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.
Production systems to suit our indigenous resources; a more even supply of cattle throughout the year; concentration on market specifications and development of processing and marketing strategies for bull beef from the dairy herd.
These were just some of the aspects outlined by Phelim O'Neill, Chief Executive of the NI Meat Exporters Association (NIMEA) when he addressed the NI Grain Trade Association at their quarterly meeting.
Market returns to Northern Ireland beef producers increased by 50% from 2.60 to 3.89 a kilo between June 2010 and June 2013, putting the province at number two in the international league of farm gate prices - second only to GB. However all of this good news was negated by increased feed and fertiliser costs combined with poor weather conditions and fodder shortages.
Phelim pointed out that Northern Ireland farmers and their representatives expect higher prices since the GB market is offering excellent returns, and we have preferential status because of our ability to use the Red Tractor logo. The difficulty is that only about half of what is produced here is sold in the GB market, with 20% sold on the home market and the remainder to mainland Europe where prices are much lower. However the European market has historically been a most important outlet and is in the process of becoming so again.
Another factor affecting processor costs is the traditional rush of cattle off grass in the autumn which necessitates processing capacity that is then under utilised during the rest of the year.
Taking the long term view Phelim stated that the red meat industry's role will be to convert its indigenous resources of grass and water to a protein that can be consumed by the expanding global population. In view of the diminishing world resources and population expansion it is difficult to make a case for feeding livestock with grain that could be fed directly to the human population. If there is a case for feeding grain to livestock for human consumption it is likely to be fed to the species that produces the greatest return per kilo of grain, namely poultry.
But as long as there are regions of the world with marginal land that grows grass with an abundance of water, then there is no better way of converting these resources to human food than through beef or sheep production, which suggests a very different industry from today's production systems.
Expansion in the dairy industry will be necessary to feed the increased population and this will result in an increased number of dairy bull calves and the need for processing techniques and market development to cater for these.
Retailer and consumer demand will also dictate the future of the industry with retailers now demanding steaks that fit retail packaging. This demand has prompted an increased interest in traditional breeds which also fit the demand for a return to utilisation of grass and water as the primary feed source.
Phelim emphasised “The challenge for processors is to develop the market to its limit - working closely with their supply base to bring more control to procurement. We have to get closer to suppliers to achieve this - promoting systems that produce cattle and sheep that best fit our environment, that finish to market specification with low input costs and that attract a market premium.
The feed price reductions of recent months have broken the trend of the last five years or so where markets have been very strong and every move was in an upward direction.
The record global maize crop has provided the break which livestock producers were looking for and has resulted in a ten percent reduction across the range of ration prices.
The downward trend in grain prices led by a mammoth US corn harvest coinciding with diminished demand for ethanol has now stalled however as spot prices have been supported by logistical issues in South America and the Black Sea. Wet weather in France has hampered harvest and delayed shipments with reports that 20 to 25% of the crop will be lost in some regions.
The Global Feed Market
The expectation that the big maize crop would exert a downward pressure on wheat prices has not really materialised and in spite of a big switch to maize and barley in livestock rations the strong demand for EU milling wheat has supported prices for the past few months. In the UK this has not been helped by the poor wheat harvest in England - the traditional source of wheat for Northern Ireland millers. In spite of good yields per acre the crop is reduced due to the large area which could not be planted in the wet autumn of 2012.
The ease in protein prices has not reached expected levels even with a record soya crop projected in South America and a reasonable crop in the US bolstering world stocks. The market expected the extra volume available in South America would have pressured prices in the second half of 2013 but record demand from China and a lack of farmer selling in Argentina due to political and economic instability have changed that outlook dramatically. As harvest is just getting under way in South America all eyes are on the weather - with hopes that the rain which caused such problems last year in terms of both harvest and transport of the crop to the ports will not spoil things again.
In North America the USDA are forecasting high exports of soya with year-end stocks extremely tight again this year - the hope would be that the current soybean/corn price ratio should mean higher plantings next year and stocks replenished in the longer term.
With the current state of the global feed commodity markets and the ongoing logistical challenges and shortages it is likely that local feed prices will not change significantly over the coming months. The outlook for the summer and further ahead is difficult to predict - the best hope of further reductions coming from the potential for wheat to be forced cheaper due to pressure from the other cereals and for soya prices to ease subject to a good harvest in South America.
Food Fortress, an innovative new testing regime for animal feed materials is just the beginning of a world leading programme of supply chain assurance for the entire food industry in Northern Ireland, according to Professor Chris Elliott, from the Global Food Security Unit at Queens University.
Food Fortress, a joint venture between the NI Grain Trade Association (NIGTA) and Queens. was officially launched last week by the Department of Agriculture in conjunction with the Livestock and Meat Commission to representatives of the entire agri food chain and received a resounding seal of approval from all sectors.
