This year was supposed to be the year where the cost of feed, fuel and fertiliser go back to normal, while the value of agricultural produce retains some of its 2022 surge.
Unfortunately, signs are that it is the input costs that are retaining some of their gains from last year, while the outlook for farm output prices has darkened in recent weeks.
Data released this week by the Central Statistics Office (CSO) clearly show how the year has developed so far, with both agricultural output prices and input prices dropping by approximately 10% in the first five months of the year.
As we can see in Figure 1, the prices paid to farmers fell faster than the prices farmers had to pay for goods and services.
Looking at those prices, energy remains the biggest factor. While gas prices have plunged this year to around €30/MWh – down from highs above €300 last year – they are still far ahead of the long-term summer average price below €20/MWh.
If gas remains close to this level, then we are seeing a long-term increase of 50% in that raw material cost.
It is a similar story in oil prices, where a barrel of Brent crude has spent much of the year to date between $70 and $80 a barrel (€64 to €73).
Again, a welcome drop from the highs of last year, but a considerable jump from the $50 to $60 average (€45 to €55)that existed in the five years before the Covid pandemic.
‘Downward stickiness’
Economists have a phrase for this phenomenon: they say there is “downward stickiness” in prices. This means that prices can rise very fast during a crisis or a shortage, but once the thing that drove that move has passed, the price of the product will fall much slower than it rose – which is why they are called “sticky”.
The CSO data is only until the end of May, but there has been little improvement in the situation since then.
In fact, in recent weeks, we are starting to see some commodity prices start to rise again. The Green Markets North American weekly fertiliser price index has been rising since hitting an 18-month low in mid-June.
Fuel costs will rise further as excise cuts are reversed.
That index held between 300 and 400 for many years before the pandemic and Russia’s invasion of Ukraine. It didn’t even get to 400 in June before rising again, and was at 480 on Friday last.
Black Sea grain deal
On the feed side, concerns remain about the Black Sea grain deal, which is due to expire next week. At every renewal, the Russians threaten not to allow the deal to continue, with a blockade likely to cause a rapid spike in global cereal prices.
While it isn’t clear that Russia even has the capability to halt the shipments at the moment, uncertainty over the future of the trade is helping to keep wheat prices above their long-term average.
Fuel costs again have a unique set of circumstances to add to the generally higher levels, and first among those is the return of excise duty. September will see 1c/litre on green diesel with a further 3c/l added at the end of October. White diesel will increase by 13c/l across the two hikes.
On the global scale, there continues to be a precarious balance in supply and demand as Saudi Arabia cuts output to boost prices, while China’s economic struggles have put a cap on demand.
The opposite effect seems to be in place for farm output prices where there has been no “downward stickiness”, as the suppliers (farmers) have very little pricing power. The rapid fall of dairy prices from the peak of last year has left many suppliers worried about what will come next.
Milk price collapse
Concerns about the collapse of the milk price this year was somewhat tempered by expectations that there would be a recovery in the third or fourth quarter, and some stabilisation at levels higher than the market is currently offering.
Those expectations, unfortunately, are rapidly evaporating as we get into the second half of the year and see little sign of the hoped-for recovery.
On the global scale, there continues to be a precarious balance in supply and demand
Speaking at the Teagasc open day at Moorepark last week Ornua global ingredients managing director Bernard Condon said it “doesn’t, at this point, look like the recovery we were hoping for will come”.
Global prices
Global prices continue to show weakness, with the GDT Index close to the lowest level since late 2020 after dropping 3.3% in the latest auction.
In the years before the pandemic and Russia’s invasion of Ukraine, the GDT Index generally traded between 900 and 1,100.
That means that right now it is close to its longer-term average. However, as we have shown, input prices for energy, feed and fertiliser are far ahead of their longer-term averages.
Beef price drops
In beef, while the price drops are not on the same scale as we see in dairy, neither was the price rise last year.
On the Irish market front, we have seen factory prices drop since they peaked at the beginning of May. The price for an Irish R3 steer is currently around 60 c/kg cheaper than in the UK.
There is little explanation for this price difference from the processors, but at the same time there is little Irish farmers can do about it, as the processors control the price.
In beef, while the price drops are not on the same scale as we see in dairy
Analysis by the Irish Farmers Journal suggests that price gap will be closed by a falling price of UK beef rather than an increase in Irish prices.
