we need to be aware that this advantage is severely eroded in an era of low energy prices. Again, we are exposed to the policies of international governments in this regard. Changes to the renewable energy policy in the US and the subsequent focus on shale gas production have dramatically reduced production costs on US dairy farms and feedlots. Not only are energy costs less than 30% of those in Europe, but the move away from further investment in bio-ethanol production has seen corn demand plateau in a year when ideal growing conditions have delivered a record US harvest. The net result has been a 40-50% decline in corn prices over the past 12 months.
Corn prices will, of course, vary from year to year depending on weather and global demand. However, armed with the benefit of having access to forward pricing tools, margin protection supports, cheap labour and production technologies that are banned in Europe, we will see the US becoming increasingly competitive on the global market. This will be most evident in the dairy market, where production is already responding to the favourable production environments and output was up 4% during the month of September alone.
While global demand for dairy produce is forecast to increase, we should consider this in the context that US exports are forecast to reach 20% of total production in the years ahead – from more or less a standing start only a few years ago. The scale of this increase can be grasped by the fact that such export volumes would match the total production of New Zealand.
If we assume that a sustained period of low energy prices will put a ceiling on global grain markets, then we must also assume an increase in global beef production. The increase will be two fold – herds will increase as land on the margins of grain production reverts back to pasture while feedlots, with access to cheap grain, will push up carcase weights. This is likely to be a longer term development, given the nature of the production system.
One might not expect any increase in global beef production in the next three to five years. In fact beef supplies will actually be getting tighter as increased numbers of heifers are retained for breeding. However, cheap grain will limit the potential of beef prices to rise due to increased competition from the pig and poultry sectors. When grain prices are low, production of both pork and chicken will also increase, from a lower cost base.
Looking into the future
One thing for certain is that, given the wide-ranging factors that have the potential to impact on the future of Irish agriculture, anyone prepared to give a definitive forecast is almost guaranteed to be wrong. That said, we cannot ignore the potential that the abolition of milk quotas next spring presents for our dairy sector. However, for the reasons outlined above it is critical that we remain focused on our cost base for this potential to translate into farmer profit.
Personally I do not subscribe to the theory that one more dairy cow means one less suckler cow. There is scope to comfortably operate a herd of 1.5 million dairy cows alongside a suckler cow herd of one million head. Given my view that we will see a reintroduction of coupled payment for this sector, I think this will be the likely outcome in five to eight years’ time.
Where I do think the abolition of milk quota will have an impact will be on the age at which animals are slaughtered. Lack of land competition in the past, because of the inability of the dairy sector to grow, has enabled inefficient beef breeding and finishing systems to develop. From now on there will not be surplus land which, in the past, enabled beef animals to roam the countryside for 30-36 months before being slaughtered. We should not rule out the possibility that any direct support to the beef sector in the future will be targeted towards slaughtering animals at younger ages.
Tillage vulnerable
The tillage sector is vulnerable to an area change given its dependence on rented land. While an exodus of tillage farmers into dairy is unlikely, land may transfer due to the ability of dairying to deliver higher returns to pay higher rents. Of course the tillage sector is one where production can change rapidly based on economics. We have already seen a direct payment introduced to promote protein crops. A roll out of such a policy in any further CAP reform would undoubtedly change the economic landscape.
To conclude, the direction of Irish agriculture over the next five years will largely depend on how quickly Europe realises the flaws associated with breaking the link between production and support.
The three sectors most exposed are suckler, tillage and sheep. If we continue on course towards a flat area-based payment by 2019, a 20-30% reduction in the productivity of all three sectors cannot be ruled out. However, should we see a mid-term review that recognises the need to support active farmers, both from a food security and climate perspective, then there is no reason why productivity cannot be maintained, even in light of a 30-40% increase in dairy cow numbers.
I write this article only weeks after farmers locked down meat factories in search of better prices and transparency over specifications. Hopefully, the Beef Forum agreement can mark the beginning of a more positive working relationship, minimising the long-term fallout for the sector. However, if history has taught us one thing, it is that for as long as our beef industry remains totally void of transparency and leadership, it will continue to rumble on from one crisis to the next.
