Escalating raw material prices could bring a hefty increase in animal feed costs for the farmer according to Robin Irvine, President and Gary McGuigan, Vice President of the Northern Ireland Grain Trade Association.

Robin Irvine commented, "Increased grain prices over the winter months have been largely passed on to the farmer but millers have been able to shield producers from rising costs of other materials due to their forward contracts. However compounders now attempting to "fill their books" for the summer season are facing commodity prices for the other main ingredients in ruminant rations increased by £25 to £30 on the winter contracts".

He added, "The inevitable result of these markets is an increase in the price of compound feeds in the region of £12 to £20 per tonne depending on the formulation.

"At current prices buyers are reluctant to commit to large volumes of raw material, hoping for some reduction in price when demand eases as we get into the summer months; - but there is the risk of a last minute scramble for materials which could push up prices even further".

Gary McGuigan points out that while energy is the main price driver, EU policies and investors in commodity markets are also having an effect.

President Bush's target of 35 billion gallons of ethanol to be produced by 2017 is the equivalent of 342 million tonnes of corn or 128% of the current crop. US corn prices have doubled in the past 12 months and they have their biggest planted area for 60 years.

He added "In Europe 5.7% of all energy must come from renewable sources by 2010. Currently the UK has an exportable surplus of wheat of 2 million tonnes but if all the planned ethanol plants get built then the UK could be a net importer of wheat". Another factor contributing to the volatility of the commodity futures markets is investors eager to get good returns. For example from 4 February 05 to 22 February 07 the funds made a turnaround equivalent to the whole soya crop of Argentina.

Robin Irvine concluded, "The situation is exacerbated by the EU restrictions on materials derived from crops which have been genetically modified. This currently affects much of the maize gluten and distillers produced in America and has the potential to be an even greater problem as new GM varieties come on stream".

Both NIGTA spokespersons stated that it is regrettable that this happens at a time when livestock farmers are not in a position to absorb these increases and an increase in the price of their produce is urgently needed if the industry is to remain viable.

Background to Feed Material Price Rise Of 20% in 12 Months.

The last twelve months has seen a huge increase in commodity prices across the board. On average, prices for all commodities have risen by 20%, according to the Northern Ireland Grain Trade Association.

The main driver of price strength has been a new element of demand, energy. The Green lobby across the developed world has created the requirement for a greater use of energy from renewable sources.

In the US the main source for renewable will come from Corn being transformed into Ethanol. This technology has been around since the last Oil crisis in the early 1980's and was developed as a mechanism for helping the US become less dependant on the Middle East, particularly Iran as President Reagan did not want a re-run of the Iranian hostage crisis to further drive up Gas prices in the American heartland. This has led to an explosion in demand for Corn due to the huge increase in Ethanol plants that have been built (109) or are being built (53). The total amount of corn needed to meet the demand from the above plants equates to 55 million metric tonnes of Corn or 20% of the crop. This is expected to rise to 86 million metric tonnes of Corn in 2007/08. (See graph)

Ethanol is mandated as an additive to Gasoline in all of the 50 US States, and as such it is not price sensitive. Today we are seeing the rush into Ethanol being driven by the need for "security" of supply combining with the need to preserve the planet. This also has the consequence of supporting farm prices. In President Bush's state of the union address this year he set a non-binding target of 35 billion gallons of Ethanol to be produced by 2017. This has been supported with a $0.51 per gallon incentive. To put these 35 billion gallons into perspective this is the equivalent of 342 million tonnes of Corn or 128% of the current crop!!

This huge potential demand has underpinned the market and seen the price of US corn double in the last twelve months. As the price of corn has gone upwards this has made corn a more valuable crop than Soya beans and this is borne out by the USDA figures released on 30th March that showed the biggest planted area for corn in 60 years, thus reducing the amount of beans that get planted.

The demand from the energy sector has also been affecting markets all across the globe. In the Far East the price of Palm Kernal has risen 34% as this product has been bought by UK power stations for burning. The price of Crude Palm Oil has increased by 20% due to a huge increase in demand from the bio-diesel sector.

With such high corn prices the price of Corn by-products such as Gluten have also sky rocketed, up 30%. Global Wheat production in the last year was down 30 million metric tonnes, Australia lost 12 million tonnes of its crop due to drought, and prices have increased by 20%.

US Citrus production has not yet recovered from the 2003/04 hurricane and we have seen prices rise by 35% in the last twelve months. A bright point amid all of these increases has been Soya meal. This product has seen a more modest increase in price of 10%. This is due to the continued excellent crops coming out of South America, but we may see this price change, as so much acreage has been lost to corn in the US.

We must also keep in mind the huge flows of money from Hedge Funds that have been pumped into the commodity futures markets. As investors continue to demand good returns on their investments fund managers have been looking to new areas where they can invest and achieve better returns than the traditional equity markets. This thinking has led to an increase in volatility in our markets stemming from the colossal buying and selling power of the funds. For example, on the 4th February 2005 the funds were 'short' 16 million tonnes of futures. On the 22nd February 2007 they had become 24 million tonnes 'long' of futures. This 40 million ton turnaround is equivalent to the whole Soya crop of Argentina!

We are in a new era of commodity pricing with the link between crops and energy being forged at the highest level politically. The risk for the Food and Feed industry becomes one of price and availability, as already mentioned the prices of Gluten and Distillers have substantially risen on back of higher corn prices. In Europe the politicians have mandated that by 2010 5.75% of all energy comes from renewable sources, this has led to a surge in the price of all Vegetable oils such as Rape, Soya and Palm.

The UK could soon be a net importer of Wheat if all of the planned Ethanol plants get built; the UK currently has an exportable surplus of around 2 million metric tonnes.

With Green issues gaining more and more political momentum there doesn't seem to be any reason for prices to retrace significantly in the medium term.