Like in dairy, there is little cause for optimism from international markets.
Australian production seems set to expand further, with that country having wider access to the key UK market in the wake of a trade deal with the non-EU country. This will inevitably push Irish beef prices lower.
Unfortunately, there is less progress than might be hoped for in opening international markets.
The reopening of the Chinese market to Irish beef so far has been large on promise and low on delivery – not helped, it has to be said, by some restrictions that remain in place and the slower-than-expected post-Covid recovery of China’s economy.
Irish exports to the US have almost completely collapsed, adding to the disappointing performance.
2022 – an outlier
Teagasc data on farm incomes showed that 2022 was not only a record year, but it also was an outlier. When the data comes through for this year, it will definitely show a substantial drop in dairy and tillage incomes.
It will be hard for it to show a substantial drop in beef or sheep income, as those figures were never substantial to begin with, because 65% of suckler farmers and 53% of sheep farmers earned less than €10,000 last year.
There is little explanation for this price difference from the processors, but at the same time there is little Irish farmers can do about it
An argument can be made that the high incomes made in the dairy sector in 2022 will provide a buffer for a lean 2023, and under normal circumstances, that might be reasonable.
However, the dairy sector also faces challenges on production, as derogation limits seem set to either reduce output – thereby reducing cashflow – or increase the cost of production, as extra land will have to be sourced to maintain herd numbers.
IFA president Tim Cullinan said in the wake of the Teagasc report that it is clear continued Government support for the beef and sheep sectors is needed to stop them disappearing from the Irish landscape. While he is right to highlight those sectors, the entire Irish farming industry is also under pressure in 2023 from ‘sticky’ costs and falling prices.
Dairy prices point to global over-supply. Beef prices are simply misaligned with production costs. Tillage farmers are struggling to get land to plant their crops.
This year’s budget needs to help support the agricultural sector through the continued high-cost period. In time, attrition will reduce global competition, tighten supply and hopefully lead to more sustainable agricultural returns.
Waiting for that attrition to take effect on Ireland’s global competitors is an expensive tactic though.
Without the correct supports in place, the industry that falls victim to high costs may well be Ireland’s.
This year was supposed to be the year where the cost of feed, fuel and fertiliser go back to normal, while the value of agricultural produce retains some of its 2022 surge.
Unfortunately, signs are that it is the input costs that are retaining some of their gains from last year, while the outlook for farm output prices has darkened in recent weeks.
Data released this week by the Central Statistics Office (CSO) clearly show how the year has developed so far, with both agricultural output prices and input prices dropping by approximately 10% in the first five months of the year.
As we can see in Figure 1, the prices paid to farmers fell faster than the prices farmers had to pay for goods and services.
Looking at those prices, energy remains the biggest factor. While gas prices have plunged this year to around €30/MWh – down from highs above €300 last year – they are still far ahead of the long-term summer average price below €20/MWh.
If gas remains close to this level, then we are seeing a long-term increase of 50% in that raw material cost.
It is a similar story in oil prices, where a barrel of Brent crude has spent much of the year to date between $70 and $80 a barrel (€64 to €73).
Again, a welcome drop from the highs of last year, but a considerable jump from the $50 to $60 average (€45 to €55)that existed in the five years before the Covid pandemic.
‘Downward stickiness’
Economists have a phrase for this phenomenon: they say there is “downward stickiness” in prices. This means that prices can rise very fast during a crisis or a shortage, but once the thing that drove that move has passed, the price of the product will fall much slower than it rose – which is why they are called “sticky”.
The CSO data is only until the end of May, but there has been little improvement in the situation since then.
In fact, in recent weeks, we are starting to see some commodity prices start to rise again. The Green Markets North American weekly fertiliser price index has been rising since hitting an 18-month low in mid-June.
Fuel costs will rise further as excise cuts are reversed.
That index held between 300 and 400 for many years before the pandemic and Russia’s invasion of Ukraine. It didn’t even get to 400 in June before rising again, and was at 480 on Friday last.
Black Sea grain deal
On the feed side, concerns remain about the Black Sea grain deal, which is due to expire next week. At every renewal, the Russians threaten not to allow the deal to continue, with a blockade likely to cause a rapid spike in global cereal prices.