Back to the long-term outlook for Irish Agriculture. I imagine most readers will be looking through this publication to help gain an insight into where the various authors see the direction of farmgate prices over the next five years. However, we only have to look back over the past five years to see how futile such an exercise would be. During this period, the price of grain varied from peak to trough by almost €100/t, beef price by €1.20/kg and milk price by over 15c/l.
This price volatility has largely been due to the exposure of European and indeed Irish commodity prices to global market forces. The level of exposure reflects the fact that, over the last five to eight years, global market prices have increased at a pace that has eroded the price premium once returned to European farmers. At present we see US farmers receiving a price for both beef and dairy products that is significantly above the EU average, while Chinese dairy farmers are securing a price equivalent to 50c/l. Over the past 10 years, Brazilian beef prices have increased from 50% of the average EU price to 80-85%, having actually totally eroded the price gap in 2010.
Therefore, when we look to the future, we must do so in the context that we are now operating in a global market environment where we no longer have the buffer of a European premium to absorb global shocks. As we have learned in recent years, this new environment leads to price volatility.
The three main factors contributing to this price volatility are weather patterns, food scares and government policies. There is little point in trying to build weather patterns or food scares into any forecasts, other than to say that they will happen and when they do they will affect the market. However, in most cases, normalised trading conditions will return.
Government policies, on the other hand, are very different. Firstly we can analyse the trends that are developing. But, perhaps more importantly, it is decisions taken by national governments which have the potential to fundamentally shift the long-term direction of global agriculture. Therefore, in the context of looking ahead to the next five years for Irish agriculture, we must carefully study international policy developments and their impact on the production of agricultural commodities.
Direct supports under CAP
The World Trade Organisation (WTO) was officially established in 1995, having replaced the General Agreement on Tariffs and Trade (GATT), with a clear mandate to liberalise international trade. It has failed spectacularly and after almost 20 years, the current Doha round remains in a condition of stalemate. Not only is this scenario unlikely to change but there is now clear evidence that sectors which once viewed free trade as a panacea are revising their global ambitions. Even the financial sector is on a global retreat. In recent weeks the US banking giant Citigroup announced that it was pulling out of consumer banking in 11 different countries. HSBC and Barclays are both going down a similar route.
And just as the chief executives of these large finance institutions are drawing back from globalised markets, there is a growing realisation within Governments that the globalisation of agriculture, and the subsequent move to break the link between supports and production, is fraught with danger.
As one of the largest producers of agricultural commodities in the world, it is no surprise that the US has been first to realise the dangers. While still keen to be seen as a strong proponent of globalisation, Congress has shifted the focus of the US farm bill towards safeguarding domestic production from the challenges of a global market. The introduction of new support measures around margin protection and crop insurance reinstates the model of supporting active farmers. The new bill is widely accepted to be a retrograde step in the context of WTO and in reaching any agreement under the Doha round.
The policy shift is worth considering in the context of bi-lateral deals, particularly the Transatlantic Trade and Investment Partnership (TTIP) being negotiated between the US and EU. The US commitment to protecting domestic production and safeguarding the use of GM technology and growth hormones makes it difficult to see how any trade deal will be reached while agriculture remains on the table.
This shift in US focus is especially relevant in the context of the future of European Agriculture. We have just completed a reform process which, over time, will further erode the link between support and production within the EU. US policy has come back from this cliff. Europe will have to do the same as the need to reintroduce measures which safeguard primary production, in the face of global market challenges, becomes apparent.
When the heads of EU Governments met in Brussels at the end of October to agree a 15-year plan to tackle climate change, the agreement reached effectively paved the way for the reintroduction of direct supports under CAP. From an agricultural perspective the two key outcomes were:
The acknowledgement that food security should be viewed on an equal footing to climate change.That the positive impact of agriculture should be acknowledged in the climate change argument, eg the ability of permanent pasture and forestry land to sequester carbon. Both make a strong argument for the CAP to support the intensification of sustainable agricultural systems. Few could argue that breaking the link between production and supports, through the introduction of a flat area-based payment, will deliver this. Meanwhile, there is clear evidence to show that environmental and economic sustainability can be delivered through supporting improved technical efficiency at farm level. In my view, it would therefore be dangerous to look to the future of Irish agriculture in the context of the current reform package. We should be factoring in the reintroduction of direct payments when looking to the future.