Chris Elliott pointed out that a single contaminant can enter the supply chain and affect the entire food industry. "The challenge is to identify the risks, analyse them and then build a testing programme that would detect these before they get to the supply chain. He added "We are using the power of new technologies that can detect contamination at very low levels. The system we have developed, in conjunction with NIGTA and with support from Invest NI, has been benchmarked against some of the leading monitoring and testing systems in Europe and will be much more comprehensive, encompassing a much wider range of materials.""
Alan Johnston, NIGTA Vice President who manages Moy Park's Animal Feeds Division throughout the UK said: "We have built a system to find a needle in a haystack and at no additional cost to the food industry. This new testing is leading edge and by protecting the supply chain, we're protecting the consumer. This is the first time such a high level of testing has been done and will undoubtedly be replicated elsewhere in the world. It is our ambition to see the Northern Ireland agri-food industry lead the way in assuring buyers from around the world that, in sourcing produce here, they are not only sourcing the best, but also the safest of any products available."
Declan Billington, from NIGTA, who worked closely with Queens in the formative stages of the scheme commented "Testing capacity has been increased more than six fold and feed companies have come together to submit samples for composite testing. This collaborative approach ensures the costs for testing are kept to a minimum. It is all about working smarter and incorporating the latest technologies developed by our partner, the Global Food Security Unit at Queens University"
Robin Irvine, Chief Executive of NIGTA, who has been co-ordinating the implementation of the scheme added "With feed production in the province growing steadily we now have well over two million tonnes of feed materials shipped into the province every year. The Queens work is based on detailed research into all the risks involved with these materials and employing leading edge technology to achieve a much higher level of assurance for the money we spend on analysis. The pilot scheme which was set up to test the program is well advanced and we are now in a position to offer Food Fortress to the industry."
Ian Stephenson, Chief Executive of LMC has already committed the support of the red meat sector and announced that Food Fortress would become a requirement of the Farm Quality Assured Beef and Lamb Scheme adding "This is a great example of an industry working together - adopting leading technology and raising standards to a world beating level, whilst retaining competitiveness in the supply chain"
Commenting on the introduction of the scheme Owen Brennan, President of NIGTA, said "With recent food scares, we wanted to find a better way of managing and protecting our supply chain. This system will play an integral role in building on our agri-food industry by helping to ensure the safety of all feed materials coming into the island of Ireland and continuing to monitor them through processing and transportation to the farm gate."
Grain Trade Expands Membership Base
Fertiliser companies have joined the Northern Ireland Grain Trade Association in order to strengthen the links within the agri food chain.
Welcoming the first two members from this trade at the annual general meeting the outgoing President, Alan Ashenhurst said "We are delighted that Kemira GrowHow and Gouldings Fertilisers have joined our Association, and I know that other fertiliser companies are considering doing so. The agri food industry needs co-operation throughout the entire food chain. We look forward to working with our new members and we know that we will benefit from their knowledge and expertise."
Alan went on to say that current environmental matters including the Nitrates Directive will present a challenge for all aspects of the industry. NIGTA has been working on phosphorus content of diets in order to help farmers meet the dictates of this directive and the fertiliser industry is concentrating on supplying products to meet the exact requirements of each farm situation.
Positive Future For Milk Production
Guest speaker at the Northern Ireland Grain Trade Association's annual general meeting was Dr Sinclair Mayne, Agriculture Branch, Agri-Food and Biosciences Institute (AFBI) who outlined a very positive future for dairying in Northern Ireland. Following an extremely difficult year for milk producers in 2006, because of the continuing milk price/ cost squeeze, Dr Mayne predicted that the current strengthening of international dairy markets would have a positive effect on milk prices in 2007. This trend should also be sustained thereafter, based on increased international demand for dairy products and restrictions in supply. He predicted higher grain prices worldwide because of increased use of grain for fuel (bio ethanol) rather than for food production. Given the high reliance on grain in most milk production systems, this should push up dairy product prices internationally.
Northern Ireland milk producers are well placed to benefit from higher milk prices due to high reliance on grass and grass silage, with increasing grain prices significantly improving the competitiveness of local milk production systems. Recent research at AFBI Hillsborough (funded by DARD and AgriSearch), and undertaken in conjunction with Dr Duncan Anderson, AFBI Agriculture and Food Economics Branch has developed a Profit Maximising Farm Model for the typical Northern Ireland dairy farm which highlights advantages for local systems.
Dr Mayne concluded by indicating that whilst there was a much brighter future for milk producers, the environmental impact of milk production systems would come under increasing scrutiny. The challenge for ongoing research is to develop sustainable and profitable milk production systems which minimise losses of nitrogen, phosphorus and methane to the environment, whilst maintaining animal performance.
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