Recent increases in prices and demand threaten to pinch the financial returns of farmers.
Certain farm input costs continue to spiral upwards. This is taking some of the gloss off better prices in the cereals and milk sectors, and adding to the margin pressure in other sectors where there have not been significant price increases.
Animal feed prices are well documented. The uplift in cereals prices since the spring has been a prime factor, but the contribution of protein to animal diets should not be forgotten. As an example, soya prices have risen since last winter.
An oil price of around $100 per barrel directly feeds into higher tractor fuel prices. Duty rises on gas oil haven't helped. The rise in global energy costs is reflected in the price of fertiliser, as gas is a major feedstock for nitrogen production. Supply and demand imbalances are also driving up fertiliser costs. Higher grain prices have seen demand for the product surge, as a greater area is planted and producers chase extra yield. The US ethanol boom has also had an effect; American farmers have switched from growing soyabeans to growing maize, which increases the nitrogen requirement.
Unfortunately, the surge in demand has been met with static supply as there are obviously structural constraints to the speed at which the fertiliser industry can increase production. In fact, capacity has decreased over the past few years, at least in Europe. Although nitrogen prices have fluctuated in line with energy prices, the new factor this time is booming values for potassium and phospherous. Traders report phenomenal demand from China (much of which is being subsidised), as well as competition for petro-chemical feedstocks from the energy sector. Many merchants have been unable to supply fertiliser products until last month (February).
Although prices for cereals and dairy farms are looking much better than they did a year ago, these cost increases will take some of the shine off them. Indeed, many farms' financial returns may not be much better in 2007/08 than they were in 2006/07. Unfortunately, those parts of the industry that have not seen better prices (beef, sheep, pigs and vegetables) are being caught in a cost-price squeeze.
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