Low energy prices
The ability of Irish agriculture to remain competitive in the global market will be essential to our future prosperity. Of course, any changes to support payments in future CAP reforms will only be one part of the actions needed to help achieve this. Costs of production at farm level will be the main driver. There is no doubt that it is our grass-based system that gives us a major competitive advantage over many of our global competitors.
However, we need to be aware that this advantage is severely eroded in an era of low energy prices. Again, we are exposed to the policies of international governments in this regard. Changes to the renewable energy policy in the US and the subsequent focus on shale gas production have dramatically reduced production costs on US dairy farms and feedlots. Not only are energy costs less than 30% of those in Europe, but the move away from further investment in bio-ethanol production has seen corn demand plateau in a year when ideal growing conditions have delivered a record US harvest. The net result has been a 40-50% decline in corn prices over the past 12 months.
Corn prices will, of course, vary from year to year depending on weather and global demand. However, armed with the benefit of having access to forward pricing tools, margin protection supports, cheap labour and production technologies that are banned in Europe, we will see the US becoming increasingly competitive on the global market. This will be most evident in the dairy market, where production is already responding to the favourable production environments and output was up 4% during the month of September alone.
While global demand for dairy produce is forecast to increase, we should consider this in the context that US exports are forecast to reach 20% of total production in the years ahead – from more or less a standing start only a few years ago. The scale of this increase can be grasped by the fact that such export volumes would match the total production of New Zealand.
If we assume that a sustained period of low energy prices will put a ceiling on global grain markets, then we must also assume an increase in global beef production. The increase will be two fold – herds will increase as land on the margins of grain production reverts back to pasture while feedlots, with access to cheap grain, will push up carcase weights. This is likely to be a longer term development, given the nature of the production system.
One might not expect any increase in global beef production in the next three to five years. In fact beef supplies will actually be getting tighter as increased numbers of heifers are retained for breeding. However, cheap grain will limit the potential of beef prices to rise due to increased competition from the pig and poultry sectors. When grain prices are low, production of both pork and chicken will also increase, from a lower cost base.
Looking into the future
One thing for certain is that, given the wide-ranging factors that have the potential to impact on the future of Irish agriculture, anyone prepared to give a definitive forecast is almost guaranteed to be wrong. That said, we cannot ignore the potential that the abolition of milk quotas next spring presents for our dairy sector. However, for the reasons outlined above it is critical that we remain focused on our cost base for this potential to translate into farmer profit.
Personally I do not subscribe to the theory that one more dairy cow means one less suckler cow. There is scope to comfortably operate a herd of 1.5 million dairy cows alongside a suckler cow herd of one million head. Given my view that we will see a reintroduction of coupled payment for this sector, I think this will be the likely outcome in five to eight years’ time.
Where I do think the abolition of milk quota will have an impact will be on the age at which animals are slaughtered. Lack of land competition in the past, because of the inability of the dairy sector to grow, has enabled inefficient beef breeding and finishing systems to develop. From now on there will not be surplus land which, in the past, enabled beef animals to roam the countryside for 30-36 months before being slaughtered. We should not rule out the possibility that any direct support to the beef sector in the future will be targeted towards slaughtering animals at younger ages.
Tillage vulnerable
The tillage sector is vulnerable to an area change given its dependence on rented land. While an exodus of tillage farmers into dairy is unlikely, land may transfer due to the ability of dairying to deliver higher returns to pay higher rents. Of course the tillage sector is one where production can change rapidly based on economics. We have already seen a direct payment introduced to promote protein crops. A roll out of such a policy in any further CAP reform would undoubtedly change the economic landscape.
To conclude, the direction of Irish agriculture over the next five years will largely depend on how quickly Europe realises the flaws associated with breaking the link between production and support.
The three sectors most exposed are suckler, tillage and sheep. If we continue on course towards a flat area-based payment by 2019, a 20-30% reduction in the productivity of all three sectors cannot be ruled out. However, should we see a mid-term review that recognises the need to support active farmers, both from a food security and climate perspective, then there is no reason why productivity cannot be maintained, even in light of a 30-40% increase in dairy cow numbers.
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