While it isn’t clear that Russia even has the capability to halt the shipments at the moment, uncertainty over the future of the trade is helping to keep wheat prices above their long-term average.
Fuel costs again have a unique set of circumstances to add to the generally higher levels, and first among those is the return of excise duty. September will see 1c/litre on green diesel with a further 3c/l added at the end of October. White diesel will increase by 13c/l across the two hikes.
On the global scale, there continues to be a precarious balance in supply and demand as Saudi Arabia cuts output to boost prices, while China’s economic struggles have put a cap on demand.
The opposite effect seems to be in place for farm output prices where there has been no “downward stickiness”, as the suppliers (farmers) have very little pricing power. The rapid fall of dairy prices from the peak of last year has left many suppliers worried about what will come next.
Milk price collapse
Concerns about the collapse of the milk price this year was somewhat tempered by expectations that there would be a recovery in the third or fourth quarter, and some stabilisation at levels higher than the market is currently offering.
Those expectations, unfortunately, are rapidly evaporating as we get into the second half of the year and see little sign of the hoped-for recovery.
On the global scale, there continues to be a precarious balance in supply and demand
Speaking at the Teagasc open day at Moorepark last week Ornua global ingredients managing director Bernard Condon said it “doesn’t, at this point, look like the recovery we were hoping for will come”.
Global prices
Global prices continue to show weakness, with the GDT Index close to the lowest level since late 2020 after dropping 3.3% in the latest auction.
In the years before the pandemic and Russia’s invasion of Ukraine, the GDT Index generally traded between 900 and 1,100.
That means that right now it is close to its longer-term average. However, as we have shown, input prices for energy, feed and fertiliser are far ahead of their longer-term averages.
Beef price drops
In beef, while the price drops are not on the same scale as we see in dairy, neither was the price rise last year.
On the Irish market front, we have seen factory prices drop since they peaked at the beginning of May. The price for an Irish R3 steer is currently around 60 c/kg cheaper than in the UK.
There is little explanation for this price difference from the processors, but at the same time there is little Irish farmers can do about it, as the processors control the price.
In beef, while the price drops are not on the same scale as we see in dairy
Analysis by the Irish Farmers Journal suggests that price gap will be closed by a falling price of UK beef rather than an increase in Irish prices.
Like in dairy, there is little cause for optimism from international markets.
Australian production seems set to expand further, with that country having wider access to the key UK market in the wake of a trade deal with the non-EU country. This will inevitably push Irish beef prices lower.
Unfortunately, there is less progress than might be hoped for in opening international markets.
The reopening of the Chinese market to Irish beef so far has been large on promise and low on delivery – not helped, it has to be said, by some restrictions that remain in place and the slower-than-expected post-Covid recovery of China’s economy.
Irish exports to the US have almost completely collapsed, adding to the disappointing performance.
2022 – an outlier
Teagasc data on farm incomes showed that 2022 was not only a record year, but it also was an outlier. When the data comes through for this year, it will definitely show a substantial drop in dairy and tillage incomes.
It will be hard for it to show a substantial drop in beef or sheep income, as those figures were never substantial to begin with, because 65% of suckler farmers and 53% of sheep farmers earned less than €10,000 last year.
There is little explanation for this price difference from the processors, but at the same time there is little Irish farmers can do about it
An argument can be made that the high incomes made in the dairy sector in 2022 will provide a buffer for a lean 2023, and under normal circumstances, that might be reasonable.
However, the dairy sector also faces challenges on production, as derogation limits seem set to either reduce output – thereby reducing cashflow – or increase the cost of production, as extra land will have to be sourced to maintain herd numbers.
IFA president Tim Cullinan said in the wake of the Teagasc report that it is clear continued Government support for the beef and sheep sectors is needed to stop them disappearing from the Irish landscape. While he is right to highlight those sectors, the entire Irish farming industry is also under pressure in 2023 from ‘sticky’ costs and falling prices.
Dairy prices point to global over-supply. Beef prices are simply misaligned with production costs. Tillage farmers are struggling to get land to plant their crops.
This year’s budget needs to help support the agricultural sector through the continued high-cost period. In time, attrition will reduce global competition, tighten supply and hopefully lead to more sustainable agricultural returns.
Waiting for that attrition to take effect on Ireland’s global competitors is an expensive tactic though.
Without the correct supports in place, the industry that falls victim to high costs may well be Ireland’s.
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